Against the War on Cash

In recent years, economists and central bankers have been advocating moving away from cash transactions towards an economy relying fully on financial transactions. At prima facie, this seems to be a good idea. Using checks and financial transfers can be more secure; the fact that every transaction is recorded makes illegal transactions (drug deals, etc.) harder. Additionally, it makes tax evasion harder, which is a key selling point for government officials. Will Luther (here, here, and here) and Larry White (here) have already covered much of the ground.

No one denies that financial transactions come with these benefits. However, individuals still willingly choose to perform legal transactions in cash. Therefore, it follows benefits of using cash or costs of banks cash are being overlooked. Indeed, using cash can often be pragmatic. For instance, a low-income individual may prefer to withdrawal the amount of money he can use to buy, say, a beer after work every month. This person might find that it’s easier to control and monitor his spending this way than by checking his bank account to keep track of his transactions each month. His reasoning might also be that he prefers handling cash because he worries about having his credit card number stolen for second (or third) time.

In many countries, the move away from cash transactions has caused serious problems. Many geographic areas, such as rural or underdeveloped areas of a country, may not have access to the required technology (secured communication, internet, etc.) necessary for effective electronic transactions. Many times, bank deposits are expropriated repeated times. Think of Argentina, how can a government official ask an individual to put all of his money in the bank when he still remembers the expropriations he’s had to go through himself? For these individuals, keeping resources away from governments hands may seem safer than keeping cash in their home or in a safety deposit box. Countries like Argentina, for instance, tax financial credits and debits, prompting individuals to try to stay away from additional tax burdens. Indeed, this tax is so intrusive, that even an electronic tax payment is taxed.

Oftentimes, a key reason cited in efforts to move away from a cash economy is that doing so helps the country fight crime. Critics argue that making cash transactions virtually impossible would seriously constrain drug deals, tax evasion, illegal gun markets, etc., I find this argument weak and even dangerous, since it could lead to arguments in favor of making all cash transactions illegal. By using this argument against the use of cash, the advocates of cash-less society make two impositions: firstly, this argument would de facto transfer the costs of policing illegal transactions to all law-abiding citizens who choose to engage in cash transactions. But it is the role of government to police illegal activities; that is the reason we pay taxes. Secondly, this argument reverses the burden of proof by having all people who engage in cash transactions guilty until they prove otherwise. But the tenant that any individual is innocent until proven guilty is one of the main building blocks of a free society.  A cash transaction in itself is not proof of an illegal activity. Certain institutional constraints may impose short-term economic costs for the benefit of the economy in the long-run.

The benefits of financial transactions over cash are undisputed. The costs, however, seem to go overlooked. But an economy that works 100 percent on banks but sacrifices the ease of using cash transactions is not an ideal economy.

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