Global Trends and Politics

Cash is a lot more than just notes and coins

Over the past few weeks and months, there has been a great deal of discussion among renowned economists about the abolition of banknotes and coins. Michael Menhart, Munich Re's Chief Economist, is not a fan of the idea.


Have you found yourself rubbing your eyes with surprise while reading the financial section of your daily newspaper in recent weeks? A number of renowned economists are demanding an end to physical currency. In lectures, Kenneth Rogoff – Professor of Economics at Harvard University and one of the most respected and widely cited economists of our time – has long been proposing the end of banknotes and coins. And Peter Bofinger, a member of the German Council of Experts of the Federal Government, has also recently expressed his support of the idea.

A number of countries have actually started taking steps in this direction. Denmark is one example: petrol stations and shops are allowed to refuse to accept cash payments under certain circumstances. Some of the arguments in favour of an all-out switch to electronic payment may have a certain charm at first. Just imagine never having to queue up again behind someone who insists on paying in small change at the cash register. Or never again having a bulging wallet ruin the line and silhouette of your good pair of suit trousers. Of course, this begs the question whether it is actually faster to pay for groceries by credit card or mobile phone in the supermarket or - for that matter - whether walking around with a lighter wallet justifies the drastic step of abolishing coins and banknotes.

There is another argument that seemingly carries more weight: doing away with physical currency is intended to put an end to crime and undeclared employment. It is assumed that these days 500 euro notes are mainly used to finance organised crime. And in a world without cash, it would be difficult to pay for those working in undeclared jobs. Tax authorities are hoping that a move away from cash will lead to more honesty. However, I have serious doubts that this will have the desired effect. It is true that the stocking-masked, pistol-toting bank robbers we see in films and on TV would be put out of business. After all, they could hardly transfer the spoils into their own accounts.

But many a cyber criminal would have a field day if cash were to be banned. Their "market" would boom. Criminal activity has always kept up with technical progress. So why would this be any different with a shift to digitalised payment?

It is hardly practicable to abolish cash completely.

To achieve the effects proclaimed by advocates, the world's major currency areas would have to switch to electronic payment more or less simultaneously. If not, the criminal underworld would simply go over to using US dollars for their drug-trafficking operations. Even if a large-scale abolition of cash were feasible, I am not in favour of it, neither in my role as an economist nor as a citizen. It is no coincidence that this debate is currently gaining momentum, given the record-low interest rates.

Economists that advocate the abolition of physical currency are making no secret of the huge benefit this would entail for central banks, as it would enable them to introduce significantly negative interest rates. Today, the prospect of being charged negative interest rates on an account would encourage anyone to withdraw their money and put it under their pillows or in a vault. This option would be ruled out in a cash-free world.

Thus central banks would have much more scope for manoeuvre. In times of crisis, this would have certain practical benefits: charging negative interest rates would prompt private persons and enterprises to spend their money rather than save it, thereby stimulating the economy. But is this really the solution? What fatal signal would this be sending in terms of monetary and fiscal discipline in an economy if the people's control over their own money were undermined in this way?

I can already hear the advocates of cash abolition saying that this kind of criticism is another typical example of German scepticism - or even German Angst – about progress. In many industrialised countries, the share of cash money in financial transactions is significantly lower than in Germany, where it makes up almost 80%. And even in Germany, more people are now resorting to cash-free payment methods than they did a few years ago.

Cash has been losing ground to other means of payment in recent decades, but doing away with it entirely would have serious consequences. We would be deprived of the freedom to decide whether we would rather use notes, coins or electronic money.

Control what we do with our money

Everything we buy could be traced, whether we dine in a restaurant, purchase medicines in a pharmacy or buy a book. "If you have nothing to hide, you have nothing to fear", the advocates of abolition are probably saying. But this kind of argument can be used to justify almost any form of government control. And it disregards the fact that no one knows what yardstick future governments may choose to apply for disclosing payment transactions.

A plea for the preservation of notes and coins is not hostile to progress, or to the new digital world. There are many good reasons for us to hope that we can continue to use non-cash payment methods in future. But there is only one reason for ensuring that cash-free payment is the only payment method available to us: and that is control over what we do with our money – and when – and control over access to our money. And that is the kind of control I certainly would not want anyone else to exercise.

Munich Re Experts
Michael Menhart
Michael Menhart
Head of Economics, Sustainability and Public Affairs