Dr. David McGrogan’s piece ‘The Open Conspiracy Against Cash‘ shone a light on a subject which until recently has barely made the finance pages. A combination of lockdown shenanigans around cash and the general cultural drift to hyperbole and coarsening political discourse have brought it to the margins of the culture wars. Branded as a War on Cash and spiced up with conspiracy theories and tales of corporate malfeasance, it is a subject on the march towards the front pages. Given its new exciting status as a full-blown war, I offer this two-part guide to the supporters and enemies of cash. Today we look at what cash is and how its properties make it ideal for crime. In the next article we look at its opponents in the card industry, central banks and eCommerce, and ask whether a libertarian approach could help.
What is cash?
An amazing variety of objects have been used as currency, from giant 12-foot stone discs in Micronesia to ramen noodles in U.S. prisons. For the more inconvenient forms of tender, including gold, the receipt for its safe deposit formed the earliest banknotes. Once everyone had got used to the idea of using notes as currency it was only a matter of time before the gold itself could be sold off, at which point we only had the paper notes and were left with what is known as a fiat currency, the value of which rests on nothing more than social and legal consensus. This is cash and maintaining that legal and social consensus is the job of the Bank of England (BoE).
What is legally cash can be tricky. Take the much misused term ‘legal tender’. It has a narrow technical meaning relating to what is allowed to be used to settle past debts in court. What is allowed isn’t much, only coins of the Royal Mint, so strictly speaking Scottish and Northern Irish banknotes are not legal tender in either Scotland or Northern Ireland. The term legal tender does not apply to ordinary transactions where both parties are free to agree to accept any form of payment according to their wishes. A retailer can refuse to accept your £50 note and it can also refuse to accept cheques, cards or any cash at all.
If notes and coins are not available, not trusted or cannot be spent then other substitutes quickly arise, such as cigarettes or petrol. Given that legally parties can agree to use anything to settle payment, exactly what cash is takes on a subjective nature. Nevertheless, the war on cash is really about notes and coins, their widespread acceptance and their anonymity.
Cash vs the War on Crime
Cash and crime can be roughly split in two. Counterfeiting, which the BoE can influence through fancy counter-forgery technology, and everything else, over which it has no influence whatsoever. Those inventing penalties to deter forgers are not immune to its temptations themselves. Inducing hyperinflation by flooding an economy with counterfeit cash was used as a weapon of economic war by the British Government during the American War of Independence.
The real problem for the BoE is the ‘everything else’ bucket over which it has no influence. From the everyday evasion of VAT by your builder to the trade in nuclear gas centrifuge parts, cash is the lifeblood of crime. Your builder’s financial handywork might seem trivial to the economy but it adds up. Professor Ken Rogoff, author of The Curse of Cash and Professor of Economics at Harvard, calculated that in the U.S. black market cash transactions added up to $700 billion in 2016 alone. It is likely more in countries with higher regimes.
One interesting detail is that almost all cash-based crime is transacted in high denomination notes. In the U.S. there is about $1.4 trillion dollars of cash in circulation, about $4,200 for every American. Almost all of that $1.4tn is denominated in $100 bills. How many ordinary U.S. citizens are hanging on to 42 one-hundred-dollar bills? Quite, so where is it all? Europe has an even larger note, the €500, which became known as the ‘Bin Laden’ because it was so prominent in the funding of terrorism and everyone knew what it looked like but few people had ever seen one. Britain banned them in 2010 after research showed nine out of 10 Bin Ladens were in the hands of organised crime. Since 2019 European banks no-longer issue the €500 note but they are still legal currency, if you can find one. All those $100 bills are still in circulation, somewhere.
Proposals from the likes of Prof. Rogoff to withdraw high denomination notes are part of the war on cash. Rogoff’s opponents say it does not work and point to India’s withdrawal of the ₹2,000 note in 2016 which caused chaos. Rogoff responds that it was the way it was done, overnight rather than over decades and without wide-spread access to retail banking. Although he titled his book The Curse of Cash he does not advocate its elimination.
Serious crime – political corruption, terrorism, drug dealing, extortion and human trafficking – makes use of cash too. But just as running a large legitimate organisation on cash is effectively impossible, the same is true for organisation crime. Criminals need the services of the global banking system for the same reasons as everyone else, not least of which is that when you are working with criminals you don’t want a lot of cash around. Politicians who claim to have solutions to crime therefore do what politicians do and legislate that banks must know their customers (KYC), have procedures for anti-money laundering (AML) and sign up to Combating the Financing of Terrorism (CFT). In practical terms, knowing your customer means being able to identify them, are they really who they say they are, and trying to determine what they are up to. As we have no well-designed, privacy preserving identity system (I do not mean national identity cards) this explains why opening a bank account is a bureaucratic pantomime of utility bills and random Government-issued documents. In terms of knowing their customers’ activities, it is the banks that are frustrated because as I have pointed out before the payment systems run by banks do not know what it is that is being paid for, only the parties involved. The same is true for retailers, which is why they have so-called loyalty schemes, to link a customer to what he or she bought. Even with scant data on each transaction banks are quite ingenious in looking for patterns and anomalies. These days your bank usually spots your cloned or stolen card being used before you do.
KYC and AML legislation certainly makes banking more bureaucratic and forces it to hold huge amounts of personal data, but it has a more pernicious effect. KYC is explicitly intended to deter criminals from using banks, to make their lives more difficult. The corollary is that if you cannot qualify for a bank account you are in the same situation as a criminal. This puts those who legitimately cannot or do not want to use a bank into that category. If you turn up to your new employer and on being added to the payroll say you do not have a bank account you will have some explaining to do. Also in this category are children, foreign visitors and people with learning difficulties. This is not to say that banks would not like more people to have bank accounts, on the contrary. But when it comes to KYC children cannot be asked for payslips and council tax bills and children are easy prey for coercive adults wanting to open accounts for nefarious aims. Hence the phenomenon of money muling.
It is the anonymity and widespread acceptance of cash that criminals like. Anything with these properties works, it does not have to be cash. As more and more things can be bought online, where cash currently does not work, small-time criminals are increasingly preferring gift vouchers and pre-paid credit cards. Very large payments such as ransom fees demanded by organised crime default to Bitcoin. It has some of the anonymity of cash but is not as easy to spend, so it needs laundering through exchanges. Still, with proceeds of ransomware victims alone around $900 million last year they can afford some exchange fees.
Cash vs its handlers
Defending against cash-induced crime is expensive but those who have to handle it in large quantities, banks, retailers and post offices, have no choice. Cash needs to be kept in safes on insured premises and transported securely. Staff can find themselves working in locked security cages or behind Perspex screens and are at risk of robbery and worse. It is no wonder that retailers are not resisting dwindling cash usage. Advocates of a right to pay with cash don’t have much to say on the corresponding duties imposed on retail businesses and their staff. If the use of cash continues to decline, with increasing numbers of outlets now doing without it entirely, using the law to force every retailer to maintain cash handling paraphernalia could be an expensive, bureaucratic burden, akin to having to offer facilities for anyone choosing to arrive by horse or to pay in gold sovereigns.
To be continued
The case for cash is up against more than just law enforcement. In the next article it faces central bankers, card providers and apathetic politicians.
Stop Press: Trump has announced he will never allow CBDCs at campaign rally in New Hampshire.
Stop Press 2: Test your understanding of the issue by watching Glenn Grenwald interview Saifedean Ammous. How many mistakes and misunderstandings can you spot?