For some years now, cash has been on the retreat. Against the backdrop of globally changing payment behaviour, the debate about the abolition of paper money is gaining more and more importance. While large banknotes are to disappear, coins and small notes will be retained in the long term.
What functions does cash fulfil? How have means of payment changed over time? What arguments are there for and against the abolition of paper money and what exactly should the implementation look like?
Vera Dembski gives a comprehensive overview of the positions in the current discussion and discusses their plausibility. She also presents possible consequences of abolishing cash and argues for strict data protection and security requirements for electronic means of payment.
From the contents:
- ECB;
- Banknotes;
- Coinage;
- Undeclared work;
- Illegal transactions
Table of contents
List of abbreviations
Symbol directory
1 Introduction
2 Cash abolition at a glance
2.1 Conceptual basics
2.2 Functions of cash
2.3 Means of payment in transition
3 Arguments
3.1 Gaining central bank control
3.2 Curbing illegal transactions
3.3 Issuance of cash and its costs
3.4 Cash as protection against unwanted data collection
3.5 Further argumentation
4 Conclusion
Bibliography
List of abbreviations
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1 Introduction
On May 4, 20161 the Governing Council decides to abolish the EUR 500 banknote. The issuance of the banknotes will cease towards the end of 2018. Production of the largest banknote in the European Monetary Union in terms of value is terminated. The Central Bank of Denmark has announced that it will no longer print new crowns from 20172. Cash is also on the decline in other European countries. Since 2011, cash payments in Italy are only possible up to an amount of 999.99 euros, in France only cash payments up to 1000 euros are allowed (see Beck & Prinz, 2015, p. 515). Since February 2016, the assembled EU finance ministers have also been considering a uniform cash ceiling within the European Monetary Union (see Eilfort & Raffelhüschen, 2016, p. 3).
"With the decision of the European Central Bank to discontinue the production and issuance of the 500 euro banknote and the current considerations on the legal limitation of cash payments in Germany and throughout the EU, the discussion about the abolition of cash has become much more intense (Noack & Philliper, 2016, p. 5)".
On the one hand, the abolition of paper money is intended to improve the fight against organised crime and undeclared work, and on the other hand, it is intended to enable central banks to regain control. Critics fear that the restrictions represent a step in the direction of totalitarian surveillance. The debate is taking place against the background of a globally changed payment behaviour promoted by innovations based on technological progress (cf. Noack & Philliper, 2016, p. 5). In implementation, large banknotes are to be abolished step by step, while smaller notes and coins are to be retained for a long time or even indefinitely (see Rogoff, 2016, p. 9).
At the beginning of the work, an overview of the topic of cash abolition is given. Conceptual basics, the functions of cash and the changes of means of payment over time are presented. In the main part, the entire debate is divided into four main arguments, while in the last section two less relevant points are concisely summarized.
The aim of the work is to present the current discussion about the abolition of cash scientifically, in detail and vividly. There are already numerous publications or scientific papers that deal with the topic, but usually with the preference of a point of view or a lack of overview of the overall situation. This work is intended to provide a panoramic view of the arguments mentioned in the debate, to discuss the plausibility of these and to present possible consequences of abolition.
2 Cash abolition at a glance
Chapter 2 explains in more detail some terms relevant to the topic. Subsequently, an insight into the functions that cash has in current economic events is given, as well as changes in the means of payment over time are shown and a conceivable implementation of the cash abolition in the future is explained.
2.1 Conceptual basics
In order to better introduce the topic of the debate, some terms for understanding the arguments in Chapter 3 are explained in advance. The terms are defined cash, abolition in relation to cash and alternative means of payment. In addition, a brief overview of the actions of the Economic and monetary policy given.
under cash understood are banknotes and coins denomined in a specific amount in a particular currency. Coins are a complement to paper money in circulation and are intended for smaller payments. If their face value is higher than the metal value, e.g. for the euro or US dollar, it is referred to as dividing coins. In the euro area, banknotes are the only unrestricted legal tender. Unlike banknotes, coins are not unlimited legal tender. In the euro area, for example.B, the creditor is not obliged to accept more than 50 coins per payment.
Banknotes are handed over to the central bank by an independent body authorised by the state (see Böhle, 2004, p. 673). The central bank has a monopoly on banknotes. In the euro area, the ECB and the national central banks are entitled to issue banknotes. The volume of notes put into circulation is determined exclusively by demand. In order to acquire these, commercial banks usually take out loans from central banks (see Mussel, 2011, p. 25). There are two types of money in the economic cycle, cash and bank money (cf. Blanchard & Illing, 2009, p. 113).
