How life after cash could take away your freedom

I inserted my card into the ATM, and then clumsily punched in my new pin number. A few buttons presses later and out popped a single thousand-franc Swiss banknote.

“Good grief, what did I do?” I cried out in despair, “I wanted a hundred francs!”

I have to confess, I’ve done this twice. Both times were my fault.

It’s incredibly irritating because the thousand-franc banknote in Switzerland is one of the world’s largest denominated bills in circulation. It’s roughly a thousand US dollars, 900 euros or 800 pounds sterling.

On both occasions, I went to my bank branch and explained what an idiot I was. After a bit of light-hearted banter, the cashier debited the offensively large bank note back into my account and then  dispensed a more useful hundred-franc note.

Holding large amounts of cash is quite common in Switzerland. In Geneva, I witnessed old ladies going into the bank and withdrawing six thousand francs at a time and then casually putting it into their dainty slim-line purses.

Though banking-secrecy in Switzerland has now ended, holding cash can still offer a degree of privacy. Authorities can’t trace where you store it, where you spend it or where you move it to.

Two members of Swiss parliament from the wealthy Canton of Zug even proposed issuing a ludicrous 5,000-franc banknote to preserve the sanctity of cash in Switzerland. They argued that it would “saved the freedom and privacy” of Swiss citizens and maintain the Swiss-franc’s safe-haven status internationally.

Switzerland is however, a bit of an exception to international norms. Most governments dislike cash because it’s difficult to tax. It also removes the degree of control they have on their citizen because they can’t easily trace where money is deposited or spent. It can help sustain unregulated black market economies and aid criminal activities.

The demonetisation event in India is a great example of an attempt to crackdown on this type of activity.

Overnight on 8 November 2016, the Indian government scrapped the 500 and 1,000 rupee Mahatma Gandhi Series banknotes. They replaced them with new 500 and 2,000 rupee notes. However, there was an immediate shortage of the new banknotes in circulation, which caused chaos.

Although India’s remains largely a cash-based economy there was a sharp spike in cashless payments made in India during this period. Though this action in India was poorly executed, it’s a strong indication of where the current Indian government want to head toward – a cashless society where government coffers receive a greater share what’s created through economic activity.

Of course it’s not all about government control. There are also some powerful economic benefits to going cashless. It makes it quicker and easier to sell and purchase goods for instance. Payment volumes also increase along with lines of short-term credit (i.e. credit cards) to speed up transactions speeds. This is important because the increase in the sloshing around of money in the economy increase the overall growth in money supply, which creates economic growth.

Cashless payment also add more dynamism to an economy and facilitates the laws of supply and demand better under capitalism. The death of money could create quite a leap in economic activity, which is in a way ironic. The birth of money in former barter societies made transactions much easier to carry out because it created a universal store of value and medium of exchange. It gave rise to tremendous economic growth and saw the birth of early human civilisation.

The other positive benefit of having a cashless society is that it can provide added security to the financial system.

Globally interest rates have hit historic lows. We have even seen negative rates emerge in some developed markets in an attempt to boost extremely stagnate levels of growth. If these interest rates were to dip deeply into the negative, this would force banks to charge depositors significantly more than they currently pay. It would therefore incentivise people to withdraw their money. If enough people do, it could lead to a number of bank runs, which would cripple the financial system.

Although fundamentals no longer favour this scenario with interest rates more likely to rise going forward, it presents how a future financial crisis could unfold. Therefore, eliminating cash could  prevent this situation because money is instead moved around electronically, rather than withdrawn as cash.

However, there are so many holes in this line of reasoning. I won’t go into all of them, but the most obvious is that a new form of cash – that is out of government control – will be created.

This is not too difficult to imagine. Throughout human history, people have experimented with lots of types of cash. They have almost always ended up favouring gold and silver. These metals have always been universally accepted in most societies owing to their rarity. They proved to be a robust store of value and a highly accepted medium of exchange. Moreover, they had the added advantage that they were impossible for any government or regime to control.

Of course if the government deems any form of cash illegal then this might make life difficult. Though we are stretching the realms of possibility here, holding gold or silver in large quantities, could be banned. However, if this were to happen, I suspect the price of these illicit rare metals would skyrocket, making them even more valuable as an alternative form of cash. Again it’s ironic because once upon a time, our cash was pegged directly against the gold reserve held in the central bank.

The problem with having a pure cashless society is about control. A corrupt government or regime could wipe you out financially with a keystroke, just because it didn’t like something you said. We also borrow more because money appears to be less tangible as a concept.

However, I don’t think it would ever be possible to completely eliminate cash. When times are tough, cash is still king. Though we are on a path towards a cashless society, it’s far too early to proclaim the death of cash and the loss of our liberty.