Backlash Against War on Cash Reaches the Bank of Canada

A cashless society could have “adverse collective outcomes.”

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

In recent months, a slew of political and financial institutions have raised concerns about the march toward a cashless economy. They include:

  • The ECB warned that a phase-out of cash could pose a serious risk to the financial system. Depending too heavily on electronic payment systems could expose financial systems to catastrophic failures in the event of power outages or cyber attacks. The European Commission has also backed off is war on cash.
  • The People’s Bank of China announced that all businesses in China that are not e-commerce must resume accepting cash or risk being investigated, and cautioned businesses against hyping the “cashless” idea when promoting non-cash payments.
  • In Sweden, one of the most cashless societies, the central bank and parliament have spoken out in support of cash.
  • Cities too have spoken out, including Washington D.C., whose City Council introduced a bill that sought to ban restaurants and retailers from not accepting cash or charging a different price to customers depending on the method of payment they use.

Now, it’s the Bank of Canada’s turn to sound the alarm. In a paper — “Is a Cashless Society Problematic?” — it outlines a number of risks that could arise if the country went fully cashless.

The premise underpinning the analysis is that at some point in the future individuals and firms decide, of their own volition, to cease using cash altogether. In response, the central bank stops printing physical money because of the large fixed costs inherent in supplying bank notes.

In such a scenario, even though most individuals and firms freely choose to abandon cash, there could be “adverse collective outcomes,” the study warns. For example, “a small segment of the population” may still prefer to go on using physical money rather than electronic payments, whether out of “a continuous desire for anonymous transactions” or because of “the self-imposed spending constraints afforded by cash.”

In a cashless economy, this “minority of people” would be worse off since “their choice set would be smaller without cash”. Plus, they would have zero anonymity and less control over their finances.

Meanwhile, retail payment services would be provided entirely by private sector networks. In other words, banks and credit card companies would have even greater monopoly control over the payments system. In Canada, there is already only one domestic debit card scheme, provided by Interac, and three major credit card networks, operated by Visa, MasterCard and American Express.

For people with no choice but to use cash, such as those living in geographically remote areas or who do not have bank accounts, this would be a huge problem. In Canada the number of “unbanked” is relatively small, representing just 2% of the population, but in many other countries it is much larger. In a cashless society those people would struggle to participate in the economy at all.

The problem is not just one of economic exclusion. There’s also the heightened security risk to consider. Cash, as a transaction medium, “is robust to electronic network failures, cyber attacks and power outages”. In a cashless economy, there would be even greater dependence on the operational reliability of electronic retail payment networks and associated power systems, both of which are prone to go down. A massive outage of visa services in Western Europe this June gave a foretaste of the sort of chaos that could ensue.

Cash also serves as a vital store of value in economic crises. For example, during the worst period of Iceland’s economic crisis, between 2008-09, when all three of its major banks collapsed, cash in circulation more than doubled. The increase in demand for banknotes was concentrated in the largest denominations, suggesting that it was driven largely by store-of-value motivations.

Even for central banks themselves, an entirely cashless economy could cause headaches:

  1. Loss of Seigniorage. This is the profit a government earns by issuing currency, as represented by the difference between the face value of coins and notes and their production costs. As the report points out, the disappearance of cash would lead to a severe contraction of the central bank’s balance sheet, since bank notes represent around three-quarters of the Bank of Canada’s liabilities.
  2. Reduced Interventionary Powers. One of the ways central banks have to provide liquidity in a financial crisis is to sell their holdings of government securities and purchase other (illiquid) assets with the proceeds. An unmitigated contraction of the central bank’s balance sheet could compromise its ability to use this tool.

The authors suggest this problem could be offset if the central bank chose to charge more for the services it provides to the financial industry. It could also expand its balance sheet “by buying government bills and bonds with reserves,” much as certain central banks have done through their quantitative easing programs.

The BoC concludes the report by stating that while a cashless society would not “generally” cause material system-wide problems, there are clearly concerns “with regard to the maintenance of operational reliability.” It may also be necessary to provide a safe store of value in an (extreme) financial crisis as well as an alternative to private-owned payment networks, it says.

The report proposes three possible policy responses:

  • Retain the obligation to make cash available, and consider preemptive measures to mitigate the potential erosion of cash demand over time.
  • Regulate critical payment networks to support operational reliability and to mitigate anti-competitive outcomes.
  • Issue a central bank “digital currency” — a digital version of the Canadian dollar and not a “cryptocurrency” — to compete with private payment networks.