Under a abolition an action is understood that makes something invalid or no longer exists (cf. Duden, 2016). With regard to cash, its effect as legal tender would be suspended and gradually removed from the economic cycle. Rogoff (2016, p. 123ff.) turns to the question of how abolition could be established in the practical world. For future action, it is proposed to abolish banknotes with high value step by step (see Rogoff, 2014, p. 1). Over time, lower and lower denominations are reached until finally cash is completely restricted in its functions. Rogoff (2016, p. 123ff.) sees the main goal of abolition as making repeated, extensive and anonymous payments more difficult. In addition, the secret transport and storage of large amounts of cash is to be made more difficult. However, change must take place slowly and extend over at least five to ten years. A step-by-step approach prevents excessive upheaval and gives the institutions and the population time to adapt. In addition, people with low incomes and without their own bank account must be granted access to free, simple credit accounts. Ideally, these costs can be borne directly by the state. In principle, the objective is to enable small, anonymous transactions, e.B to a few hundred dollars, while at the same time large, completely anonymous payments can only be made through illiquid and costly transaction methods.
From the moment of the occurrence of a complete abolition, the population is on alternative means of payment Instructed. In addition to cash, alternative forms of payment instruments already exist. Under means of payment money i.S.v. Cash and money-related objects that can directly take over means of payment functions because they are easily liquidated (cf. Büschgen, 2012, p. 1174). A payment is defined by the transfer of a means of payment from one economic entity to another to settle a liability. In addition, payments with bank money can be effected, which is not cashable. Non-cash payment transactions are absolutely dependent on payment transaction instruments. Over time, these have become more and more differentiated using new technical possibilities. They can be divided into four categories: Internet-enabled payment instruments of giro transactions, such as transfers, electronic money, such as Bitcoin systems, virtual credit accounts, such as PayPal and aggregation systems (cf. Böhle, 2004, p. 673). So-called crypto currencies are described as a particularly suitable cash substitute. The aim of these currencies is to enable cashless payment transactions without the dependence, supervision or participation of banks and authorities. An example of this is the already existing digital currency Bitcoin, which enables almost anonymous payments on the Internet with the use of a special browser (see Sorge, 2015, p. 521). Bitcoin is a system that can be used to pay for goods and services. The price of goods or services can be indicated in the unit "Bitcoin". Essentially, it consists of a procedure that allows transfers between users' accounts. However, users are at great risk of exchange rate losses. Figure 1 shows that Bitcoin's exchange rate fluctuates significantly as opposed to the dollar. It follows that the exchange rate with other currencies cannot be kept constant either (see Sorge & Krohn-Grimberghe, 2013, p. 721f.).
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Figure Exchange rate Bitcoin-US Dollar (Sorge & Krohn-Grimberghe, 2013, p.722).
The Bitcoin system is not referred to as a completely anonymous payment method in the broader sense, as it is based on accounts. A user can partially bypass this, as you can create any number of Bitcoin addresses or accounts. However, all transactions are public, so that, for example, the transfer of funds between one's own accounts reveals their togetherness. Nevertheless, Bitcoin is traded as a very good alternative means of payment to cash (cf. Sorge, 2015, p. 521).
In order to better present the argument of the central banks gaining control in Chapter 3.1, the following is the course of action of the Economic or. monetary policy concisely sketched. This approach is deliberately chosen, as current restrictions on the actions of central banks lead to the main argument for abolishing cash.
In principle, it is assumed that economic policy is always pursued rationally. This implies the policy's approach to the causes of error development. From the insights gained from economic theory, politicians can then derive adequate actions. The primary objective is price stability, which is enshrined as a primary task in Article 105 of the EC Treaty. The ECB is responsible for conducting monetary policy in the euro area. In addition, monetary policy has the task of supporting economic policy and achieving legally regulated objectives (cf. Mussel, 2010, pp. 163-164).
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Figure ECB interest rate instruments (Thiele, 2015, p. 4).
Figure 2 is used to explain what kind of instruments central banks can use to act. The various key interest rates of the European Central Bank from 2004 to 2015 are plotted for presentation. Commercial banks rely on the key interest rate, also referred to the main refinancing rate, shown in blue, to obtain liquidity in the form of loans. Commercial banks need liquidity to hold minimum reserves with central banks and to withdraw cash to customers. With the help of these measures, the central bank is able to influence the activity of an economy by means of the key interest rate (see Rogoff, 2016, p. 156ff.). The ECB's monetary policy instruments are divided into three groups: Open market operations, standing facilities and minimum reserves (see Figure 3).
