On Negative Interest Rates and the War Against Cash: Two Reasons Why Statists Do NOT Like Cash

A more radical alternative proposal of some negative interest rate proponents is to radically reduce the availability of cash in the economy, especially eliminating large-denomination banknotes. If cash is only available in small denominations, then the scope for avoiding negative rates on deposits by cash withdrawal could be reduced, as the storage costs and inconvenience costs of cash as a deposit alternative would be that much greater. Some of the negative interest rate advocates are also warriors against cash—a convenient coincidence—justifying their views by pointing to how cash can facilitate various illegal activities, whether people smuggling, narcotics smuggling, or tax evasion.

The view that the “abolition” or “reduction in use” of cash would serve two purposes—the reduction of illegal activities and giving new scope for negative rates to be used as a contra-cyclical tool—was a central theme of Rogoff’s advocacy (see Rogoff 2016). The author concedes there are some “liberty considerations” but largely dismisses these, concluding: “all in all, the case for going to a less-cash society if not quite yet a cashless society seems pretty compelling, with most of the various and sundry objections being easily handled. Facilitating negative interest rate policy is not the main reason for phasing out paper currency, especially large denomination notes. But it is an important collateral benefit”.

The facts do not bear out Rogoff’s advocacy. A good summary of these can be found in Mitchell 2016. The author points out that there are two reasons why statists don’t like cash: first, they prefer a system that would allow them to track and tax every possible penny of our income and purchases; second, Keynesian central bankers would like to force us to spend more money by imposing negative interest rates on our savings. As a practical matter, the author disputes the claim that removal of large-denomination banknotes would deter crime, citing evidence from anti-corruption experts. Moreover, mafia activities which result in victims paying protection in cash would continue, but the victims would be at even greater risk of harm due to being more intricately drawn into the mafia operations as part of the process of transferring revenues.

—Brendan Brown, The Case Against 2 Per Cent Inflation: From Negative Interest Rates to a 21st Century Gold Standard (Cham, CH: Springer International Publishing, 2018), 159.