Recently on the IEA’s blog, Harrison Griffiths argued that the trend towards a cashless society is ‘fine’. In this endeavour I will contend that the trend towards a cashless society is not fine: it is, instead, a serious threat to freedom. It is such a threat because the trend towards a cashless society will, if it continues, lead to an actual cashless society, which will undermine freedom and autonomy for at least three reasons.
First, a cashless society will increase the reach of the central bank. In a cash-based economy, money enters and exists the banking system, but in a cashless economy, it never leaves the banking system at all. Since, in a fiat money system, the banking system is ultimately connected to the central bank, this means that it becomes even easier for the central bank to conduct an expansive monetary policy. Such expansion could be achieved via negative interest rates, in order to increase aggregate demand during recessions, which would be much harder if cash could facilitate hoarding.
This prospect of negative rates is objectionable for two reasons. One, it seizes the wealth of the citizenry against their will, and, via an institution which is designed to be undemocratic to boot. Two, the stimulation of aggregate demand in a recession is counterproductive due to it propping up a structure of production which is maladjusted to the production of capital goods, hence, any measures which increases the power of central bankers to carry on propping up this maladjustment to a greater extent is bad.
Second, it will enable politicians to monitor and potentially control, large parts of our lives which would otherwise be out of limits with cash. If cash is abolished all of our transactions could be monitored by big banks and the government. The latter institution is especially prone to misuse this power. Only consider the Canadian truckers of 2022 who had their bank accounts frozen for protesting at the government’s vaccines mandate. If it were not for the existence of cash in Canada these individuals would have been totally cajoled into submission.
A greater worry is it would enable the government to micro-manage our lives. Imagine, for example, the state wanted to prohibit people from drinking too much, they could do this by prohibiting all card payments for “excess” expenditure on alcohol, or, to help ‘level up’ certain areas they could prohibit locals from spending outside of them. While cash exists, this micro-managing can be entirely avoided.
Moreover, a cashless society dramatically increases the dependency individuals have on banks ensuring they have greater power over the citizenry. The Coutts affair of Nigel Farage has shown banks are not averse to refusing to serve the public with whom they disagree. And this is their right, but where the government makes it impossible to live in commercial society without a bank account, this grants immense power to the banking industry over the people. No society which prides the autonomy of the individual should be happy with this. To this a right to a bank account may be argued for, however, the issue with this right is it violates freedom of association. This is because it forces the employees of banks to serve customers they would otherwise not.
Third, it would increase the fragility of our system of money for minor advantages from increased efficiency. This is due to the fact that a cashless society requires a complex system of electricity generation, record keeping, deployment of labour and cyber security. If any of these were to fail, e.g., via a strike of bank clerks, or, a storm stopping electricity, there would be chaos which is partially avoided with the existence of cash. The increased efficiency Harrison talks about would also have to be offset by the fact that ending cash would require rolling out broadband everywhere, or, leaving certain areas to become deserts of commerce.
In addition to these three reasons to oppose a cashless society, there are many more. A strong reason for libertarians of the anarcho-capitalist sort (which, I appreciate, not all readers will be) to oppose a cashless society is it diminishes the prospects for keeping some transactions in the informal economy, for example by paying cleaners and builders cash-in-hand. Disregarding concerns about taxation violating individual rights though, the existence of an informal sector keeps effective tax rates below the peak of the Laffer Curve, and, thus, increases growth over the long term, as a greater proportion of income is invested, and, production is encouraged due to its higher return relative to total compliance. In time this eventually increases the standard of living of almost everyone.
At this point in my discussion Harrison may claim that he agrees with my reasoning against a cashless society entirely, yet, he will point out, he never claimed to want a cashless society. Indeed, in his article he states banning cash would deprive people of control over their life and eliminate competitive pressure on banks to innovate cashless products. The trend towards a cashless society, Harrison will argue, is not the same as a cashless society, hence, he will claim, the dangers I have equated with the latter cannot be transferred to the former, and, given the trend to a cashless society has many benefits, it should be welcomed; it is ‘fine’ in other words. I seriously doubt this. A slippery slope exists; the trend towards a cashless society makes it increasingly likely a cashless society will result, meaning, the disadvantages of the latter really should be transferred to the former.
Before moving to the motives of politicians for abolishing cash I should explain the economic factor which will increasingly diminish its use until the situation outlined in the next paragraph. Basically, the provision of cash by banks and its acceptance by businesses involves fixed costs which increase per person when its use decreases which makes such services increasingly unprofitable, hence, these services are provided to a lesser extent. As Harrison has outlined, this is what is going on currently. And, worse, as the supply of cash services shrinks so does the demand for cash as people don’t bother to withdraw it as fewer places accept it. A dangerous spiral of reenforcing effects is in motion today.
I take it for granted many politicians into the future will wish for greater control over our lives. This is not an unreasonable assumption. In recent decades we have been required to pay plastic bag charges, required to receive training before pouring soup, required to not write certain things on social media, and, soon, we will not be allowed to smoke, to name just a few. In ten, twenty or thirty years’ time it is entirely plausible to imagine politicians campaigning to abolish cash. In particular I can imagine the following argument being deployed with great popularity, and, it being a genuine reason as to why politicians may wish to abolish cash (besides it granting them greater control over the population).
As cash is used to a lesser and lesser extent its chief advantage will become its use in tax evasion. Most of the public will not engage in this tax evasion, yet, small businesses, tradesmen and drug dealers will continue to do so. Politicians will point to all of the lost revenue from tax evasion due to cash, argue the law-abiding public are being ripped off by these free riders who are receiving public services without paying their fair share, and, finally, they will claim the only solution is to abolish cash. Envious sections of the public will lap it up and anyone defending cash will be demonised as being in favour of the free riding and crime cash facilitates. And when a libertarian points out the dangers of government having the immense power a cashless society would grant them, they’ll be labelled a conspiracy theorist and be dismissed.
This is not a predicament we should wish to see, yet, it is a distinct possibility. To stop this situation from arising it is imperative the public keep using cash, or, better, increase their use of cash, even if this is inconvenient. This should stop the dangerous spiral I have mentioned. Of course, there is a collective action problem here, i.e., it is in (almost) everyone’s interest as the public to keep cash, but in the individual interest of each of us to not use it because our unique effect on the dangerous spiral is minuscule. This same problem arises with tipping though, and we still overcome it because we believe tipping is the right thing to do. Hence, if those of us in favour of cash can convince the public to carry on using lots of it, because it’s the right thing to do to defend freedom, the dangerous spiral can be stopped.
The first step to take is simple though: keep using cash.