A World Without Cash
- The European Union will likely soon decommission the 500-euro note in an effort to deter criminal activity.
- The elimination of the euro's highest denomination is the latest step in a longer-term move toward a cashless society, prompted by factors such as the growing use of negative interest rates and capital controls worldwide.
- Setbacks in the transition to exclusively electronic transactions — for instance, a general loss of faith in financial institutions — may slow the trend but will not reverse it.
The eurozone has found a new scapegoat for international crime: the 500-euro note. The Continent's leaders are seriously discussing decommissioning the euro's highest denomination, which is favored by crime groups for transferring massive sums across international borders. Eliminating the bank note could help temper criminal activity, but in reality, the implications are much broader. The idea is just the most recent step in an ongoing process moving Europe, and indeed the world, closer to an entirely cashless economy.
European authorities have long known that high-denomination bills are a boon for the criminal underworld, but the publication in February of a paper by Peter Sands, a Harvard academic and former CEO of Standard Chartered, accelerated the campaign to phase out the 500-euro note. The widely read paper, Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes, is an exhortation to world leaders to eliminate their high-denomination notes because they make it easier for criminals to move money internationally. Sands specifically names the 500-euro note as the first that should go because of its high usage in criminal networks, but he foresees the same fate for the 1,000-Swiss franc, 10,000-yen notes and the $100 bill.
Sands is hardly the first to make the connection between high-value banknotes and criminal activity. Britain's Serious Organised Crime Agency banned the 500-euro note in 2010 because of its regular use by criminals. The note had originally been introduced with the euro at the behest of Germany and Austria, which were accustomed to having higher-denomination notes in their own currencies. Its association with criminal activity also brought it to the attention of European authorities following the terrorist attacks in Paris in November 2015 and the ensuing renewed attempts to disrupt the Islamic State's activities. The European Commission promised that it would work with the European Central Bank to examine the note's role in terrorism financing, and the European bank has itself now launched an investigation with the ultimate goal, it appears, of phasing the note out.
Most ordinary Europeans would hardly notice if the 500-euro note went out of circulation; 60 percent say they have never even seen one. The note does have its defenders, however, namely the central banks of Germany, Austria and Luxembourg, albeit for different reasons. Luxembourg is one of the top printers of the note, despite contributing to just 0.2 percent of Europe's population and itself being one of the most cashless societies in Europe. In 2013, Luxembourg printed more than twice its gross domestic product in 500-euro bills. But the Austrian and German cases are slightly different. The Bundesbank seems to be speaking for the German public in a way that the German government, which supports the change, is not. The people of Austria and Germany, after all, live in two of the more cash-heavy societies in Europe, thanks in part to the pain of past monetary crises. The prospect of losing the 500-euro note has accordingly prompted an uproar in German media.
A Penchant for Paper
There are various reasons societies tend to be more cashless or cash-heavy. One recurring theme in cash-heavy societies is the memory of traumatic monetary experiences. Both Germany and Austria experienced periods of extreme hyperinflation after the world wars. This, along with life under dictatorships and in high-surveillance societies, has given both populations a fierce desire to protect their privacy — something that is afforded by the anonymity of using cash — and to keep wealth in physical form to avoid relying on systemic institutions. In 2008, large numbers of the German public responded to the financial crisis by withdrawing high quantities of 500-euro notes from their banks, presumably to stuff in their mattresses. The German preference for cash may also have something to do with the notorious Teutonic thriftiness — poll respondents often claim that using cash makes personal budgeting easier and that cards are liable to lead to overspending.
Monetary trauma and dictatorial histories also left their mark at the other end of Eurasia in Japan, another cash-heavy outlier, which experienced its own brush with hyperinflation after World War II. And there are other similarities between the former Axis powers. Japan and Germany are both leading the developed world's aging epidemic. This makes some intuitive sense, since it is more common to find early adopters among the youth rather than the elderly, and many of the latest cashless developments are being driven by innovations in the technology sector. The Japanese have also gone through two decades of deflation, which incentivizes saving. In an inflationary environment, citizens are motivated to spend their cash because they know that it can buy less every day. During prolonged deflation, a 10,000-yen note stashed in a mattress for a year would buy more than it could when it was first earned.
