Why some economists want to get rid of cash

By S.N. | AMSTERDAM

CASH is one of mankind’s greatest inventions; a vast improvement, one would imagine, on carting around sheep or bales of hay. Despite the proliferation of other forms of payment, cash retains qualities that alternative methods cannot match, including anonymity, instant clearing, universal acceptance and a relatively tech-free mechanism. It can be used even if the power grid goes down or the banks are all hacked. Yet a growing number of economists are now calling for cash to be phased out. Why?

In “The Curse of Cash”, published on August 16th, Kenneth Rogoff makes the case for gradually getting rid of most paper currency. It certainly has benefits, he admits, but these are outweighed by the costs associated with its murky side. Take anonymity. The same virtue that provides the ability to pay for a self-indulgent treat or a naughty service without its appearing on bank records or credit-card statements also allows criminals to fund their activities and tax-dodgers to avoid levies. The record $1.4 trillion circulating outside of banks in dollars alone, mostly in high-denomination bills, might suggest that every four-person American family has $13,600 in $100 bills stashed in a jam jar. That is unlikely. According to Mr Rogoff, the bulk of the rich world’s currency supply is used to facilitate tax evasion and illegal activities such as human trafficking and financing terrorism. A cashless world would also make monetary policy more effective, argue some, including Mr Rogoff, because savers would no longer be able to stuff cash under mattresses in case of negative rates. And as shopkeepers and businesses in relatively cash-light countries such as Sweden are discovering, there are other real benefits to preferring electronic payments over cash, including security, lower costs, hygiene and convenience, for both business and customer.

Moving away from cash would not be without complications. Some objections can be easily dismissed, such as a claim expressed by a fifth of a sample of Germans, who said in a recent survey that they like the feel of carrying cash. But other problems are harder to pooh-pooh. The most intractable are the loss of anonymity and the risk that parts of society will be left out of the financial system, in a world where smartphones and plastic become the only ways to pay. The anonymity problem can in part be solved by retaining smaller notes and coins; enough for punters to keep buying porn, weed and birthday presents, but not so much as to buy property. The point about financial exclusion is trickier. In a near-cashless world vulnerable groups, such as the poor, the elderly and migrants, could become further marginalised, and those who are especially cash-dependent for income, such as churches, charities and the homeless, could expect to see a drop in their incomes. But changes can be made gradually and intelligently, for example by paying benefits on prepaid debit cards and supplying charities with contactless card machines. The switch could in fact increase financial inclusion, by ensuring that the unbanked become banked.

The debate elicits strong reactions; Bild, a German newspaper, recently organised a reader protest against a €5,000 ($5,633) limit on cash transactions. And German academics have argued that banning cash won’t magically end crime and black-market dealings: electronic fraud, cyber-crime and anonymous payments online are easy enough for those with skill and determination. Yet as countries in the rich world grow increasingly detached from cash, with some shops and cafes flat-out refusing to accept the stuff, economists can already see early evidence of the benefits of going cashless—as well as the relatively painless nature of the transition.