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Figure Eurosystem monetary policy instruments at a glance3.
The central bank, using the available instruments, determines the conditions under which it makes central bank money available to commercial banks. In this way, events on the money market are controlled. Technically, this is implemented by setting the amount of liquidity and its price, i.e. interest rates. If the central bank wants to curb the expansion of the money supply, the instruments will be used restrictively. The provision of central bank money is reduced or the prices for it are raised. Conversely, this applies to the use of expansive means. The ECB's use of instruments focuses on open market operations. Figure 3 shows that their settlement can be based on different types. The standing facility instrument allows banks to influence their liquidity position on their own initiative. In this situation, the ECB sets interest rates, commercial banks decide on amounts. With the marginal lending rate, light blue in Figure 2, a bank can procure central bank money at any time (see Mussel, 2010, p. 208ff.). The fact that current monetary policy is limited in its course of action and that the abolition of cash can be a solution to the problem is described in Chapter 3.1.
2.2 Functions of cash
"In our modern world of division of labor, money performs very specific tasks without which the functioning of modern economies would not be possible. It is available to economic agents both as cash and bank money or book money (Noack & Philliper, 2016, p. 7)."
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Figure Functions of money4.
In the classical sense, money in the form of banknotes or bank money fulfils the function of a medium of exchange, a store of value and a unit of account (see Figure 4). There are some differences between cash and book money (cf. Noack & Philliper, 2016, p. 7).
Money acts as a generally accepted means of payment and exchange. In this function, its economic origin is justified. In a modern economy with a high degree of division of labour, there are numerous unilateral transfers of value. Examples of this are tax payments, inheritances or fines (see Mussel, 2010, p. 17). Cash acts in society both as a means of payment and as a medium of exchange. In the case of very large sums, however, it can reach physical or legal limits (cf. Noack & Philliper, 2016, p. 7).
Paper money is only sufficiently accepted by the population if it is accepted in return for the exchange of goods or as remuneration. Users must be able to trust that they can reuse it with stable value in the exchange of goods. For this reason, central banks are subject to the imperative of safeguarding price stability (see ibid., p. 7). The fact that money in its capacity is also to be used as intermediate exchange goods at a later date for barter or payments implies the function of the store of value. It serves as a store of value. The time of further value transfer is not determined at the beginning of a transaction. This is referred to as an accumulation function (cf. Mussel, 2010, p. 18). Both cash and book money have the function of a store of value (cf. Noack & Philliper, 2016, p. 7). In a study, Beck and Prinz (2015, p. 515f.) prove that cash can also act as a store of value in larger dimensions. An example explains the facts: In the euro area, small banknotes are mainly in demand within the monetary union, while the demand for larger banknotes depends on the short-term interest rate, fluctuations in the inflation rate and the exchange rate. The latter is regarded as an indication of foreign demand for euro banknotes and as evidence of the storage of paper money abroad. Cash is still one of the largest components on the balance sheet of most central banks: On the ECB's balance sheet, banknotes in circulation in 2014 amount to around EUR 1 trillion (see Figure 5).
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Figure Total value banknotes European Monetary Union (Beck & Prinz, 2015, p. 516).
According to estimates by Krüger, Fisher and Seitz (2004), only about 30% of the euro's cash is used for domestic transactions, the remaining amount is hoarded or circulated outside the eurozone.
Paper money is deeply rooted in the public sphere, carries a symbolic value and shapes the image of the government and the country (cf. Rogoff, 2014, p. 1). Globally, cash also has the function of creating a basis of trust for the population. The volume of cash holdings has been steadily increasing in recent years, despite technological advances. On the ECB's balance sheet, the banknote stock in 2009 is still just under 700 billion euros, while this will rise to over one trillion by 2015 (see Figure 5). Compared to other industrialized nations, cash in circulation in relation to GDP in Germany is very high (see Beck & Prinz, 2015, p. 516). As part of central bank money, banknotes are the most liquid means of payment. Likewise, in the function of money as a store of value, it can make a difference whether cash or book money is held, since the inflow and issue dates of income fall apart in time and income is accordingly stored or saved in the meantime, also in cash (see Noack & Philliper, 2016, p. 7).
The third function is that of a value meter or a computing unit. All economic transactions are subject to a valuation. A benchmark is needed in view of the heterogeneity of the objects exchanged on the markets. Monetary units that are able to express all prices are suitable for this purpose. All economic transactions must be carried out with the help of arithmetic operations (cf. Mussel, 2010, p. 18). The function of the unit of account applies in full to cash (cf. Buiter, 2009, p. 6).