The authors do not indicate which option is preferable, but they clearly have misgivings about getting rid of cash altogether, without at least having viable alternatives in place. And for the moment, there is no viable alternative. By Don Quijones.

Home-equity-loan balances in Canada per capita are now 3.3 times what they were in the US during HELOC peak before it all collapsed. Read…  HELOCs in the US & Canada: As “Scarred” Americans Learned Bitter Lesson, Canadians Went Nuts

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  42 comments for “Backlash Against War on Cash Reaches the Bank of Canada

  1. People need to believe that the monetary system has finite limits, or they won’t have confidence. Cash is a symbol of central bank restraint, and eventually a symbol that is shown to be false is no longer respected, and then we will all be ready for the cashless society. Short answer its all part of their plan.

    • polecat says:

      QUESTIONER : “So, how exactly, did you find yourself falling into penury, working in the forced corporate labor camps.. ??”
      Clueless Peon : “Well .. it goes like this” … “I went cashless .. first, a little at a time ………. and ttthen All-at-once !!” “.. and now suddenly, I’m a faceless nonperson, with any and all of my former assets, certifications, honours .. revoked by the State/Corps, due in great part to my contrary political/philosophical beliefs, living on the outskirts of town, relying on either my wits .. or from the charity of the few that care.” Kind of a miserable situation to be in …”

      “Hey, by the way .. gotta extra quatloo you could spare ?”

    • Andrew says:

      The monetary system does indeed have limits, as Mr Bierce points out.
      It’s worth noting that the Canadian Federal Government recently passed “bank recapitalization (bail-in) issuance regulations,” so when cash really dries up, the banks will dip into depositors’ savings to release cash.

  2. Jarhead John says:

    How fortunate we have a vault full of academics to tell us what most people already know….

  3. Pavel says:

    When I go out to restaurants here in Canada the wait staff bring the credit card machine by reflex and when I pay with cash they are actually surprised.

    Unfortunately the Canadian paper currency is now among the worst in the world — horrid plastic, slippery bank “notes” which don’t even fold properly. Sigh.

    What I detest above all with the “cashless” society after the loss of privacy and anonymity is the fact that the money-grubbing banks and credit card companies are making more money off our daily purchases. There should be a legally-mandated *discount* for those paying cash.

    • realist says:

      The laundering of bags of cash is the subject of the opening paragraphs of this excellent article about Vancouver, whose title is: “The City That Had Too Much Money”. Vancouver surely does – mostly foreign, of dubious legality both in its creation and transmission to Canada, and mostly untaxed, especially if invested in Canadian real estate.
      But the point is made: cash remains essential to money laundering, as alternatives are not yet robust enough to replace it for that purpose. And money laundering is a very big business for the world’s high-end criminals and their “financial services providers”. Cash here to stay.

      • polecat says:

        So, I hope you aren’tt implying, by extension, that the non-laundering lumpin folk are criminal as well . I can certainly say that most governments, by their complicity with shadow ‘entities’, are, by their very nature, criminal and corrupt ! The bigwigs around the planet must have finally realised if cash were to be eliminated from total use, that much of the public would go ape-shit and loose it completely, causing al, kinds of .. uh .. issues.

        • alex in san jose AKA digital Detroit says:

          Some projections are that when it’s time for me to collect Social Security, I may get 70% of what I put in, if I’m lucky.

          This is better than hiding cash under a mattress, how?

          Cash is king.

        • Wolf Richter says:

          The scaremongering about Social Security is as old as SS. I remember my high-school sweetheart’s dad telling me at the time that SS would be bankrupt by the time he’d try to collect it. He lived on to a ripe old age and died a few years ago, and SS is still there, paying his widow her survivor benefits.

        • alex in san jose AKA digital Detroit says:

          Wolf – If I were *that* skeptical about SS I’d not participate. I’m not a big enough fish for the IRS to come after if I don’t file taxes, yet I do.

          I just don’t think SS is going to be allowed to die, and in fact I think there’s more scrutiny of, and hopes to overhaul, the social safety net in the US than there has been in a while.

          Will my SS be enough to live in? Maybe in Bulgaria. But it will be something. Enough to rent a room or something, and maybe the whole system will be reformed and it actually end up enough to live on by the time I need it.

