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Cash vs. Bitcoin: A Staggering Victory?

Categories : Cash generates security, Cash is a contingency and fall-back solution, Cash is a public good, Cash is also a store of value
October 29, 2021
Tags : Cash demand, coin, Cryptocurrency, Store of value
Marc Schwartz, CEO of the Monnaie de Paris, the French Mint, and Yannis Messaoui have recently published a study, “The great paradox or why the reign of cash is far from over”. They discuss here the history of money and explain why cash is not in the process of extinction.

This interview by Emma Barrier, Catherine Hartog and Camille Ibos was first published in French, in issue 22 of Emile, the quarterly magazine published by the Alumni of Sciences Po Paris. It is republished here with permission of the authors and the publication.

The Covid-19 pandemic has reignited speculation around the end of cash. However, cash does not yet seem ready to bow out, as Marc Schwartz (class 84), CEO of the Monnaie de Paris, the French Mint, and Yannis Messaoui, economics student (Yale 19, HEC) explain.  They have recently published a study for Terra Nova entitled “The great paradox or why the reign of cash is far from over”, they discuss here the history of money and explain why cash is not (yet) in the process of extinction.

Marc Schwartz, you are Chairman and CEO of Monnaie de Paris . How do you explain the recurring rumors about the disappearance of species?

The role of cash as a means of payment is diminishing. That’s a fact. When you go to the bakery, you can pay for your bread with a contactless card which, symbolically, raises questions. Recently, we thought that raising the ceiling for contactless payments from 30 to 50 euros would lead to the disappearance of cash. In our opinion, this has very little effect: we know that the level at which we switch from cash to card payment is somewhere between 20 and 25 euros. On the other hand, the disappearance of the floor, which no longer requires you to pay cash for small amounts, has really taken a bite out of the use of cash.

What was the role of the pandemic in this phenomenon?

Marc Schwartz: The coronavirus was the main argument! During the health crisis, there were concerns about cash payments.  As banknotes and coins are passed from hand to hand, they supposedly presented a higher risk of viral transmission. But in fact, scientific studies have shown that this is not the case. The lifespan of the virus is 10 to 100 times shorter on a banknote than on stainless steel or a doorknob. In addition, coins are made with copper, a bactericidal material. So, the reality contradicts the rumor! This false idea has gone so far that avoiding cash has frequently been perceived as an anti-Covid safety precaution, with signs in shops recommending to favour contactless payment. But it is important to recall that it is the role of the Health Ministry to decide what safety precautions should be mandated… And even though paying with a card was not one of them, the idea has spread, and cash usage has diminished

You are both co-authors of the note “The great paradox, or why the reign of cash is far from over”, which addresses these questions. What is this paradox?

Marc Schwartz: When I arrived at the Monnaie de Paris two years ago, I discovered the rumors about the end of cash. John Maynard Keynes spoke of gold as a “barbaric relic” and today, with the widespread idea that digital will replace physical money, I wondered whether cash might be the barbaric relic of our time. We therefore used the term “paradox” for the title of our paper, because on the one hand, we hear that cash will disappear and on the other, we see that the volume of cash in circulation continues to increase.

Yannis Messaoui: The increase in the volume of cash in circulation is also coupled with a decrease in its use for payments. The second paradox stems from the store of value phenomenon, according to which we use money to save rather than to pay. Finally, fairly recent opinion studies, carried out in Europe and the United States, show that the population is not in favour of the disappearance of cash. This is what we wanted to highlight in our report.

“The increase in the volume of cash in circulation is coupled with a decrease in their use. We use money to save rather than to pay.”

Yannis Messaoui

Could this store of value paradox be explained by mistrust of the state?

Yannis Messaoui: This is an important question and it can indeed be such a phenomenon of protection, although, as long as income is declared, the state will be aware of peoples’ financial situations. However, one can think that people wish to stay away from the state when it comes to their own finances. This was the perspective of Friedrich Hayek in his 1970 book in favour of the denationalization of money and in favour of private and local currencies. A sociological study would be needed to analyze this desire to establish a distance with the central state … But what we know today is that states has intervened massively last year in the economy to financially support employees and sectors in difficulty, including private companies.

You argue, in your report that “the reign of cash is far from over”. Why ?

M. S. : If cash was really doomed to disappear, then the amounts of cash currently in circulation – and published monthly by the European Central Bank in the case of the euro, or by the Federal Reserve System for the dollar – should be in constant decline. However, it is quite the opposite. We are going to celebrate the 20th anniversary of the euro and for 20 years, the amount of euro cash in circulation has continued to increase, more or less quickly obviously depending on the period. The value of euros in circulation has thus increased sixfold since the introduction of this currency. Our first argument is therefore obvious: if cash were to disappear, we would not observe this curve. Regarding the rumor of the disappearance of cash linked to the pandemic, were surprised to observe a massive increase in cash in circulation from March 2020 onwards.

