For a number of years, the Swedish and Swiss banking sectors have been working together to reach a situation where cash is neither available nor used in either country.
Both are advanced economies with populations which are IT literate.
Research indicates that the use of on-line banking, credit/debit cards and contactless card systems for the payment of bills is widespread in both countries, making cash unnecessary.
Banking statistics show that in 2009, 106 billion Swedish crowns were in circulation. Today that figure has fallen to 80 billion. Not surprisingly, one reason for the fall in the circulation of cash is that many people, unhappy with the prospects of a cashless society, are now hoarding up to 60 billion Swedish crowns at home.
Swedish banks have been removing ATMs throughout the country, a move which has angered farmers and those living in rural areas. Banks are also making it difficult for customers to either draw out or pay cash into their own accounts. Customers say that they feel like criminals and are subjected to questions about why they need cash or where they obtained the cash they are trying to pay into their accounts.
Banks in both countries are already moving towards the day when they will charge customers -0.125% on their account credit balances. Swiss banks plan much higher charges for all deposits over 100,000 Swiss francs. The payment of interest on credit and deposit balances will be abandoned forever.
In October of this year, Richard Haldane, the Bank of England’s Chief Economist gave a speech in which he also supported the end of ‘paper money’ within the UK economy.
In his speech he explained that central banks have a problem. They simply cannot lower interest rates any further. If they do, interest rates will move into negative territory and people will watch their savings gradually reduce as the banks apply negative interest charges to all credit balances and deposits.
Clearly, those watching their bank balances reduce each month would be encouraged to take their cash and savings out of their banks and keep the money under their mattresses. This would create a massive run on the banks, many of which could go bankrupt (Northern Rock, RBS).
However, if bank customers think that cash will gradually be phased out over a period of time or that individuals can hold small amounts of cash, it is likely that they will spend their money instead of saving it for the future. This, believe the economists, will help economies to grow.
The real reason for the proposal to apply restrictions to cash relates to monetary policy, which is hampered when interest rates are low or in negative territory.
Haldane believes that central banks need the freedom to introduce interest rates below zero but can only do so if the public are not in a position to quickly convert their bank balances into cash.
The Pros-and-Cons of a ‘Cashless Society’
A variety of reasons have been given to justify the removal of cash. High on the list is the claim that it would reduce illicit activities such as drug dealing and money laundering but history shows us that those involved in criminal activities have always found a way to circumvent attempts to control their activities.
The removal of cash and requiring customers to settle all bills by electronic means presents considerable risks for the customer. For example, in the event of a financial crisis the central bank in a country could raise funds by instructing the retail banking sector to apply a -2% rate to all credit balances and deposits. Each retail bank, with total control over all of its customers money, could simply raid customer accounts at will.
A central bank could also decide that every account holder would have a specific amount of money removed from their account (Bank of Cyprus).
In the past three years the UK has seen a number of major IT failures in the banking sector resulting in customers being unable to use their cards, unable to obtain cash from ATMs, make their mortgage payments, buy food or pay their bills. The New York Stock Exchange also crashed this year following an IT failure. Cyber crime and hacking are on the increase and now account for millions of pounds of losses.
These events should provide a warning to the banking sector, economists and politicians.
For banks, the removal of cash and a move to a totally on-line process would increase their profitability. They would not need High Street premises, could make hundreds of thousands of retail staff redundant and cut the costs associated with cash management. Money would also be saved on the production of notes and coins and counterfeiting would be reduced, if not eliminated.
The question is of course, when it comes to your money, are governments and central banks trustworthy?