Severe restrictions on the use of cash have been imposed by several governments in recent years. They claim that restricting the ability to pay in cash prevents tax evasion and reduces criminal and terrorist activities – though the overwhelming majority of such transactions are legitimate.
Authorities actively encourage or even mandate the use of debit and credit cards and other electronic means of payment to replace cash. Concerned with tracking financial activity, they choose to ignore the negative economic and social consequences of their policies, particularly the weaker parts of society whose interests they are expected to defend.
While electronic payments have benefits for consumers, severely restricting the ability to use cash as an alternative undermines the economic and civil freedoms that are the foundation of our democratic societies.
Restricting cash use
Usually, governments first establish a maximum amount permitted for cash payments and set procedures for enforcing restrictions. Any offenders are prosecuted under criminal law. The ceilings imposed on cash transactions are then progressively lowered.
This trend is spreading across Europe and other parts of the world. France, Italy, Belgium, Spain, Portugal, Slovakia, the Czech Republic, Bulgaria, Greece and Israel enforce maximum amounts on cash payments, sometimes as low as €1,000.
Scrutiny and surveillance
The US hasn’t implemented formal limitations by law, but in practice even small cash transfers have become subject to scrutiny and surveillance by the authorities. Indeed, US authorities require increasingly numerous and strict reporting by banks on their customers’ cash transactions. The result can be more restrictive than the laws enacted in many European countries.
This restrictive trend is gathering momentum. Further steps in the same direction include the recent suspension of the €500 banknote by the European Central Bank, and the proposal to abolish the $100 dollar bill made by Larry Summers, a former US Treasury Secretary who now sits on the board of the e-payments company Square Inc.
While draconian measures are being imposed or discussed, there is precious little debate or research about the negative economic and social consequences.
Poor, young and old
People have legitimate reasons – and the right – to remain anonymous by using cash. There are also plenty of people who are disabled, too poor, too young or too old to be in a position to use electronic payments.
People shun electronic means of payment for a variety of reasons, whether to reduce the risk of becoming a victim of cyber theft or simply to avoid opaque automatic deductions from their bank accounts.
Many insist on holding investments in tangible assets such as banknotes, because they trust what they can see and feel.
These people should not be made financial pariahs. Yet, to my knowledge, no government that has imposed cash restrictions has conducted any serious studies or public consultations regarding the socio-economic consequences.
Electronic means of payment are advantageous in a number of circumstances.
But cash has a number of unique attributes that explains why it remains the preferred means of payment by a large share of the population. Cash is universally accepted – unless prohibited by law. Cash payments are the only means of payment that is final, while others are subject to cancellation and exposure to fraud. In contrast to electronic payments, no fees are charged to payers and payees in cash transactions; it is the central bank that bears currency production costs.
The hidden costs of e-payments can represent a significant burden for commerce and vendors — and ultimately consumers — as they rely on platforms owned by private companies to drive profits.
Artificially restricting cash usage therefore has economic implications. It disrupts and constrains consumption. The lack of choice impedes the free flow of payments throughout the economic fabric. The overreliance on credit and debit cards, where payments are reversible after supplying the goods and services, are inefficient and hinder economic dynamism.
In the same way that governments have failed to investigate the socio-economic consequences of restricting cash, no serious study to date has brought any proof that measures taken against cash have curbed tax evasion, crime or terrorism.
The wide discrepancy of nominal cash payment ceilings is a case in point: in the EU, the recently introduced limits on cash payments vary from €1,000 to €15,000 without any serious justification – while Germany, the largest EU economy, has no limits whatsoever.
Studies published by the OECD and NGO Transparency International, meanwhile, show that there is no correlation between the size of the shadow economy and the extent of any restrictions on the usage of cash.
Concentrate on crime
Money laundering and other crimes should be attacked directly at source.
The recent spate of terrorist attacks in Europe has encouraged many politicians to justify tightening restrictions on cash by the need to block the funding of terrorist groups. Yet available evidence shows that cash has played little or no role in the attacks, such as those seen in Belgium.
The CTIF, the Belgian arm of the Financial Action Task Force, has investigated the financing of terrorists linked to the Islamic State (IS). They found that existing restrictions on cash usage (ie. tough limits on cash withdrawals and deposits; a €3,000 ceiling on cash payments) and the obligation to report large or suspect cash transactions have in no way impeded the attacks and their financing.
In its detailed 2015 annual report, the CTIF advise that Belgium-based IS terrorists used remittance operators, such as Western Union and prepaid cards, to finance their deadly attacks anonymously.
Though the freedom of payment choice is being eroded, cash is often the preferred means of payment by consumers. Cash in circulation keeps growing worldwide, even in highly developed economies.
Restrictive policies toward legitimate cash usage are encroaching on personal and economic liberties. Cash users are being branded as potential law offenders and are subject to investigation.
Yet people have the right to use cash if they desire. Freedom of choice must be preserved; else the future of our open, democratic and prosperous societies will be at stake.
Article originally published in Currency News in September 2016.