The Phaserl


Eliminating cash will also eliminate the checks and balances on banking policy and practice

by Stefan Wieler, Gold Money:

Eliminating cash will also eliminate the checks and balances on banking policy and practice

The rhetoric against cash (bank notes and coins) has intensified over the past months. Academics and central bankers are advocating the elimination of large denominations of currency notes; some suggest to eliminate cash altogether. This hasn’t gone unnoticed by the public as the spike in Google Trends for topics such as “war on cash” shows. Now it seems the ECB is considering the first step towards implementation by eliminating the largest euro-denominated bank note: the 500 EUR bill. This bill, so described by ECB president Mario Draghi, “is being viewed increasingly as an instrument for illegal activities.”

We examine this trend and the recent rhetoric around the ‘war on cash’. We find the academic-led strategy to rush through a ban on large bills quite concerning; their analysis lacks thoroughness in examining those baring the costs of such a policy, while at the same time containing a high degree of misdirecting-spin by focusing on criminal activity rather than their underlying economic goals. We also discuss the following insights and findings, largely underreported thus far:

1. While most advocates for phasing out large bills are not getting tired emphasizing that smaller bills would not be affected, we show that the largest bills of each currency account for over 2/3 of all bank notes in circulation. Hence, many of the problems we think will emerge with a complete phase-out of cash would in our view already materialize by eliminating the largest bills.

2. One important finding we present is the systematically important use of large-denomination cash bills in times of market volatility. Eliminating the ability of savers to redeem cash and store it outside of the banking system would remove important checks and balances on commercial banks’ activities.

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