- Abolishing cash under discussion
- Fighting crime and undeclared work is a one-sided argument
- Without cash, negative interest rates hit savings in full
Abolishing cash — or even just restricting its use — means there is no escape from central banks' negative interest rates. So writes Philipp Dobbert, chief economist at quirin bank AG, which specializes in fee-based advice.
The discussion around reducing or even abolishing cash is gathering pace again. Proponents argue that, without cash, undeclared work and organized crime would hardly be financially feasible any more. "But in fact, another consideration is likely to be front and center here: passing on the negative interest rates of some central banks, such as the ECB, to savers and businesses," says Dobbert.
One concrete proposal under discussion is the German government's plan to legally ban cash payments above €5,000. On top of that, there is a proposal by the European Central Bank (ECB) to discontinue the use of €500 banknotes entirely.
The origin of these considerations lies a little further back in the past. As early as 2014, the well-known US economist Kenneth Rogoff discussed the costs and benefits of abolishing cash. Without cash — so the thinking goes — undeclared work and the shadow economy, but also organized crime and tax evasion, could hardly be carried out any more. Payments documented exclusively in electronic form would cause these areas to dry up financially: when the tax office and other authorities can read along, undeclared work is no longer under the radar.
In his article, however, Rogoff focuses primarily on a different motivation that is currently far more relevant in economic-policy terms. Because, as Rogoff explains, a complete abolition of cash would above all mean that central banks could extend their current policy of negative interest rates on the deposits of commercial banks in full to the deposits of savers and businesses as well. Why? Well, because the only barrier to such an extension is precisely cash. After all, savers would probably have all their deposits paid out to them if their bank were to introduce a negative interest rate — that is, costs instead of returns — on savings and overnight deposits. But if cash no longer existed, such an evasive move would be impossible, and the negative interest rate would hit savings in full.
Ultimately, this would make it possible to redistribute the costs of the crisis since 2008 away from debtors and toward savers. Abolishing cash would cement the current low-interest-rate environment and make it even more severe. In the end, savers can only escape such possible developments by engaging in the capital market and investing consistently in stocks and bonds.