        • realist says:

          “So, I hope you aren’t implying, by extension, that the non-laundering lumpin folk are criminal as well .”

          Certainly not. But I am suggesting that the “defense of cash” is being promoted by diverse interests, some of which are those engaged in the money laundering business, or in need of their services.

  4. Paulo says:

    Cash is big in our Cdn home. I just finished a run to town for a dentist checkup. After I swung into my favourite restaurant for a late lunch (paid by cash + tip, no receipt please) I returned home to top up the cash envelope (again).

    Cashless society! hmm What’s that Buddy Holly song, ‘That’ll be the Day’? yeah, that’s it.

    We pay lots of taxes here and I don’t mind doing so. But let’s see the 1% pick up the slack for awhile.

  5. In Canada most of the newcomers or new arrivals have to cash their welfare cheque at Money Mart. They can’t outlaw cash.

  6. Crysangle says:

    I dislike paying everyday transactions by card. It seems odd to me when you receive something not to return something tangible. To pay a meal that has already been eaten, or a pile of shopping just passed through checkout, relying on your card working, seems dishonest… and the familiar moment that would be cash payment taken over by messing with your phone, or standing there waiting for permission from some computer somewhere , always feels like a mixture of will it or won’t it and how convenient now you are dismissed.

    I dislike the potential lack of privacy with any digital transaction. Not in a paranoid or tax evasive way, but from the point of view that by allowing registry of your actions you are giving knowledge and power to others on a platter. Does that matter? Just consider how hard it is for any individual to collect any information from authority that might help put them in the picture. Yet we give out all kinds of information on ourselves without thinking twice how it might be used. If someone’s trust gets abused by authority often all they know how to do is to go along with it.

    Seigniorage originates from its original feudal prerogative. That is how money came into being, the recognised stamp of quality that also carried information of the issuer. This stamp was later extended to give a fixed notional value to currency, then fiat where that value eventually completely disconnected from the base worth of the money. International trade was resolved in gold and silver until recently, they were trusted. I just came across a coin of Edward the first here, a small copper half real from over half a millennium ago. It is still fully legible, is hand struck. You weren’t over there in those days, you were all over here (not you DQ) . As the borders changed during this time, which was still reconquest, the king would issue his money as he went, and payment was made due with it, even while various neighbouring currencies might circulate concurrently as well. That is seigniorage.

    So to look to any modern central bank, let alone fully digitalised, with any kind of similar respect ? I have difficulty finding anything noble about their business even as stands, and the Euro in particular is an abomination. Who are these people behind the euro really? They don’t stand for any individual country, and never present what they personally stand for, just technical jargon and a lot of illusive ideals.

  7. Jeremy says:

    — It could also expand its balance sheet “by buying government bills and bonds with reserves,” much as certain central banks have done through their quantitative easing programs.

    Does this imply that a cashless society would be inherently inflationary?

    • Mel says:

      I don’t think so. They’re meant to do this “to provide liquidity in a financial crisis”, that is, when the private sector has run out of money, and the big threat is deflation. When the report specifies “government bills and bonds” they seem to be thinking of funding the government so that it can run expansionary programs.

  8. Peter Boardman says:

    A campaign to demand that all electronic transactions be net.
    That is, legislation that no fees whatsoever can be charged above the otherwise cash amount. Going “cashless” would consequently lose its appeal to today’s parasitical money merchants.

  9. Prairies says:

    If people would calculate the fees they pay for plastic and direct payments they would start to look back at cash as a smarter form of payment. Too many people think the plastic is free, the fees are hidden and subtle. Cash was being attacked and almost phased out because the banks couldn’t make a profit from handling cash like they do with transaction fees on every business transaction around the globe.

    • Paul says:

      Unfortunately, most of the costs of plastic are incorporated in the prices you pay, normally the 4% that the credit card company gets being included in the price.
      If you pay with cash, nobody gives back that 4%, so you have the worst of both worlds!

    • L Lavery says:

      It might be, likely is, that cash is not as efficient as plastic. A shop that doesn’t deal in cash cannot be robbed of it, thus doesn’t have to pay for security and/or insurance against such. Nor does it have to convey it to a bank each night. Nor keep a float of small change in all its tills.

      • Prairies says:

        People can still steal inventory, security is a must in all businesses. Cash is usually in a safe, so most break ins take product that can be traded for cash at pawn shops or sold for drugs privately. Plastic isn’t as safe or reliable as you think either, but that is a whole different rant.

