In Praise of Cash: Paper and Plastic Are Not Equal
In Praise of Cash: Paper and Plastic Are Not Equal
Giovanni Battista Ponzetto
Giovanni Battista Ponzetto
I posted this on Linkedin on August 22, 2018 . Fast forward to October 2025 and the UK Government is infesting the media with Digital ID, and the push for a central bank digital currency hasn't stalled. Disclaimer: This financial "painter" is strictly without academic qualifications; his opinions are personal and should not be taken as advice to guide anyone in buying or selling anything. Soak overnight in lukewarm water before ingesting.[Update September 14, 2018, Draghi's Communication]
[Update February 21, 2019, Zimbabwe]
[Update April 22, 2019, IMF]
[Update Conte 2 Government] Dedicated to Carlo Alberto Carnevale Maffè, a good friend when we agree, and an even better one when we don’t.
“Lady Bracknell. Ah! A life full of incidents, I see; perhaps too exciting for a young lady. Personally, I am not in favor of premature experiences. [She rises, looks at her watch] Gwendolen! Our departure is approaching. We cannot waste a moment. As a matter of form, Mr. Worthing, I must ask whether Miss Cardew has a small dowry?Jack. Oh! About one hundred and thirty thousand pounds in the funds. That’s all. Goodbye, Lady Bracknell. It was a pleasure to see you.Lady Bracknell. [sits back down.] One moment, Mr. Worthing. One hundred and thirty thousand pounds! And in the funds! Miss Cardew seems a very attractive young lady, upon closer inspection. Nowadays, few girls have solid qualities, qualities that last and improve with time.” [From The Importance of Being Earnest by Oscar Wilde, translated by the author. 130,000 pounds at that time is equivalent to about 20 million EUR in 2018. “Funds” is a definition unfamiliar to modern readers, see https://www.immediateannuities.com/annuitymuseum/annuitycertificatesofthebankofengland/]The imperious Lady Bracknell, played by Judi Dench in the movie version, lived in an orderly world where renouncing the possession of money was rewarded. “Qualities that improve with time” is, alas, no longer a fitting quip for today’s government bonds, where the yield on German bonds is zero or negative up to an eight-year maturity.Zero interest rates bring another unintended consequence: the “cost” of holding banknotes, the flip side of interest, has also vanished.This is best understood with an example. Take two twins, Pippo and Pluto. Both have 5,000 EUR in savings they know they won’t need for everyday expenses. Pippo, a frugal farmer living in the countryside with dogs and a shotgun, keeps his money hidden at home. Pluto, who moved to the city with a tidy office job, deposits his money in a bank for easy access, where he essentially gets the annual Treasury bill rate. So, Pippo prioritizes safety over returns. Pluto accepts a small counterparty risk for a return.After eight years, let’s look at the results based on varying interest rates.
Until 2008, Pluto’s choice was almost certainly better: rates were around 4%, the world was orderly, and his brother’s money earned nothing. Over eight years, Pluto could expect to outperform his brother, whose money earned zero, by nearly 2,000 EUR, about 38% of the initial sum. But now?Poor Pluto is left with only risks: he either buys “something else” with his liquid funds (increasing risk) or earns less than his brother. And beware, there’s always another issue: true, Pippo risks theft at home because the dog sleeps and the shotgun is unloaded, but Pluto isn’t risk-free either. Between the “war on cash,” recurring and non-recurring wealth taxes, and memories of the beloved Amato [a reference to a 1992 "Sunday heist" Italian bank account cash levy], he doesn’t sleep soundly either.For now, we’re in the top three rows of the table. I’ve deliberately included negative rates, first because they exist (see previous figure, one-year Bund yield at -0.60%), and second because no bank account is truly at zero: a bit of stamp duty, some fees, and hitting -0.25% is easy. This is BEFORE the Monti stamp duty, which also affects bonds.So, why this widespread disdain for cash, except when the Russians show up? A mass veneration has been triggered for the idea of a “cashless” economy, where governments could track every transaction, supposedly to prevent evil and defend good. And what is the concept of private property in the face of such a noble