Finally, we use less and less money to pay, but we store it more and more. Fear about the future and increasing unemployment did not in any way mark the end of cash: on the contrary, they accelerated the demand for cash all over the world! By comparison, the circulation of cash increased by 11% in the euro area at the end of last year and by 15% for the dollar. My American counterpart, the president of the US Mint, even told me that there had been a shortage of coins in the United States during this period and that they had had to increase production by 40%! It had not happened since 20 years and this leads us to think that cash has a very bright future ahead.

“Fear about the future and increasing unemployment did not in any way mark the end of cash: on the contrary, they accelerated the demand for cash all over the world. “

Marc Schwartz

What are the advantages of cash over scriptural money?

Y. M.: According to the European Central Bank, cash is ultimately assimilated to a public good. It is a free, universal and easy-to-use payment method. It is also inclusive: around 20% of the French population is not comfortable with digital tools, which makes it very difficult to use digital payments. I am thinking of the elderly, but also of economically vulnerable people, migrants and the homeless, for whom cash is the only way to obtain essential goods. Cash is also a resilient form of payment: in the event of a power outage, cyberattack or any other phenomenon that would undermine the digital payment infrastructure, it can still be used to survive. This possibility may seem very remote in France, but it has occurred in Porto Rico, for instance, when ATMs and payment terminals were knocked out of order by a hurricane in 2017.

M. S.: Cash also has the advantage of protecting personal data. You cannot trace the history of a cash payment. This the argument is also often used to decry cash: it would promote illegal activities. However, it is far from being the only method of payment liable to be used for fraudulent purposes!

“Cash is also a resilient form of payment: In the event of a power failure or a cyberattack, you can continue to use it.”

Yannis Messaoui

Precisely, this idea that above a certain amount, cash is synonymous with illegality is well established. Despite this, can we still defend cash in France?

Y. M.: It’s not easy. French retailers have an obligation to accept cash, but we are also the first country to have introduced caps on cash payments in order to fight the underground economy. Today, regulations prohibit payment in cash above 1,000 euros. It all comes from the perception that money obtained illegally necessarily goes through cash, as if it couldn’t use electronic means! In 2017, the CAP22 report, requested by the Prime Minister, included the proposal to limit cash in this regard, even if it was not retained. On the other hand, in other countries, such as Germany or Austria, citizens are considered “cash lovers”.

M. S .: It is often said in France that cash is the medium for illegal activities, but look at what is happening on bank accounts! When in winter 2020 Bruno Le Maire [French Minister of Economy] chose to strictly regulate cryptocurrencies, it was clearly aimed at limiting money laundering. The Panama Papers, for example, did not reveal any illegal transfers of cash; it was all about money transfers between banks and individuals. Today, the majority of illegal money circulating around the world does not involve cash.

Earlier, you mentioned the idea put forward by Friedrich Hayek of a private currency..

M. S.: This is the most burning question on the future of money, and in particular of digital money. In recent years, we’ve heard a lot about cryptocurrencies and bitcoin. Our opinion, shared by central banks and governments, is that these are not money in the definition mentioned above. We therefore prefer the term “crypto-asset”. Bitcoin, for example, is very volatile and does not offer the guarantees of value stability that can be seen with major currencies as units of account.

On the other hand, we could see further developments of what we call stablecoins like Libra [now renamed Diem] by Facebook. The aim of the company is to create an international currency, of a different nature, for the three billion Facebook users. This would pose a significant threat to central banks, whose role is to control the money supply and monitor financial stability. Along with governments, they therefore raised their voices for the regulation of cryptocurrencies and warned Facebook that to create money, you first had to become a bank.

 Would central banks therefore have an interest in creating their own cryptocurrency?

Y. M .: A cryptocurrency developed by a central bank would serve as an alternative to stable coins and crypto-assets. In use and form, it would not be so different from the scriptural currencies that we use with our bank cards. The only difference would come from the issuer, which would be the central bank. The value of this currency would not depend on supply or demand, as is the case with bitcoin, but would be based on the value of the currency itself. Thoughts are still in the early stages and it is currently unclear what form these central bank digital currencies might take.

M. S.: These digital currencies will also have to combine all the advantages offered by cash, which is not easy. The Banque de France already successfully carried out initial experiments a year ago, and is pursuing them today. The Central Bank of China has done the same with the “digital yuan”. The ECB, which has carried out several exploratory works, is expected to vote this summer on this digital euro issue project.

“The creation of stable coins by private companies would be a real threat to central banks, whose role is to regulate the available money supply and monitor financial stability. “

Marc Schwartz

A very last question to the CEO of the Monnaie de Paris: can you tell us where we are with the project of a 5 euro coin?

M. S .: In fact, there is not project at this point! The project was defended by the Monnaie de Paris a few years ago, echoing a question that arises in many countries, because the smallest denomination, the 5 euro note, is often the unloved one. The decision whether or not to produce this coin will depend on the European Central Bank and the European Council. On the other hand, at the Monnaie de Paris, among the 7,000 tons of metal that we buy each year on the markets to transform them into coins, medals and decorations, we issue collector coins of 5, 10, 20 and 100 euros. We even go up to 5,000 euros, with pure gold coins that weigh a kilo… and of which I can assure you that they are far more solid reserves of value than bitcoin!

This post is also available in: Spanish