The Most Prominent Arguments For Banning Cash — And Why They’re Wrong

catoinstitute:

The arguments for phasing out cash or confining it to small denomination bills are, when not entirely mistaken, extremely weak…

Many have argued that banning or restricting use of cash will reduce criminal transactions within the underground economy. However, just how much underground economic activity constitutes truly harmful criminal acts, as opposed to productive activities that evade taxes or other regulations but nonetheless increase social welfare, is unclear. Further, the likely effects of a cash ban on genuinely predatory activities such as extortion, human trafficking, drug-related violence, and terrorism are extremely difficult to quantify. 

Economist Friedrich Schneider estimated that even a complete phasing out of cash would only shrink the underground economy by 10-20 percent. Yet high-denomination bills still account for a substantial volume of licit transactions, so even a ban limited to such high-denomination bills could harm many innocent persons.

Phasing out cash would have a particularly negative effect on the unbanked, including many poor and vulnerable persons, who might find themselves still further excluded from the modern economy. Anti-cash advocates who recognize this admit that any plan to phase out use of cash would have to include corresponding efforts to provide such persons with basic debit cards, if not with smartphones, at a cost that one estimate puts at $32 billion. Phasing out cash would particularly affect illegal immigrants, drastically cutting their labor contributions and creating additional deadweight loss for the U.S. economy. Internationally, a ban on cash would harm those who use U.S. dollars as a refuge for value, sheltering their savings from the influences of unstable currencies and corrupt governments.

Advocates of phasing out currency also see it as a means of allowing monetary authorities to implement negative interest rate policies. Negative rates could then be imposed on all money holders, acting as a direct tax on their money monetary balances. The necessity of this tool is questionable at best – there are only three instances in the past quarter century where negative interest rates could possibly have been helpful, hardly meriting the extreme measure of eliminating cash. Negative interest rates in a cashless economy end up giving an unelected regulatory body discretionary power to tax money and would require massive restructuring of financial institutions and norms.

Finally, most arguments for doing away with cash ignore the public-choice dynamics of the myriad regulations that such a reform would require. Even if banning cash produced benefits such as a reduction in crime, do those benefits offset the harms and costs to those who use cash for legitimate reasons? Consideration should be given to alternative means for preventing crime and tax evasion that do not cast their web so widely.

In short, none of the arguments favoring restrictions on cash withstand close scrutiny.

It is the advocates of restricting hand-to-hand currency who bear the burden of proof for such an extensive reshaping of the monetary system, no matter how cautiously or slowly implemented and no matter whether all cash is eliminated or just large-denomination notes. 

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