THE WAR ON CASH: INSTITUTIONAL HOSTILITY AND COVID-19.

• Author: Beretta, Edoardo

There is significant economic literature investigating the hostility to cash or "war on cash" (Beretta 2005, 2007; Deutsche Bundesbank 2017; Jain 2017; Scott 2013; White 2018) by which financial institutions supported by governments discourage individuals from using (publicly issued) physical means of payments and convince them to move to digital (privately issued) ones.

Banks, in particular, have a strong incentive to move directly to electronic payment systems (Spar 2003:413). The term "war" might sound like "a polemical exaggeration" (Rogoff 2017), but there is little doubt that "persuasion work" by those who want to replace cash with digital currency is prevalent (Nagata 2019). In a "bankful society," banks (or platforms built on top of them like PayPal) intermediate even small payments.

The COVID-19 pandemic has given digitization a boost through physical lockdowns and fear that physical cash may help spread the virus (see Klein 2020a). This article examines the influence of both the financial sector and governments on cash aversion prior to and after the outbreak of the pandemic.

We argue that cash has been unjustifiably accused of facilitating illicit transactions; the COVID-19 pandemic has been misused to push individuals away from banknotes and coins; and cash is even more welfare enhancing in troubled economic times. After a review of "instruments of convincement" used before the current pandemic, we show drat since the pandemic hostility to cash has continued. We conclude by explaining why cash remains essential.

An Assessment of "Instruments of Convincement" to Abandon Cash before COVID-19

The main arguments against cash are money laundering and financing terrorism (Passas 2003) while those in favor of cash point to its practicality, better control of expenses, immediate finalization of settlement (Committee on Payments and Market Infrastructures 2020), and better data protection (Mai 2019). In the following, we analyze less discussed methods to reduce cash's influence in daily lives and identify the new "instruments of convincement" the financial institutions are using.

De Jure and De Facto Demonetization

Institutional aversion to cash has become particularly evident in India, where the government degraded its cash system (Pankaj and Jain 2017), or, from June to October 2019, in Kenya, where "7,386,000 pieces of the older KSh. 1,000 notes, worth KSh.7.386 billion, were rendered worthless at the end of demonetization" (Central Bank of Kenya 2019). Demonetization might not be explicitly (i.e., de jure) declared but still (i.e., de facto) pursued, in the same way as the International Monetary Fund (2020a) distinguishes between de jure and de facto exchange arrangements. New banknote series combined with a tight deadline before losing their status of legal tender are a frequent approach to absorb part of circulating cash.

Table 1 compares the Swiss, Euro Area, and U.S. policy in terms of currency in circulation. For instance, while Switzerland will withdraw its eighth banknote series within a couple of months after its announcement in 2021, die euro area is still issuing the second series. In contrast, U.S. banknotes--provided they have been issued from 1914 onward--remain legal tender. This approach is often neglected by those who look at the United States solely as an example for payment digitization.

Another fact often glossed over is that, although credit cards originated in the United States during the 1920s (Britannica 2020), only European countries have decided to limit transactions settled in cash.

Promotional Campaigns, "Nudges," and Shutdowns of ATMs: Why Seigniorage Matters

Movements against cash have also taken explicit forms-for example, Visa has launched "Cashfree and Proud" (Payment Week 2016) in order to "persuade British consumers that contactless was better than cash" (Jon Ashwell Creative 2020)-amidst a subtle drive to make cash inconvenient. People are told to be dodgy it they do not wish to comply with new ways of paying (Economic Times 2020) and cash is displayed as a "barbarous relic" (Financial Times 2015). Shutting down ATMs has been another approach, although "regulators seek to safeguard consumer access to cash as branches and free-to-use ATMs disappear" (Makortoff 2020). As shown in Table 2, there is not yet a pronounced trend toward shutting them down at the global level. This has been however the case in advanced countries.