goal? As any respectable skeptic would do, let’s study History, because while History deserves a capital H, economics does not.The correlation between “correctness” and cash usage is untenableLet’s start in order: when the Euro was created, Germany had a 1,000 Deutsche Mark banknote in circulation. In some form, it’s still legal tender in Germany because, unlike countries like Italy, which has a rather cough “flexible” concept of the state’s obligations to citizens, the ability to exchange old currency for new has no expiration date. [Reference here]. Indeed, abolishing this possibility can be described as either “unilateral debt repudiation” or “a 100% ownership tax on unknown holders.” But so be it, the true characteristic of Italians is resignation, and that of politicians is lack of accountability.Back to the point: since the highest-value banknote among future Euro adopters was German, one would expect the upright and wise Italians of the time, with their 500,000 lire notes (half the value), to have been summoned to the Bundesbank to advise on fighting tax evasion and corruption, rampant across all German Länder, and especially to tackle the mafia clans of Obersalzberg and Mecklenburg. But for some strange reason, this didn’t happen. Who knows why, but small-denomination notes are used in transactions. And as much as it may displease the One True Thought, tax evasion, crime, and corruption are also transactions.The good news is that today, September 14, the ECB president communicated in a letter to a European parliamentarian that the 500 EUR banknote will never lose its legal tender status: [ECB Letter].Tax evasion, the eternal grievanceEven in daily life, when we “sin” by paying for a home repair in cash to avoid taxes, no one says, “Doc, got a bigger bill?” It follows, absurdly, that politicians (including all those preaching the “banknotes = crime” religion) should ban all banknotes EXCEPT those of 200 EUR and above. This would address small transactions and the underground economy that politics (officially) despises. It would also solve the issue for “note concentrators”: the market stall vendor, who dreads the daily anti-money laundering declaration at the bank counter, would no longer have the problem! Except…But what is money?How would we then transact among ourselves? Obviously, they say, pointing to France, Sweden, Germany, etc. (all countries where, to my recollection, the state hasn’t forcibly withdrawn funds from accounts since the war, which will be relevant later): Plastic money! A flurry of debit cards, credit cards, maximum rates, online reporting, etc. But there’s a catch, and it’s simple.A banknote, by its nature, represents a debt from the issuing entity to the holder. It has no legal expiration and is a direct bearer instrument, with the holder also acting as custodian. Other forms of payment (credit or debit cards) are NOT the same, and the transaction is no longer between two parties but involves three or more.A debit card (or Bancomat, as it’s often called) assumes the money remains deposited in a bank. Imagine all the protections and safeguards are in place—European deposit guarantees, state interventions to protect accounts, etc. But what if the internet is down? Do you really think if the issuing bank fails on a Friday, you could buy gas over the weekend? How long would it take to regain access to your money? Remember, it’s NOT cash: the bank has lent that money. This, by the way, complicates the specter of “punitive wealth taxes”: who tells the banks to call in loans on a Saturday night? They don’t keep your account money in a vault.So, one debit card or two from different banks? (In different countries, but that’s another story.) Keep in mind that no one is imagining a way to make “plastic” transactions anonymously between citizens: if you want to give your niece a cash gift for her birthday, it’ll involve four parties: you, your niece, your bank, and her bank. And the state. It’s like watching The Truman Show.Credit cards! Sure, you don’t need the money upfront; you pay at the end of the month! And maybe you spread it out at 15% interest. Too bad a credit card, no matter who issues it, assumes you have a bank account. No bank, no card. Or a new bank—would be interesting to meet someone who still has an account at “new” Banca Etruria, just to see the effect.Of course, a checkbook has the same implications. It