The cash in our pockets is under attack. We must defend it. Paper currency may have its flaws, but it is one of our last protections against overbearing and untrustworthy governments.
The most spectacular campaign against cash to date has been mounted in India, where in November Prime Minister Narendra Modi announced the cancellation of the country’s ubiquitous 500 rupee (HK$56) and 1,000 rupee banknotes. The demonetisation was woefully mishandled, and the damage it inflicted on businesses and consumer sentiment will weigh heavily on India’s economic growth this year.
With the cost of Modi’s move so high, sceptics in India allege that the real purpose of the prime minister’s move was less to strengthen the country’s economic future than to wipe out the “black money” cash campaign funds accumulated by his political opponents ahead of key state elections next month.
Nevertheless, outside India, many prominent policymakers, bankers and economists in the developed world sympathise with Modi’s desire to create a cashless economy. In recent months figures as influential as former US Treasury secretary Larry Summers, former International Monetary Fund chief economist Ken Rogoff, and former Standard Chartered Bank CEO Peter Sands have all lent their weight to the campaign by calling for the elimination of large denomination banknotes, notably the US$100 bill and the €500 (HK$4,000) note.
Typically these calls are presented as crime-fighting proposals. In a paper published last February, for example, Sands pointed out that “high denomination notes are the payment instrument of choice for those evading taxes, committing crimes, financing terrorism or giving or receiving bribes”. Getting rid of them, he argued, would disrupt criminals’ business models, severely degrading their ability to traffic in slaves, deal drugs, launder money, evade taxes and finance terrorist outrages.
It is an unconvincing argument. Someone so keen on martyrdom that he is willing to blow himself to atoms to achieve it is hardly likely to be deterred because he can no longer pay for his explosives in US$100 bills. Similarly, with such massive profits on offer, drug peddlers will waste little time before finding alternative means of exchange. And as a former banker Sands knows perfectly well, the tools of large-scale money laundering and tax evasion are not briefcases full of used dollar bills, but offshore bank accounts, futures contracts, shell companies in the Cayman Islands and all the other arcana of high finance with low morals.
If the crime-fighting explanation for the developed world’s attack on cash sounds feeble, it is because it is largely an afterthought, dreamt up to win public support for a policy that has a different and altogether less palatable purpose.
In recent years governments in the developed world have consistently lived above their means, running up enormous debt mountains that few can realistically hope ever to repay.
In Japan, public debt now stands at 1 quadrillion yen, or around 250 per cent of gross domestic product. In Italy it is 133 per cent of GDP and in the United States 108 per cent. In all these countries, debt ratios continue to grow.
In time-honoured fashion, governments have attempted to inflate their way out of the problem by printing money. The idea is that if the authorities can push up inflation, the size of their liabilities will fall relative to the nominal value of economic output, effectively shrinking their debt. The trouble is that populations have declined to take the bait. Despite the lure of free money, consumers have largely remained cautious, and there has been insufficient demand to push up prices to any great extent.
In increasing desperation, governments would like to go a step further, and push interest rates deeply into negative territory. The trouble is banknotes. Faced with the prospect of seeing the value of their savings diminished by deeply negative interest rates, savers would simply withdraw their money from banks in the form of cash, and stick it under their mattresses.
The solution is to get rid of banknotes. As the former IMF economist Rogoff explained last year in his book The Curse Of Cash, “phasing out paper currency is arguably the simplest and most elegant approach to clearing the path for central banks to invoke unfettered negative interest rate policies”. In other words, he wants to impose an expiry date on money. In a cashless world you either spend your money now, or risk losing it.
Only an eminent economist could come up with such a hare-brained plan which so fundamentally misunderstands the nature of money. An economist will tell you that money is a means of exchange, a unit of account and a store of value. Yes, it is all those, but above all it represents trust: the faith that your debtor will pay. Banknotes are the physical embodiment of that trust.
If officials attempt to scrap banknotes in order to impose negative interest rates that deliberately diminish the value of their citizens’ savings, they will be reneging on the fundamental compact of trust between people and government. Of course, it can be argued that governments have been breaching that trust ever since Roman emperors began clipping their coinage. Nevertheless, withdrawing banknotes would make the betrayal explicit.
Citizens may well abandon cash of their own accord one day, but only if they trust their government. Any government that attempts to withdraw cash unilaterally is simply showing itself to be untrustworthy. All such attempts should be vigorously resisted. ■
Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 20 years