2.3 Means of payment in transition
It was only with the invention of the coin about 2600 years ago that it became possible for businessmen to trade extensively around the Mediterranean (cf. Milkau, 2013, p. 20). The first secure means of payment that facilitates the storage and payment of goods is created. Banknotes have a brief historical development compared to the coin (cf. Siekmann, 2012, p. 10). Rudimentary forms of paper money are already circulating in the 7th century n. Chr. in China, but at this time these are not widely distributed (cf. Fish & Whymark, 2015, p. 4).
In the Western world, the paper form of payment was not used until the 16th century. At the beginning, these are receipts for deposited coins or precious metals. Especially with northern Italian or Dutch traders, a need arises early on to carry the documents instead of heavy gold and silver coins. These are considered impractical, expensive and dangerous. In the course of the 17th century, the first financial institutions issued notes securitized the right to a fixed amount of precious metals or coins without the formation of an actual deposit. As a result of this measure, banks are able to put into circulation financial instruments whose total nominal value exceeds the value of the deposited goods. The term banknote for all documents that entitle your owner to claim the respective equivalent value without proof. Until the middle of the 20th century, many documents were in use in this form, in Germany until 1937. "For a long time, the decisive property of money was that the tax administration of a state accepted these papers as a means of payment for fees or taxes (Siekmann, 2012, p. 12)." It was not until 1910 that Reichsbank banknotes had to be accepted as legal tender everywhere (cf. Siekmann, 2012, p. 12).
In the field of electronic payment, advanced technologies have been established since 1920. Figure 6 shows the evolution of card payment technology from its origins to the various forms of plastic money to mobile payments in the United States of America. For some years now, the spread of mobile phones and smartphones has had a major influence on the development of payment transactions (cf. Milkau, 2012, p. 21).
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Figure Technological development of card payment (Milkau, 2012, p. 22)5.
The current payment system, as it exists, for example, in Germany, consists of electronic payment transactions, such as transfers, card payments, mobile payments and direct debits, in connection with the cash cycle (cf. ibid., p. 21).
In 2005, MasterCard, one of the largest credit card companies in the world, called in the media the War on Cash from. Since then, there have been repeated proposals to abolish cash completely (cf. Rösl & Seitz, 2015, p. 525). At an Ifo conference in 2015, Rogoff advocates phasing out cash slowly and gradually. At the latest since the introduction of cash caps and a mirror interview6 von Bofinger, the discussion also reaches the German public (cf. Krüger & Seitz, 2015, p. 9).
Legal regulations are already in place to prohibit the use of cash that exceeds a certain limit. Many EU countries are introducing caps on cash payments (see Figure 7), including Belgium, Greece, Poland, Portugal and the Czech Republic. In France, at the end of 2015, following the terrorist attacks, the cash ceiling is reduced from 3000 euros to 1000 euros (see Quitzau, 2016, p. 5).
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Figure EU cash ceilings (European Consumer Protection Centre, 2016).
Within the European monetary union, clear signs are visible that the use of cash is increasingly being restricted. For some time now, financial institutions, as well as public authorities, have been exerting pressure on companies and consumers to restrict the use of cash. The following examples illustrate some of the barriers to cash use that can be observed:
- Financial institutions charge fees for withdrawing or depositing cash.
- Companies refuse to accept cash, especially tall banknotes.
- Cash caps per transaction are being introduced in some Member States.
- On 5 May 2016 the Governing Council decides to abolish the largest euro banknote, that of the 500 euro note (see Siekmann, 2016, p. 1ff.).
According to Siekmann (2016, p. 4f.), the categories of obstacles can be divided into three groups: factual and indirect obstacles, restrictions due to legal provisions that close channels for the use of cash, and fair prohibition by law.
Despite the global decline in cash and technological progress, there is a persistently high demand for cash in Germany.
[...]
1 ECB: Press release from 20.05.2016.
2 This information comes from a speech by Thiele (Executive Board of the Deutsche Bundesbank) on 2.12.2015 in Berlin.
3 Own illustration based on Mussel (2011, p. 209).
4 Own illustration based on Mussel (2011, p. 17ff.).
5 The years refer to the first roots of the technology.
6 The interview took place in May 2015.
- Citar trabajo
- Vera Dembski (Autor), 2020, Consequences of the abolition of cash. Arguments for and against cashless means of payment, Múnich, GRIN Verlag, https://www.grin.com/document/1187329
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