has a slight advantage: imagine, in a burst of goodwill, private ownership of firearms is banned. But you’re stubborn, you already have a gun and a permit, and you go to the gun shop to buy ammo for the range with friends, and then… “BEEEEEP!” “We’re sorry, the transaction was declined. Contact your institution.”If you pay by check, they’ll come to your house. To get you. Naturally, you’ve realized it’s impossible to imagine a dream (or nightmare) where cash is abolished, even just the 500 EUR note, but checks are not.By the way, do you smoke? Buy wine in quantities that, spread over time, would put you over the legal limit for driving? I’m a former Carabiniere; I’ve heard “I bought it for my friends as well!” before (true story). Oh, right, “we’re doing it to fight drugs!” But those heavily addicted often find ways. They do favors they shouldn’t, etc. Plus, Europe, which absorbed former Soviet bloc countries, should remember you can always use cash in another country, just not your own. Argentinians use dollars, as do Venezuelans: if you tell them it’s time to ditch paper money, they’ll say, “About time, my back was breaking carrying enough Bolivars for a dinner for four! Enough is enough!”The clay piggy bankBut banknotes, like gold and silver in metal-based monetary systems before them, have another function: they store wealth, like government bonds, bank deposits, or other “safe” investments. They’re also the benchmark for all investment decisions because even keeping money in a zero-interest account is an investment: you’re paying for custody and administration, and you always have, in the form of lower returns compared to what the bank earns using your money. With the latest bank “dramas” (Etruria, Marche, Ferrara, and Novo Banco in Portugal), fear of bail-ins has led many to question whether that custody is worth it. A European deposit guarantee is often requested to reassure the public.Wait a moment. Did someone say “European deposit guarantee”? Oh, right: ME. Because, you see, a European deposit guarantee… already exists. It’s called [drumroll] “the Euro banknote.”
[Update February 21, 2019, Zimbabwe]
[Update April 22, 2019, IMF]
[Update Conte 2 Government] Dedicated to Carlo Alberto Carnevale Maffè, a good friend when we agree, and an even better one when we don’t.
“Lady Bracknell. Ah! A life full of incidents, I see; perhaps too exciting for a young lady. Personally, I am not in favor of premature experiences. [She rises, looks at her watch] Gwendolen! Our departure is approaching. We cannot waste a moment. As a matter of form, Mr. Worthing, I must ask whether Miss Cardew has a small dowry?Jack. Oh! About one hundred and thirty thousand pounds in the funds. That’s all. Goodbye, Lady Bracknell. It was a pleasure to see you.Lady Bracknell. [sits back down.] One moment, Mr. Worthing. One hundred and thirty thousand pounds! And in the funds! Miss Cardew seems a very attractive young lady, upon closer inspection. Nowadays, few girls have solid qualities, qualities that last and improve with time.” [From The Importance of Being Earnest by Oscar Wilde, translated by the author. 130,000 pounds at that time is equivalent to about 20 million EUR in 2018. “Funds” is a definition unfamiliar to modern readers, see https://www.immediateannuities.com/annuitymuseum/annuitycertificatesofthebankofengland/]The imperious Lady Bracknell, played by Judi Dench in the movie version, lived in an orderly world where renouncing the possession of money was rewarded. “Qualities that improve with time” is, alas, no longer a fitting quip for today’s government bonds, where the yield on German bonds is zero or negative up to an eight-year maturity.Zero interest rates bring another unintended consequence: the “cost” of holding banknotes, the flip side of interest, has also vanished.This is best understood with an example. Take two twins, Pippo and Pluto. Both have 5,000 EUR in savings they know they won’t need for everyday expenses. Pippo, a frugal farmer living in the countryside with dogs and a shotgun, keeps his money hidden at home. Pluto, who moved to the city with a tidy office job, deposits his money in a bank for easy access, where he essentially gets the annual Treasury bill rate. So, Pippo prioritizes safety over returns. Pluto accepts a small counterparty risk for a return.After eight years, let’s look at the results based on varying interest rates.