At the other end of the spectrum, Sweden and Denmark are leading the move away from paper currency. In fact, Denmark has made the transition to a fully cashless society an explicit goal for 2030. And the prevailing winds appear to be blowing in the Scandinavian direction. Obviously, technological advancements are making cash-free transactions easier than ever before, but there are also distinct structural advantages to a cashless economy that make it more appealing in today's regulatory environment.
The Evolving Global Economy
The primary example is the growing prevalence of negative interest rates, which have now been introduced by the Bank of Japan following the examples of the European, Danish, Swedish and Swiss central banks. Monetary theory holds that, when it comes to interest rates, there is a theoretical "zero lower bound" that banks cannot cross. If a central bank effectively charges commercial banks a fee to hold their money overnight and those commercial banks then pass those charges on to their customers, customers will simply remove all their money from the bank and keep it in cash. Now, steep rate cuts are testing this theory.
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With Switzerland leading the way with rates of -0.75 percent, all are watching closely to see how low a rate can go before triggering mass withdrawals. Electronic money eliminates this threat, of course, since money that cannot be held physically cannot be withdrawn. In theory, then, a cashless society frees up central banks to explore an entirely new set of financial tools, which could be useful in fighting the low inflation that has so far defied already unprecedentedly low interest rates.
Another trend is the return of capital controls to the global stage. Since the mid-1970s, economic theory has broadly held that all states should free up their markets and allow capital to flow across borders unrestricted. But during the Asian financial crisis of the late 1990s, the countries that weathered the recession best were those that tightly controlled their capital flows. The financial crisis of 2008 cast further doubt on the idea that financial liberalization is always and everywhere ideal. As a result, capital controls have been gradually coming back into fashion. Iceland has been repairing its economy behind capital controls since 2008, and Greece introduced them in mid-2015 as part of its financial crisis. Even the International Monetary Fund, usually a vocal proponent of free movement of capital, has admitted that some situations warrant tighter controls. There is also some speculation that China will cope with its current financial woes by reversing some of its previous liberalizing reforms and reinstituting monetary barriers.
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The link between capital controls and a cashless society is simple. A geographically remote country such as Iceland, an island in the middle of the Atlantic, can easily impose restrictions on the movement of capital. It is harder, however, to stop a determined Greek national from crossing the Bulgarian border with a backpack full of 500-euro notes. As more countries consider capital controls a possibility — and much of Europe must at least consider the possibility of finding itself in Greece's position — the attraction of a cashless society becomes stronger.
This would especially be the case for a country leaving the eurozone, as Greece nearly did last year, since it is much easier to freeze assets and redenominate them into a new currency electronically than to try to confine all the euro bank notes in Greece. Along the same lines, the ease with which governments can track and control electronic money makes it harder for citizens to hide capital or to misrepresent their income. Now that there is a global push to end tax evasion, a cashless system becomes all the more appealing.
All of these trends, allied with the unstoppable progress of technology, will likely make cashless transactions ever more prevalent in the global economy, especially as the emerging economies of Africa and India embrace concepts such as mobile banking. Of course, widespread monetary trauma or a loss of faith in central institutions could drive citizens back to cash or even into gold. But such retreats will only slow the trend; they are unlikely to reverse it. The next step in the process will be the continued phasing out of higher-denomination notes, as international governments collude to make life harder for criminal networks. The first of these is likely to be the 500-euro note, despite the objections of Austria, Luxembourg and Germany.
A World Without Cash was originally published by Stratfor, a geopolitical intelligence and advisory firm based in Austin, Texas.
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