A study on cash and the shadow economy by Dr. Friedrich Schneider (April, 2017)

calendar iconMay 3, 2017


Professor Dr. Friedrich Schneider - a teacher of economics at Austria's Johannes Kepler University in Linz - presented a study of the potential relationship between cash use and the shadow economy in Grey Matter: Charting the Development of the Shadow Economy.

Published in April 2017, the paper looks the relationship between cash and the shadow economy, cash and corruption, cash and terrorism and, finally, cash and civil liberties. The analysis concludes that limiting or abolishing cash will not prevent terrorism but will instead severely cap civil liberties.

"Cash is neither the motivation nor the reason for shadow economies, crime or terrorist attacks"
"Friedrich SchneiderEconomics ProfessorJohannes Kepler University, Austria

In his paper, Schneider first establishes that cash is "heavily used in the legal economy. Despite the increasing use of alternative payment methods, such as credit cards, electronic payment systems, or virtual currency, banknotes still represent the preferred means of payment, both in Europe and abroad, including the United States."

He then takes a closer look at cash and the data available for cash in the context of the shadow economy, corruption, money laundering and cyber crime.

Using three different methodological approaches, he comes to the conclusion that "cash is an important element in the shadow economy. But cash is by no means a causal factor and it has a quantitatively limited influence on the development of a shadow economy. Without any cash, a shadow economy might be reduced between 10 to 20%."

Looking at the data available on corruption, Schneider "cannot conclude that cash is a driver of corruption."  And while he says that "cash is quite important for money launderers in traditional criminal activities at the first stage", he also points out that "the costs and proceeds of cybercrime activities are sizeable. In future, they will certainly rise because the use of electronic networks for crime activities is becoming more and more attractive."

Schneiders' results show that the impact of restrictions/abolition of cash use on the shadow economy, corruption, money laundering and the financing of terrorism is low and continues to decline while the societal impact would be high.

"In a democracy, the choice between cash and other means of payment should be left to users, who happen to be citizens, taxpayers, consumers and producers at the same time. [...] They should be free to choose which payment instrument they use."
"Friedrich SchneiderEconomics ProfessorJohannes Kepler University, Austria

Schneider goes beyond economics in the conclusion of his paper. He sees cash as part of an unspoken covenant between citizens and their state, with cash representing "the fundamental relation between citizens or taxpayers and state authorities. Using cash means freedom, independence and personal fulfilment for a citizen who doesn’t want a state intervention when using cash."

Looking at the impact of severely restricting or abolishing cash, he consequently states that "the abolishment or strict limitation of cash carries the risk of seriously weakening trust in state authorities [...] and can easily prove to be counter-productive."

Last Updated: Nov 5, 2018