Until 2008, Pluto’s choice was almost certainly better: rates were around 4%, the world was orderly, and his brother’s money earned nothing. Over eight years, Pluto could expect to outperform his brother, whose money earned zero, by nearly 2,000 EUR, about 38% of the initial sum. But now?Poor Pluto is left with only risks: he either buys “something else” with his liquid funds (increasing risk) or earns less than his brother. And beware, there’s always another issue: true, Pippo risks theft at home because the dog sleeps and the shotgun is unloaded, but Pluto isn’t risk-free either. Between the “war on cash,” recurring and non-recurring wealth taxes, and memories of the beloved Amato [a reference to a 1992 "Sunday heist" Italian bank account cash levy], he doesn’t sleep soundly either.For now, we’re in the top three rows of the table. I’ve deliberately included negative rates, first because they exist (see previous figure, one-year Bund yield at -0.60%), and second because no bank account is truly at zero: a bit of stamp duty, some fees, and hitting -0.25% is easy. This is BEFORE the Monti stamp duty, which also affects bonds.So, why this widespread disdain for cash, except when the Russians show up? A mass veneration has been triggered for the idea of a “cashless” economy, where governments could track every transaction, supposedly to prevent evil and defend good. And what is the concept of private property in the face of such a noble goal? As any respectable skeptic would do, let’s study History, because while History deserves a capital H, economics does not.The correlation between “correctness” and cash usage is untenableLet’s start in order: when the Euro was created, Germany had a 1,000 Deutsche Mark banknote in circulation. In some form, it’s still legal tender in Germany because, unlike countries like Italy, which has a rather cough “flexible” concept of the state’s obligations to citizens, the ability to exchange old currency for new has no expiration date. [Reference here]. Indeed, abolishing this possibility can be described as either “unilateral debt repudiation” or “a 100% ownership tax on unknown holders.” But so be it, the true characteristic of Italians is resignation, and that of politicians is lack of accountability.Back to the point: since the highest-value banknote among future Euro adopters was German, one would expect the upright and wise Italians of the time, with their 500,000 lire notes (half the value), to have been summoned to the Bundesbank to advise on fighting tax evasion and corruption, rampant across all German Länder, and especially to tackle the mafia clans of Obersalzberg and Mecklenburg. But for some strange reason, this didn’t happen. Who knows why, but small-denomination notes are used in transactions. And as much as it may displease the One True Thought, tax evasion, crime, and corruption are also transactions.The good news is that today, September 14, the ECB president communicated in a letter to a European parliamentarian that the 500 EUR banknote will never lose its legal tender status: [ECB Letter].Tax evasion, the eternal grievanceEven in daily life, when we “sin” by paying for a home repair in cash to avoid taxes, no one says, “Doc, got a bigger bill?” It follows, absurdly, that politicians (including all those preaching the “banknotes = crime” religion) should ban all banknotes EXCEPT those of 200 EUR and above. This would address small transactions and the underground economy that politics (officially) despises. It would also solve the issue for “note concentrators”: the market stall vendor, who dreads the daily anti-money laundering declaration at the bank counter, would no longer have the problem! Except…But what is money?How would we then transact among ourselves? Obviously, they say, pointing to France, Sweden, Germany, etc. (all countries where, to my recollection, the state hasn’t forcibly withdrawn funds from accounts since the war, which will be relevant later): Plastic money! A flurry of debit cards, credit cards, maximum rates, online reporting, etc. But there’s a catch, and it’s simple.A banknote, by its nature, represents a debt from the issuing entity to the holder. It has no legal expiration and is a direct bearer instrument, with the holder also acting as custodian. Other forms of payment (credit or debit cards) are NOT the same, and the transaction is no longer between two parties but involves three or more.A debit card (or Bancomat, as it’s often called) assumes the money remains deposited in a bank. Imagine all the protections and safeguards are in place—European deposit guarantees, state interventions to protect accounts, etc. But what if the internet is down? Do you really think if the issuing bank fails on a Friday, you could buy gas over the weekend? How long would it take to regain access to your money? Remember, it’s NOT cash: the bank has lent that money. This, by the way, complicates the specter of “punitive wealth taxes”: who tells the banks to