Abolish cash? You’d be losing a crucial part of free society

Trying to get a plumber in France? In the rather unlikely event that you can actually find one who isn’t still on his grandes vacances, gone above his permitted 35 hours a week, or indeed long since relocated himself to South Kensington, then you’ll also have to make sure that you can pay by cheque or bank transfer.

From today, France is banning the use of cash for transactions worth more than €1,000, or slightly more than £700. On one level, that is about combating crime and terrorism. But on another, it is also part of a growing movement among academics and now governments to gradually ban the use of cash completely. It is inefficient, oils the underground economy, and makes it harder for central banks to manage the economy, or so runs the argument.

Much like gold, it is a “barbarous relic”, as some publications loftily dismiss it. The trouble is, cash is also incredibly efficient. And it is a crucial part of a free society. There is no convincing case for abolition.

When it comes to creeping state control, it is no surprise to find the French out in front. In the wake of this year’s attack on the Charlie Hebdo office, the government has clamped down on the use of cash. The maximum permitted transaction has been reduced from €3,000 to €1,000, and any cash withdrawal of more than €10,000 will be automatically flagged up to the police (tourists have a higher limit, but even that is being reduced to €10,000 – just in case you are planning on ordering some very expensive wine on your next trip to Paris).

But it is not just the French. A movement has been growing within academic circles for a widespread ban on cash. It has been pushed by Kenneth Rogoff, the Harvard economics professor and influential author of This Time Is Different, who wants to start with high denomination notes.

Last week, the Financial Times threw its weight behind that with an editorial calling for cash to be banned, at least for larger transactions. But it is wrong. There may be a case to be made for banning cash – just not a very convincing one.

Technology is replacing traditional notes and coins all the time, much as it is the book, or indeed the traditionally printed newspaper. We can now pay with our phones, with contactless cards, or via websites such as PayPal. Very soon, so long as we have our debit card and phone, we might not need any cash.

In fairness, there is no question that high-value notes are mainly used by criminals, terrorists or tax evaders. That is one reason the UK has banned the use of the €500 note. It is true as well that cash oils the wheels of the black economy. It makes collecting taxes a bit harder, and a gardener or electrician might have to be a bit more scrupulous about filling in their tax returns if all their transactions ran through a bank account.

A world without cash would also make life significantly easier for governments. One idea is for a simple transactions tax to replace VAT, with HMRC taking a slice off every electronic payment. In countries such as Greece, where tax avoidance is rampant, it would make it a lot harder to avoid paying your fair share. On top of that, and perhaps this is where the drive to abolish cash is really coming from, it is starting to limit the ability of central banks to control the economy.

Some would like to introduce negative interest rates – indeed, the Swiss already have, and if there is another stock market crash or a recession many others may join them. But that is very hard when you can just hold your money in cash instead – after all, the 0pc interest you get on a stack of notes in a safe is a lot better than the -1pc a bank might charge under a negative interest rate regime. A cashless economy would be far easier to both tax and control.

But hold on. Is that something we really want? In reality, cash is far too valuable to be given up lightly. In truth, the benefits of abolition are largely oversold. While terrorists and criminals may well use cash to buy weapons, or deal in drugs, it is very hard to believe that they would not find some other way of financing their operations if it was abolished. Are there really any cases of potential jihadists being foiled because they couldn’t find two utility bills (less than three months old, of course) in a false name to open an account? The web is full of false payment systems and anonymous names.

Nor is clamping down on the black economy such a big deal. Admittedly these things are hard to measure, but according to research by the London School of Economics, the black economy only accounts for 10pc of British GDP, which is the fourth lowest in the EU. Many of the people working in it are below the tax threshold anyway, and certainly below the VAT threshold. So the tax collected even if you clamped down completely is unlikely to amount to more than 1pc of GDP. As for negative interest rates, do we really want those? Or have we concluded that central bankers are doing more harm than good with their attempts to manipulate the economy?

Against all that, we have to remember the benefits of cash. A simpler and more efficient “payment technology” has never been invented. No matter how smart our mobiles get, or how much data can be loaded on to a debit card, a banknote is an incredibly efficient way to handle small transactions. It is costless, immediate, flexible, no one ever needs a password, it can’t be hacked, and the system doesn’t ever crash.

More importantly, cash is about freedom. There are surely limits to the control over society we wish to hand over to governments and central banks? You don’t need to be a fully paid-up libertarian to question whether, in a world where we already worry about the amount of data that Facebook and Google can gather about us, we really want the banks and the state to know every single detail of what we are spending our money on and where. It is easy to surrender that freedom – but it will be a lot harder to get back.

People have used notes and coins for several thousand years. The earliest go all the way back to the Iron Age. If they wither away because people prefer using their phones or their cards, then that is fine. No one wants to stand in the way of technological innovation. But outlawing cash? That is surely a step too far – and we might miss it when it’s gone far more than we realise.