Denmark’s new rules on cash mark the beginning of the end for physical money

Should you hoard cash? We wrote about this here and here last week. But there’s been a new development in Denmark.

The Danish government is concerned that cash puts too many “administrative and financial burdens” on shops and that it acts as a drag on GDP growth. (A McKinsey study recently suggested that if you could get rid of the stuff in the US, you could push up America’s total GDP by 0.47%.) So, as part of a wide group of proposals to boost economic growth, it is to allow shops to stop taking cash.

This makes sense in all sorts of ways. As M&G’s Jim Leaviss points out, handling cash is expensive – you have to process it, give people change for it, provide security for it, take it to the bank, etc.

Cash is also a bore for governments because it is the main facilitator of the black economy – anything paid for via the banking system can be taxed; anything paid for in cash can be missed. Plus, physical cash often means physical crime, so getting rid of cash could mean less crime and less tax evasion. That’s all good.

And getting rid of cash isn’t likely to bother the Danes much. Denmark’s central bank has already stopped printing notes and producing coins; many banks don’t carry cash; two million people out of 5.6 million use Danske Bank’s mobile payment system; and almost everyone has a debit card anyway.

But that doesn’t mean there’s nothing to worry about. There is.

Danish interest rates are negative: put your money in the bank and it’ll cost you 0.75% in interest (yup, you pay them). The idea here is that to avoid paying this you will either invest or spend your money, boosting the economy along the way.

But as long as cash exists as a medium of exchange, ordinary people have an option. Instead of keeping their money in the bank, they can withdraw it and keep it under their mattresses or in a safety deposit box. That, as Leaviss points out, is why 60% of bank notes in negative-interest-rate Switzerland are held in CHF1,000 notes – they are more  efficient to store.

There is no problem for the hoarders. But there is for the government: if people hold cash in this way, the state can’t fully control monetary policy (the holders of cash don’t care how low rates go).

If the government wants to full control how money is used via monetary policy it has to do away with physical money and make sure that all means of exchange are held within the electronic money system they can control. That’s not really something I like the sound of much.

But, driven partly by technology and partly by state policy, it is on the way. As this paper on the matter puts it “the certain eradication of physical currency is only a question of time.”

Hang on to your gold…