call in loans on a Saturday night? They don’t keep your account money in a vault.So, one debit card or two from different banks? (In different countries, but that’s another story.) Keep in mind that no one is imagining a way to make “plastic” transactions anonymously between citizens: if you want to give your niece a cash gift for her birthday, it’ll involve four parties: you, your niece, your bank, and her bank. And the state. It’s like watching The Truman Show.Credit cards! Sure, you don’t need the money upfront; you pay at the end of the month! And maybe you spread it out at 15% interest. Too bad a credit card, no matter who issues it, assumes you have a bank account. No bank, no card. Or a new bank—would be interesting to meet someone who still has an account at “new” Banca Etruria, just to see the effect.Of course, a checkbook has the same implications. It has a slight advantage: imagine, in a burst of goodwill, private ownership of firearms is banned. But you’re stubborn, you already have a gun and a permit, and you go to the gun shop to buy ammo for the range with friends, and then… “BEEEEEP!” “We’re sorry, the transaction was declined. Contact your institution.”If you pay by check, they’ll come to your house. To get you. Naturally, you’ve realized it’s impossible to imagine a dream (or nightmare) where cash is abolished, even just the 500 EUR note, but checks are not.By the way, do you smoke? Buy wine in quantities that, spread over time, would put you over the legal limit for driving? I’m a former Carabiniere; I’ve heard “I bought it for my friends as well!” before (true story). Oh, right, “we’re doing it to fight drugs!” But those heavily addicted often find ways. They do favors they shouldn’t, etc. Plus, Europe, which absorbed former Soviet bloc countries, should remember you can always use cash in another country, just not your own. Argentinians use dollars, as do Venezuelans: if you tell them it’s time to ditch paper money, they’ll say, “About time, my back was breaking carrying enough Bolivars for a dinner for four! Enough is enough!”The clay piggy bankBut banknotes, like gold and silver in metal-based monetary systems before them, have another function: they store wealth, like government bonds, bank deposits, or other “safe” investments. They’re also the benchmark for all investment decisions because even keeping money in a zero-interest account is an investment: you’re paying for custody and administration, and you always have, in the form of lower returns compared to what the bank earns using your money. With the latest bank “dramas” (Etruria, Marche, Ferrara, and Novo Banco in Portugal), fear of bail-ins has led many to question whether that custody is worth it. A European deposit guarantee is often requested to reassure the public.Wait a moment. Did someone say “European deposit guarantee”? Oh, right: ME. Because, you see, a European deposit guarantee… already exists. It’s called [drumroll] “the Euro banknote.”
- Wherever you go in Europe, it’s legal tender (translation: it’s treated as a debt of all European states, jointly and severally);
- It’s bearer-based;
- It pays NO interest, but its nominal value doesn’t decrease over time and doesn’t expire.
WAIT A SECOND! It pays no interest… but it doesn’t lose value either. I handle my own “custody,” which costs something, but between the 0.2% Monti stamp duty and negative yields on safe bonds, it has a yield advantage that could offset custody risks… are you seeing where this is going?Whatever it takesIn practice, my perception is that there’s no tangible link between the existence of banknotes and all the bogeymen their detractors conjure up, and there are often simpler, better solutions. The goal isn’t that, but it hinges on sub-zero rates. The real issue is something in political economy called “money velocity.”In a market economy with positive and normal interest rates (only the second adjective is an opinion), the ratio of GDP to money supply in its various forms varies with the economic cycle. But in recent years, likely due to low rates, central banks’ monetary expansion is more than offset by money circulating much less than before [http://thereformedbroker.com/2015/10/08/chart-o-the-day-the-non-velocity-of-money/].To quote Lewis Carroll, “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” [From Through the Looking Glass]So, when market rates approach zero or go negative, we enter the world of Alice in Wonderland. No, I haven’t met the White Rabbit with his hurry and watch yet, but today is my “unbirthday.” Lowering already negative rates (you never find a bureaucrat who, faced with a problematic decision, doesn’t say “double down”) paradoxically increases problems: banks lose on deposits, so they RAISE rates on loans to customers. Fixed costs rise, making it more appealing to withdraw money from the banking system. Moreover, the stock of wealth far exceeds the flow of wealth (economic growth), so the “limbo economy” of even more negative