In the middle of May, the government of Denmark prepared a draft law that would allow petrol pumps, restaurants and small shops to refuse taking cash for payment. Almost simultaneously the reserve bank of Denmark, Nationalbanken, announced its plan to stop printing paper money and minting coins by the end of 2016. Although the bank is talking about outsourcing these tasks, most people see in these measures the ultimate aim of the Danish government to transform the country into a cashless society. This intention to move towards a cashless society, however dramatic, did not receive much attention in the global media. Denmark, after all, is too small to have any impact outside of the Scandinavian countries. But then, as the German newspaper, Frankfurter Allgemeine Zeitung, rightly pointed out, not many people in Scandinavia would shed tears if they lose their paper currency.
Things changed when the German economist, Rolf Bofinger, stunned the world of economics and finance by asserting in an interview in the German weekly, Der Spiegel, that paper currency is “an anachronism”, and the sooner we get rid of them the better it will be for everyone. Bofinger, professor of economics at Würzburg University, is a member of the German Council of Economic Experts – the “Five Sages of the Economy” – that is the highest economic advisory organ of the German government and parliament. The debate on a cashless economy has been raging in the Anglo-Saxon countries for the past year, with the economists Kenneth Rogoff and (Dutch-born) Willem Buiter being the chief advocates. Belgium and Ireland also have many proponents of this measure. What is surprising is that an economist from Germany, whose inhabitants have arguably the most old-fashioned ideas about money, has now lent his support to this idea.
Professor Bofinger thought that payment by cash at the shops is cumbersome and an utter waste of time. But he stressed that the wastage of time is not the only reason for eliminating cash transactions in future. He further argued that his suggestion for a cashless society would largely eliminate drug trafficking and black economy. He stressed that one-third of euro in circulation is in 500-euro notes and no normal shopper uses them for his/her transactions. They are primarily used by shadowy figures, he asserted. Of course, to stop these activities, it is necessary for the Eurozone, the USA, the UK and Switzerland to give up cash simultaneously. The most important reason for abandoning cash is to give more policy leeway to the reserve banks. In the current deflationary climate, it is still impossible for the reserve banks to reduce interest rates too much below zero. People would then hoard cash, causing more damage to the economy. In a cashless economy, reserve banks would be free to set negative interest rates to stimulate the economy without any adverse consequences. Professor Bofinger even suggested putting this topic in the agenda for the G-7 summit on June 7-8 in Bavaria.
It would be an uphill task to convince Germans about the merits of abandoning paper money. According to a study by Germany&’s reserve bank, Bundesbank, German consumers still prefer paying in cash despite numerous possibilities to pay electronically. In fact, 79 per cent of all transactions in Germany last year (in numbers, not in the amount in Euros) were conducted with paper money and coins. Many Germans are still allergic to using credit cards. What amazes me is that there are many fancy boutique shops in German cities that still refuse payments by credit cards. Not surprisingly, most Germans are instinctively opposed to the Keynesian prescription of deficit financing to increase demand for pulling an economy out of recession.
Prof Bofinger is an exception in this regard. He is the only Keynesian economist among the “Five Sages of the Economy.” Most German economists believe in what is called “ordoliberalism.” This has been aptly described by Sebastian Dullien and Ulrike Guerot as an economic doctrine where “Governments should regulate markets in such a way that market outcome approximates the theoretical outcome in a perfectly competitive market (in which none of the actors are able to influence the price of goods and services).” This is complemented by a social safety net that started from the time of Bismarck! The Freiburg school is the standard bearer of this economic policy. No wonder that Professor Bofinger was immediately contradicted by Lars Feld, another member of the German Council of Economic Experts and a professor of Freiburg University, when he mimicked Dostoevsky&’s famous quote, “Money is coined freedom,” by saying that “Cash is coined freedom.” He also said that “illegal work” is often the only way for desperate people to earn money for survival. Most importantly, he stressed that cash is the only tool, however feeble, in the hands of ordinary people to check the absolute power of the reserve banks. He was against robbing the only “freedom” ordinary people still have under the almost total surveillance of the government.
Libertarians everywhere are furious. Germany was their last hope of stopping this talk of abolishing cash. Even just one of the “Five Sages” in Germany lending support to the voices of economists elsewhere made them really nervous. Internet is now full with scathing attacks on this proposal. The opponents are capitalising on the mistrust that ordinary people in the West now have in the banks and politicians, and the nexus between the two. Here is one comment I liked most – “I see one small problem. Before this can occur they will have to legalize weed heroine cocaine and whatever else to allow drug dealers to transact electronically. Maybe that&’s what bitcoin is for??”
Bitcoin is a digital currency that is held and used for transactions electronically. It is the first of a growing class of digital money that is commonly referred to as “cryptocurrency.” Bitcoin is completely decentralised and is not controlled by any institution. It is the brainchild of Satoshi Nakamoto and is created digitally by a software-savvy community in which anyone can join. There is a large network of computers that create bitcoins, and also processes all transactions made with the virtual currency. There is a bitcoin protocol that allows creation of at most 21 million bitcoins. Bitcoins may be divided into smaller parts, with the smallest divisible account being one hundred millionth of a bitcoin that is called a “Satoshi.” We leave out the boring technical details. The point is that a cashless economy will surely force those who want to avoid government control to go underground and use bitcoin, or some other cryprocurrency, in lieu of cash.
Right wing critics also talk about a lot of productive activity in the black economy. They cite Professor Colin C. Williams of the University of Sheffield who wrote at the London School of Economics’ European Politics and Policy Blog, “In both OECD nations and developing countries, two-thirds of all businesses start-up unregistered in the informal economy.” They prefer no taxation and no regulation in order to bring the black economy into the open. This is wishful thinking as large-scale kickbacks, illegal betting in sports and terrorist funding would not be solved by this approach. But it all amounts ultimately to faith. Here is the most amusing comment, paraphrasing John the Apostle that I found in the Internet – “… And he causes all, the small and the great, and the rich and the poor, and the free men and the slaves, to be given a (chip) on their right hand or on their forehead, and he provides that no one will be able to buy or to sell, except the one who has the [chip], either the name of the (bank) or the number of his (account).”
Let us hope that our Prime Minister, out of his fondness for all hi-tech hypes coming from the West, does not take up “cashless society” as another slogan in future. After all, money was another gift of India to the outside world. It was invented in our country about six centuries before Christ when our ancients started using silver as the medium of exchange. Without the black economy our electoral politics would be defunct, financing of Bollywood would dry up, and our high-end real estate would collapse. Surely our PM does not want that.