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Economy

What's Really Driving The End-Of-Cash Clamor

The temptation to get rid of coins and paper bills is evidence of the failure of the monetary policy of central banks, which has led to negative interest rates.

The future?
The future?
Henri Bourguinat

PARIS — It is a sign of changing times that we talk not just about the decline, but the complete disappearance of cash.

With the exception perhaps of the coins needed to unlock supermarket carts, it's clear that everything will be paid by check, or more often with the magical rectangles we call credit cards. Paying in cash is already perceived as tacky and outdated. Our beloved bills and coins, it would seem, are on the way out.

This is understandable given the convenience and increasing speed of our digital society. Still, one can't help feeling a bit put off when the bank says that because of ATMs, it no longer has to offer counter service; or when the head of the International Monetary Fund, Christine Lagarde, makes a plug for the "cashless society" of tomorrow, as she did in January at the World Economic Forum in Davos.

Lagarde's call was echoed by French Finance Minister Michel Sapin, who said the elimination of cash would help the European Central Bank (ECB) gain better control over inflation. There's also the argument that cutting cash would save on the cost of tracking down counterfeit money or installing expensive ATMs, while at the same time undermining illicit activities such as drug trafficking, prostitution, arms dealing, tax evasion and off-the-books work.

And yet there's more to this than convenience or simple economics. The real reason people are calling for an end of cash is that current monetary policy has run its course.

From 2010 to 2014, the United States, with its famous "quantitative easing" (QE) strategy, flooded the market with liquidity ($3.5 trillion). Since then, the ECB, by generously accepting all obligations and long-term securities to be provided through European banks, has done the same thing — to the tune of some 1.5 trillion euros ($1.6 trillion). ECB President Mario Draghi has now go even further, with Thursday's major new stimulus plan.

Unfortunately, though, the excess in monetary liquidity has proven ineffective. While the U.S. backs off QE, Europe is opening the floodgates wider still. With its interest rates all the way down to 0%, we're seeing negative rates. Already, out of the 9 trillion euros worth of bonds issued by EU countries, 2 trillion have negative rates. Everywhere, people are taking on debt not just at zero cost. They're actually getting paid to do it.

Herein lies the problem. Negative interest rates are no longer relevant signals for resource allocation: They reinforce the addiction to debt and penalize the investor, all the while without driving the real economy.

This is where the anti-cash crusade makes sense. With cash, the population has a remedy. People who keep their cash may not earn anything, but at least they don't have to pay to keep it in the bank. It's a refuge that, like gold, is inconvenient to store but isn't penalized by deposit rates.

The modernists tout digitalization, therefore, as a way to avoid all of that. Money could be stored in digital form and all payments made electronically. Such exchanges could even be done without intermediaries, with tools such as the "block chain" database we heard so much about in Davos.

But before jumping on the anti-cash bandwagon, there is a major caveat people should keep in mind: a cash-less society will give policymakers the means to control the entire system. For a hint of what that could imply, consider the recent blocking of cash withdrawals in Greece.

We're better off letting cash take its own course. Meddling with it could further encourage negative rates and ultimately, if we're not careful, undermine confidence in the currency, which is something no one wants.

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