    • realist says:

      “Cash was being attacked and almost phased out because the banks couldn’t make a profit from handling cash like they do with transaction fees on every business transaction around the globe.”

      Correct, however, the banks and their criminal clients still need cash for the purposes of money laundering, and until a viable substitute is found, it will not disappear.

      • ewmayer says:

        And each of your points can be countered with a positive for cash: A shop can still be robbed of its inventory, an individual who pays with cash cannot have his personal data stolen from a merchant website, a merchant has to pay 3-4% overhead to the card processing network for each such transaction (i.e. is guaranteed to have 3-4% “stolen” from each and every card transaction), cash still works if the power/processing-networks/internet go down, and a cash user does not have their every move tracked and fed into an ever-growing set of profiling databases used by predictive-analytics software to try to sell you more stuff at every turn. To say nothing of the ability of governments to implement bank-bailing-out NIRP in a cashless context by simply taking a percentage of your e-cash every few months. There are simply too many downsides to going 100% cashless for this to be turned into a binary choice.

  10. L Lavery says:

    Getting rid of cash might not be such a bad idea. People are pretty good at money, as we know by looking at the past[1]. So getting rid of cash might lead to people creating their own. Which has a bonus as local currencies tend to be good for the local economy (makes it more robust). Not so good for the banks of course, nor the state. So maybe that’s what states are waking up to. If people start issuing their own money it’ll take power away from the state.

    [1] They’ve used sea shells, stones (Isle of Yap), feathers etc. Also, people issued money rarely suffers from on going inflation (as creating it always involves doing work, which costs).

  11. Paul says:

    I don’t like the term “war on cash”, as it has implications that I don’t believe are true. Same is true about “trade war”.
    Anyway, one of the drivers in the movement away from cash is inflation.
    In the good old days, a well hidden box of gold coins was a viable alternative to a savings account at a bank.
    Maybe part of why more people saved more back then was because they could see something tangible and valuable accumulating?
    Now, inflation makes saving currency longer term a clear loser, and the currency now is stuff that can be destroyed by fire, water, or a mouse building a nest.
    Personally, I think we should abandon fiat, “we” meaning the entire world, and go back to PM based currencies some of which are PM coins and the rest being notes that are exchangeable for those coins.
    Yes, there would be some trauma as governments would have to run balanced budgets, spending being limited to their income. Countries would have to run balanced current accounts.
    However, I really believe that the long term benefits would outweigh the problems.
    In the short term, we would see more clearly how sick the current system is, and yes, there would be tribulation.

  12. Winston says:

    Cash withdrawn from banks provides last ditch protection from negative interest rate policies.

  13. Crysangle says:

    There is some kind of explanation that might be found in the meaning of the word cash. Like Paul I find the phrase “war on cash” misleading, it is probably descended from war on terror or war on crime…catch all concepts that leave people clueless and waiting for whatever definition wants to be applied. Although the main aim touted by authorities seems to be to control undesirable economic activity, that really translates into monitoring all economic activity, possibly with some not very deserving ( depending on your point of view) objectives . Those could range from taxation through to outright control of the monetary system. The term war on cash also is aggravating because it suggests that by using cash you are entering conflict, one started by authority. In truth it has no such power, unless it wants to supervise everykind of transaction possible where any kind of cash alternative might be used. You know what that would look like, and how it would show those who imposed it for what they are.

    So maybe just something simple like monetarykleptodictatorialsocialism would sound better?

    Where I started was with the word cash, so that is where I finish. It is derrived from (money) case via french and latin, which is derived from an indo-european root meaning “to grasp”. So it is some sad irony that really all this adds up to is an attempt to remove the people’s own grasp and replace it with a reliance on the continuous approval of some distant unknown third party.


    Being dirt poor is like being cashless, and being dirt poor in CANADA means that you have no cash at all, ever. At this juncture it would not matter if the banks decided to eliminate cash because only the rich have cash after the rent & food are purchased.

    Heck, that’s why CANADA is such a great place for hot money laundering.


    • Prairies says:

      Close, from my experience the working class(not dirt poor) is all plastic. All the bills are direct deposit, living off credit cards, etc. But the dirt poor I have dealt with take their government cheque to the bank and cash it, and only spend cash.

