Cash – the ‘Anchor of Stability’ Which Needs Safeguarding

A recent working paper entitled ‘Institutional Hostility to Cash and COVID-19’ by economists Doris Neuberger of Germany’s University of Rostock and Eduardo Beretta from the Swiss Institute of Economics examines how the pandemic has boosted commercial incentives and government policies to nudge consumers away from cash.

Money is a pure public good, say the authors. It creates trust between people who do not know each other. Governments establish and support cash, banknotes and coins, as money by making them legal tender and the official currency, since they do not exclude people and are not rivals to other payment options.

In the 1950s, in the post-war recovery in the advanced economies, banks needed to automate how they did their business as the number of customers rapidly increased, along with the number of transactions taking place. At the same time, the relative cost of staff was also increasing.

Today, banks want to increase the influence of the financial system, get access to valuable customer transaction data and facilitate remunerative agreements with technology platforms. Governments have supported the move to digital payments, usually citing the role of cash in enabling crime.

At the heart of the banking and financial system drive to replace cash is that it is public money. If people deposit cash in a bank, the individual effectively receives an ‘IOU’ in return and the bank can use their deposit to earn income. If people subsequently choose to withdraw their public money, cash, from an ATM, the bank loses access to their deposit. The financial institutions prefer to retain access and so want people to pay electronically. In this context, the move to accepting very low value payments using electronic payments is an important change to remove cash from the payment cycle.

Less cash before the pandemic

Before the pandemic, governments took actions which actively discouraged the use and holding of cash. Demonetisation whether explicitly to discourage cash usage as in India (2017) and Kenya (2019), or as part of the introduction of a new series (Switzerland, which is on its 9th series since 1907 and which eventually demonetises the old series), makes holding cash more onerous. Similarly, introducing legal limits on payments in cash reduces its usefulness.

Mastercard and Visa have run systematic campaigns to encourage people to move away from cash. A number of their campaigns are described, including a 2015 Financial Times article referring to cash as a ‘barbarous relic’ compared with the more advanced payment instruments.

Even before the pandemic, the number of ATMs had started to fall, and bank branches to close in economies where cash usage had been falling. A trend that has been accelerating since the pandemic started in virtually all economies.

Impact of the pandemic

The pandemic has seen much disinformation and activity based on emotion rather than science. The evidence for cash carrying the virus cannot be absolute, but the paper lists the research done, concluding that cash does not carry the virus more or less than other payment instruments. It reviews how the mobile phone and card used to pay without contact are vulnerable to the virus. It is not how you pay that matters, it is what you do with your hands afterwards.

In addition to the activity of banks, ATM operators and retailers, governments have allowed contactless payment limits to be raised, encouraged the waving of fees and worked to move government services and welfare payments online and to digital media. All these have an impact, direct or indirect, on cash.

The link between crime and cash

Governments claim that cash payments encourage tax and social security payment evasion, money laundering of the proceeds of crime and the funding of terrorism.

The authors make the point that these activities thrive where the quality of political institutions is low, there is a weak rule of law, officials are corrupt and government bureaucracy and regulations are cumbersome and expensive. They also show that before the euro was introduced, only Germany and Latvia had high denomination banknotes with a higher face value than the €500. Their research, based on official data, shows that in only one country has the shadow economy increased since the euro was introduced. The link between high value banknotes is, at best, weak.

The paper also considers the cash payment limits put in place in 12 eurosystem countries. It considers the acceptance and either non-existent or very light regulation of cryptocurrencies. Given their role in criminal activity, this seems an uneven treatment, illogical even.

In addition, the ‘value’ of cryptocurrencies is not based on assets or on economic activity. Their use for the settlement of financial obligations links them to the real economy when they are a parallel device unconnected with the economy.

This makes the decision of five of those eurosystem countries to tax cryptocurrencies equally illogical.

Cash in circulation

Despite all that has been happening pre and post-COVID, cash in circulation has been rising ahead of GDP. The pandemic has not been a banking crisis, but still people have turned to cash in almost every economy. It is clear that cash is not substitutable – the public want a way to secure their savings. Imagine a world where that was not an option.

Anchor of stability

The UK’s Access to Cash report is clear that poverty, not age, is the biggest indicator of cash dependency. In a recession, such as the pandemic is generating, banks lend more conservatively. Those who are unbanked or underbanked, a much larger number of people, lose access to financial services disproportionately. Their lack of digital access and lower levels of digital literacy are more apparent and matter more.

The paper ends by pointing out the impact of financial exclusion and social discrimination. In that context, cash is a public good to be safeguarded.