The role of cash and zero interest rates

April 19, 2017 Share Source

An in-depth evaluation of cash and its role in national economies and payment systems [see paper here] was published by The Scientific Advisory Board of the German Federal Ministry of Economic Affairs and Energy in April 2017. In the accompanying press release, the German Federal Minister of Economy Affairs and Energy explicitly states that “cash must remain an important means of payment” even in times of digitalisation. 

According to the paper, politically influencing the payment landscape in general, and particularly with regard to cash, would only be justified if there were a market failure or deficit, e.g. the introduction of other means of payment would be prevented or significantly delayed. There is no evidence for this. In addition, the authors point out that strong business interests of individual market players drive the call for the abolition of cash.

Apart from well-known advantages of cash (reliability and robustness; independence of time, location, and third parties; cost control; protection of data and privacy), the authors state that cash is the only means of payment that guarantees simultaneousness of benefit and counter-benefit and thus doesn’t require establishing trust between buyer and seller. This principle is especially important in high-volume transactions such as the purchase of a used car. Limitations on cash payments are therefore to be repudiated.

"Cash must remain an important means of payment"
" The German Federal Ministry of Economic Affairs Scientific Advisory Board Bundesministerium für Wirtschaft und Energie

The argument that cash can be used for criminal activities holds true for countless other things as well, e.g. cars. Abolishing cars because they can be used for smuggling or as getaway cars in a heist would seem completely out of proportion. The same applies to cash, especially since the abolition of cash would infringe on the constitutionally guaranteed right of informational self-determination. Furthermore, just as having and using a car is no indication for criminal activities, paying cash is not either, say the authors.

They also warn against the implementation of negative interest rates as this would have a grave impact on the stability of national economies and financial systems. Even very low-interest rates, let alone negative nominal interest rates, are a threat to life insurances, company pension funds and pension schemes in general, and long-term investments.

"The anonymity of using cash serves the constitutional purpose for a protection of informational self-determination the citizen."
" The German Federal Ministry of Economic Affairs Scientific Advisory Board Bundesministerium für Wirtschaft und Energie
Last Updated: May 13, 2017