Sleepwalking Into a Cashless Society
Central bank digital currencies would destroy any chance for financial privacy, but society is willingly moving in that direction.
Philip Lane, chief economist of the European Central Bank, recently expressed urgency for the need to develop a digital euro—also known as a central bank digital currency (CBDC)—to compete against stablecoins such as Tether and electronic payment systems developed by U.S. tech firms, such as Google Pay and Apple Pay. Not content with eliminating cash, now the goal of central banks is to eliminate any competing electronic payment system.
We're sleepwalking into a world with digital currencies without any government coercion whatsoever. As a 51-year-old Generation Xer, I carry lots of cash in my wallet. I teach personal finance at the local university and recently asked a class of about 30 students if any of them had any cash. Not one of them had a single bill or coin on them. They use debit cards, credit cards, Venmo, and Apple Pay. As it turns out, cash usage among the 18–24 age cohort has declined from 28 percent to 13 percent over the last five years. Most like the convenience of electronic payments, even though studies show that people spend 12 percent to 18 percent more when using credit cards than cash. If the government does attempt to implement a digital dollar, there will be little resistance to it.
Currently, there is $2.36 trillion in U.S. currency in circulation. Of course, much of this is held outside our borders, owing to the dollar's dominance as the global reserve currency. The most common denomination of U.S. currency is the $100 bill. There are more $100 bills in circulation than $1 bills. Many residents of foreign countries, such as Argentina, consider the U.S. dollar to be a store of value and a hedge against inflation and local currency depreciation. If the U.S. government ever decided to phase out paper currency, it would have far-reaching effects around the globe.
Promoters of a digital currency allege that it would cause a drop in criminal and illicit activity. That may be correct, or people may simply resort to another medium of exchange or barter. Philosophically speaking, virtue is not possible without the freedom of choice. If people can't choose to misbehave, it does not make them virtuous. A society in which nobody has the freedom to misbehave is far more horrifying than a society where people actually misbehave.
Cash is anonymous. Just because one isn't doing anything illegal doesn't mean one wants the government to know where they go to lunch every day. If you have a complete electronic record of someone's economic activity, you have a pretty good idea of who they are as a person, which is why economic privacy is so important.
Far more sinister than the desire to socially engineer good behavior is the potential for central banks to implement stimulative monetary policy using negative interest rates. Cash pays no interest. Interest rates are off the pre-pandemic lows, so today, it is not hard to find a bank that pays a decent interest rate on a savings account. But in the 2010s, interest rates were zero for about a decade, and central planners believed they could reverse deflation by setting interest rates at negative levels. Negative interest rates mean that your money in the bank loses value over time. Naturally, people would withdraw their money in the form of cash, because zero interest is better than negative interest, but if cash didn't exist, people would be forced to spend the cash in the bank before it lost value. Since we're now dealing with inflation rather than disinflation, these talks have mostly dried up, but negative rates could be attempted at some point in the future.
Of course, any income received in the form of cash is invisible to the IRS and cannot be taxed. The informal economy accounts for about 7 percent of gross domestic product in the United States, which is low, relative to the rest of the world. Low-income people absolutely rely on cash. Households with incomes under $25,000 use cash for 36 percent of their payments, while households with incomes over $150,000 use cash for only 10 percent of theirs. Lower-middle class or poor households are frequently un- or under-banked and have practically no savings rate as it is—forcing them into the formal economy would reduce their standard of living even further.
The number of cashless businesses is exploding. Part of this is consumer preferences—paying with a card or a phone is less awkward and clumsy than having a bunch of change slamming around your pocket. But what we gain in convenience, we lose in privacy and freedom. The chance that a digital dollar will be implemented in the next 20 years is exceptionally high, and most of the population will go along with it—willingly.