There is a remarkable tendency to "nudge" consumers toward digital payment services (Scott 2016). Central bank notes and coins are public utilities that generate "costs of handling"--and cannot be used by commercial banks and financial institutions to earn profitst (G4S Retail Cash Solutions 2020). Rather, it is the government that gains from the supply of fiat money (Bergsten 1996: 209-10). For instance, the Swiss National Bank (2020c) has declared that "the cost of producing Swiss banknotes depends on the note's size (denomination) and on the production volume, and generally averages around 40 centimes." The largest banknote issued by the Swiss National Bank has a nominal value of CHF1,000; the seigniorage for this size might reach CHF999.60 and yield a profit margin of 99.96 percent. It is therefore understandable that private financial actors push consumers toward private digital money. Individuals should be convinced that they are "choosing" digital payments, which resembles how several supermarkets inspire consumers to "choose" unhealthy food by placing it at eye level by the checkout counters (Aydogan and Van Hove 2015). Once adaptation processes have begun, compliance becomes the most likely outcome.

Currency in Circulation: A Not-to-Be-Stopped Trend

Despite "nudges" driving individuals toward technologically advanced financial solutions, circulating banknotes issued by the ECB (European Central Bank) are growing (Figure 1). While euro area GDP (at market prices) lias increased 21.63 percent from 2002 to 2019 (World Bank 2020b), circulating banknotes have soared 475.63 percent (ECB 2020b).

The ECB may have overissued means of payments, but Figure 2 is not sufficient to prove this argument. Another interpretation is that the ECB has responded to a strong demand for the legal tender. Our hypothesis is that cash is an inclusive, privacy-preserving, public means of settlement while digital payments privatize the banking and financial system gentrifying payments. According to White (2018: 485), "Well-meaning supporters of the 'war on cash' should ask themselves whether the war is really in the public's interest rather than only in the private interest of tax authorities and incumbent payment service providers." Figure 2 displays the increase of currency in circulation in Italy as of March 2020 held by the public just before the first COVID-19-related lockdown of a European country.

Banknotes issued by tire ECB are the only form of legal tender with mandatory acceptance and no levying of fees permitted (Mersch 2018). Banknotes and coins have been also defined as "safe, sound or stable money ..., plain money (J. Huber / J. Robertson), pure money (R. Stainer), chartal money (derived from chartalism), state money (R. Weiner), public money (K. Yamaguchi, M. Melior), constitutional money (R. Morrison) and, specifically in the United States, U.S. money (S. Zarlenga)" (Huber 2020). Although e-cash is still in the works, because of its missing physicality, it will not represent a perfect substitute (Belke and Beretta 2020c). It would increase our reliance on digital systems, which might malfunction or break down (Dowd 2019a: 395; 2019b; 2019c). Payment systems operated by central banks are just as vulnerable to hacker attacks and equipment failures as those operated by commercial banks (Selgin 2018). Moreover, central bank digital money might increase inflationary money issues due to shrinking production and maintenance costs. The United States has paid printing costs of banknotes equal to $0.72 billion, in 2020 (Table 3), which is not significant at first sight. If physical cash were replaced by central bank digital money, printing costs would shrink and increase the seigniorage profit. E-cash might propel overlending while exposing the central bank--if it should collect deposits from the general public-to risks from the need to comply with the "know your customer" (KYC) and "anti-money-laundering" (AML) principles (Pundrik 2009; Verhage 2011).

As highlighted by Mersch (2020):

Some 76 percent of all transactions in the euro area are carried out in cash, amounting to more than half of the total value of all payments.... In crisis times, the demand for cash surges even higher. At mid-March this year, the weekly increase in the value of banknotes in circulation almost reached the historical peak of 19 billion [euro]. Because of their tangibility, banknotes and coins are considered safe. Furthermore, "holding cash physically does significantly change subjects' behaviors byway of decreasing ... their investment amount when they do participate" (Shen and Takahashi 2017; 4).

In addition, funds in commercial bank accounts are IOUs promising savers to get access to public money, namely a "spontaneous acknowledgement of debt" (Cencini 2002: 11). However, money cannot be compared to public debt with low interest rates (Rogoff and Scazzero 2021: 2), since the first one is an irredeemable IOU of the banking system toward the economy as a whole while die second one has to be reimbursed by a specific agent (i.e., the state, which should be independent from the central bank and vice versa) to the benefit of others (i.e., savers buying these bonds). In general, "the dollar is nothing more than an IOU, and only has value ... under the illusion ... that die government or institution which issues this paper has the power, wealth, and credit to back up this currency" (Goodbaudy 2011:86). Since commercial banks need cash (public money) when customers want to...