A war on cash is being waged on various fronts around the world. Governments impose restrictions on the use of cash, while many economists call for the abolition of cash. Authorities restrict the amount of cash that can be withdrawn and limit what can be purchased with cash. Does the use of cash need to be eliminated?
One should at first distinguish between physical cash and digital cash in banks. The difference is self-evident: cash in hand cannot be confiscated by a "bail-in" (i.e. officially sanctioned theft) in which the government or bank expropriates a percentage of cash deposited in the bank. Cash in hand cannot be chipped away by negative interest rates or fees like cash held in a bank.
Cash in the bank cannot be withdrawn in a financial emergency that shutters the banks, i.e. a bank holiday.
When pundits suggest cash is "obsolete," they mean physical paper money and coins, not cash in a bank. Cash in the bank is perfectly fine with the government and its well-paid yes-men (paging Mr. Rogoff and Mr. Buiter) because this cash can be expropriated by either "bail-ins" or by negative interest rates.
Mr. Buiter, for example, recently opined that the spot of bother in 2008-09 (the Global Financial Meltdown) could have been avoided if banks had only charged a 6% negative interest rate on cash: in effect, taking 6% of the depositor's cash to force everyone to spend what cash they might have.
Also read: Denmark to be the first country to ban cash
Both cash in hand and cash in the bank are subject to one favored method of expropriation, inflation. Inflation-the single most cherished goal of every central bank-steals purchasing power from physical cash and digital cash alike. Inflation punishes holders of cash and benefits those with debt, as debt becomes cheaper to service.
The beneficial effect of inflation on debt has been in play for decades, so it can't be the cause of governments' recent interest in eliminating physical cash.
So now we return to the question: Why are governments suddenly declaring war on physical cash, the oldest officially issued form of money?
The first reason: physical cash has the potential to evade both taxes as well as officially sanctioned theft via bail-ins and negative interest rates. In short, physical cash is extremely difficult for governments to steal.
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