rates could have the opposite effect: the effective cost of money would rise. But above all, the economically rational, simple, and undeniable reaction is… to take your money home. Negative rates are, in fact, a tax, and people will perceive it as such. The outflow of money from the banking system could exceed the money “printed” by the ECB, slowing the economy. Ask the Greeks what cash controls mean and how they help economic growth.The instinctive political reaction doesn’t seem to be “analyze the problem – find the solution,” but “change the rules to fit the solution you have,” hence: eliminate banknotes, which can’t be subjected to negative rates when in circulation. Force everyone into banks, and do what you want. Even if the annual rate becomes -5%, they can’t withdraw. Want to take out cash? Like Greece. And if the state wants to help itself to your money?How do we get out of this? No idea. I’d settle for people talking like adults. Above zero rates, economics holds sway. Below, it’s politics.Update: Politics has evidently made a decision.[http://www.corriere.it/economia/16_febbraio_15/banconota-500-euro-ritiro-la-bce-valutiamo-soluzione-414e48a2-d406-11e5-ad4b-f58d2f08a6c7.shtml]For some reason, I’m reminded of Alberto Sordi in The Marquis of Grillo…The proposed abolition of the 500 EUR banknote is nearing: the ECB has shifted from the German national banking stance, which required clear evidence that the note facilitated illegality (which would involve checking if certain trafficking dropped significantly after abolition), to the Draghian phrase that it’s “notes used by savers to hoard tens of billions of euros as an instrument also used by criminals.” Well, I thought criminals used parallel Euros with John Gotti’s face on them.Worse still, someone might think the basic concept of money is its fungibility. Just to be clear: questioning whether money should be usable for any transaction is a conceptual leap toward its collectivization—a sort of 100% wealth tax.But so be it, the professional reputation of central banks, and their potential inclination to curb certain political flights of fancy, couldn’t be defended after the last six months.The Sages of AthensNo, I’m not talking about philosophers. I’m referring to something that should particularly concern Italians who not only want the Euro to remain their currency but absolutely want to avoid openings for Venezuelan-style currency sovereignty.I’m talking about the ATM heroes and the queues at bank counters, the Greek citizens who withdrew enormous sums relative to GDP in a short time. In my opinion, this was the REAL brake on Varoufakis’s wild ideas of returning to the Drachma: there were enough Euro banknotes in the system to create, as in Eastern Europe before the fall of the Wall, TWO parallel economies.The state and the EU, however, are duly taking revenge on this peasantry:[http://www.keeptalkinggreece.com/2016/08/14/greeks-will-have-to-declare-to-tax-office-even-cash-below-100-euro/]Yes, dear friends, welcome to the cashless world, where you must declare, on a specific form, EVERYTHING you have. And the changes. I brought up the EU for a reason: lovely freedom of movement, customs union, etc… but what rights does the citizen have?Note that this measure is the classic “Thaler nudge” to encourage keeping everything in the bank—no cash, no forms… afterward, how long does it take to switch from Euro to Minibot? Zero seconds over a weekend.EDIT: Poor United States, too: [http://www.zerohedge.com/news/2016-02-16/larry-summers-launches-war-us-paper-money-its-time-kill-100-bill]An interesting Wall Street Journal article points out that, despite the nominal “dollarization” of Zimbabwe’s economy, dollars held electronically… are no longer dollars. [https://www.wsj.com/articles/zimbabwe-abandons-its-dollar-peg-effectively-introduces-new-currency-11550695128]April 22, 2019: And here’s the IMF suggesting that banknotes could be withdrawn through banks at a DISCOUNT to their nominal value. Naturally, the consequences in terms of capital controls and financial repression aren’t COUGH fully understood: [https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-negative-interest-rates-work/?cid=sm-com-TW&hootPostID=8d47521db90c0e500f0ce83ecfe12b26]Conte 2 Government Update: I read, with dismay (as a humble blacksmith) and that of Prof. Stevanato (who actually understands), about “incentives for electronic transactions to combat tax evasion.” I’ll draft the law myself: I give up cash for transactions, and the state not only eliminates the withholding tax on everything withdrawn from accounts that goes to it, directly or indirectly, but retroactively bans from office those responsible for state withdrawals from accounts and sends Amato and his entire government packing. Plus, it criminalizes any contrary decrees.[https://www.zerohedge.com/news/2018-08-10/high-tech-homeless-wearing-qr-codes-cashless-panhandling]
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