  15. realist says:

    Re: the necessity of cash, even to those profiting most from electronic transactions, I draw your attention to the iceberg’s tip, being the admission to US authorities by HSBC in 2012 that it laundered the proceeds of drug cartels and terrorists, resulting in a $1.9B fine. So active was the trade that HSBC remodelled its tellers’ cages to accommodate the suitcases of cash coming in. This illegal activity took place during the tenure of a chairman who was ordained as a priest of the Church of England.

    • ewmayer says:

      So instead of sanctioning crooked banks like HSBC, we should punish all cash users, both legal and illegal?

      And you think a crooked bank won’t find ways to commit crimes in a cashless context? The problem is the unpunished crookery, not the means by which it was effected.

  16. vapp says:

    Canada is a socialized country often cash is not needed.

  17. SimplyPut7 says:

    It’s only a problem if there was a cyber attack or an extended blackout period like the Blackout of 2003 that affected Ontario, northeastern and mid-west US states as well as the ice storms of 2013 in Toronto and 1998 in Quebec. Each ice storm lasted about a week, less depending on where you lived.

    The ice storms and blackouts are more worrying than the cyber attacks in Canada as millions of people could freeze to death in larger cities where more condos and homes without fireplaces have been built than homes with fireplaces or homes that can easily add a generator for power to run electric heaters. Once the backup generators started to fail in the condo buildings, getting elderly people and people with mobility problems down the stairs would also be more concerning than lack of money. Many new condo buildings are 40 to 80 storeys high, I wouldn’t want to go down those dark staircases in below freezing temperatures after the building generators stop providing light.

    Cashless societies have been widely accepted by small and medium size businesses in Canada in larger towns that have to compete with large corporate chains that love to use cashless payments as their main source of receiving money from clients. I use credit cards (in Canada we just ask if we can pay by “Tap” aka no swipe or insert card needed) for everything from the dollar store to grocery stores to insurance payments and utility payments and transit payments. In the beginning of the transition, you used to get weird looks or suspicious payment phone calls from your bank if you used it for small transactions e.g. less than $5 at the dollar store and then bought say a TV or computer at Best Buy the next day. But now that computer systems are used to the different places you tap, those false flags have drastically been reduced.

    Businesses love the ease of use too, no worries of employees stealing from you, the struggles of counting the cash at the end of the day and not balancing with the total receipts paid by customers for that day. There are also fewer robberies as thieves know you will likely not have enough money on hand to make the risk going to jail for stealing worth it.

    If the Bank of Canada is worried about cashless societies they should tell local governments to build more detached houses with land so people will have a safe place to store their large sums of money, be able to run generators or burn wood in their fireplaces for warmth and grow their own food during a crisis.

  18. DMS says:

    “The scaremongering about Social Security is as old as SS. I remember my high-school sweetheart’s dad telling me at the time that SS would be bankrupt by the time he’d try to collect it. He lived on to a ripe old age and died a few years ago, and SS is still there, paying his widow her survivor benefits.”

    Your faith in government is charming, but not realistic. You do understand that your SS benefits are returned to you in the form of severely devalued currency units, right? The purchasing power of the dollars I receive from SS in my old age will be nowhere near that of the ones I put in initially. I’ve noticed you believe the government’s statistics for inflation and unemployment are accurate reflections of reality… We disagree on that, too. Anyone can see that monetary inflation in the last few decades is completely and utterly unhinged.

    • Wolf Richter says:

      Yeah, same story I was told when I was 17. SS is adjusted for inflation. Payments are based not on what you paid initially but on a formula based on the highest annual income years.

      Why don’t you inform yourself first rather than making up your own theories about how SS works:

      • Juanfo says:

        And what inflation # are they adjusting for? Real inflation as in my groceries go up 20% each year and doctor visits and meds double every other year? Or is it their very own mythical inflation # directly proportional to the amount of unicorns in Atlantis?

        • Wolf Richter says:

          Our housing costs haven’t changed in years. We haven’t bought a new car in 11 years; so no price changes there. Folks that are retired and own their own home, their housing costs don’t change (OK, in some ruthless states, property taxes rise out the wazoo, but not in California). Groceries aren’t the dominant part of middle-class spending. It’s housing and health care. But folks who are retired are on Medicare. Everyone has their own personal inflation rate. Ours is about in line with CPI, and we’re obviously not retired :-]

  19. Mean Chicken says:

    One thing for sure is my property tax bill arrives every year and every year it goes up. It’s my single largest expense by a good measure.

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