The Cost of Cash?

"Clearly, the economy has some significant issues which could benefit from the removal of cash"


Last month, the Bank of England finally raised interest rates. Rates have been stuck at nearly zero for a decade and only now with rising inflation are they starting to inch back up. Historically the first line of defence against recession has been cutting interest rates yet we are already due another economic downturn: the Office for Budget Responsibility estimates a 50% chance of recession in any five-year period; ten years on from the last, growth is already stalling, and unsecured consumer debt is on trajectory to reach pre-crash levels by 2021. So, the Bank of England’s monetary policy is in a bind, creating the potential for the next recession to be very damaging. Meanwhile, the UK still faces serious issues with organised crime: reports of human trafficking have doubled in the last five years; drug-dealing and importation, particularly cocaine, is still a major problem; and theft, especially attacks on ATMs has been increasing.

What links these two problems? Cash.

It seems like every month there are articles declaring that we are the verge of cashless society, and just as many rebuking the idea that people will ever give up the pound in their pocket. According to Payments UK, cash usage has fallen from 62% of all transactions in 2006, to just 40% in 2016. So, the role of cash is clearly declining but not exactly a death knell just yet. A question we should be asking ourselves, though, is whether we should welcome an end to cash?

In this article, we will examine the costs cash imposes on society, how the country may benefit from a cashless society, and what a plausible plan to phase cash out would look like.

What are the costs of cash?

One significant way cash imposes a cost on society is how it enables less-than-legal and criminal activity. The Association of Chartered Certified Accountants estimates that the “shadow economy”, legal economic activity not reported to the tax authorities, is worth around 11.5% of GDP and organised crime is estimated to make up another 1% of GDP by Home Office reports. In comparison, the Bank of England suggests only around 50% of physical British currency is accounted for by the domestic economy. Now, some of the remainder may be held overseas by tourists or currency brokers but even high estimates leave the shadow and criminal economy as disproportionate users of cash.

Those in the shadow economy use cash to avoid declaring income. For example, a restaurant may offer discounts to customers on cash transactions, so they can avoid paying VAT and offer casual waiting staff their wages in cash, where income tax may never enter the equation. They can do this because no records need to be kept and the chances of Her Majesty’s Revenue and Customs performing an audit and finding proof are worth the risk.

Eliminating cash would make attempts at evasion more transparent and difficult to accomplish: card payments and bank transfers leave a digital paper-trail; alternative physical payment methods like gift cards impose greater transaction costs and still leave a record on the acquirer’s account. HMRC estimates from 2017 suggest that the tax gap from tax evasion and the hidden economy is nearly £9 billion. While not all that is likely to be recouped, even a significant proportion would help the public finances. This greater transparency would also make it more difficult for companies who exploit and underpay migrant labour to fly under the radar.

We may decide to return some of this additional revenue to small businesses in the form of tax breaks and maintain a relative status quo. Still, a clear and universal process is more equitable than a tacit acceptance of evasion and lack of enforcement which undermines the tax system. As it stands, law-abiding citizens suffer from poorer public services and lower incomes than those who choose to break it.

Nevertheless, the less-than-legal activity is still mostly harmless compared to the criminal activities cash also helps enable. Firstly, without a necessarily traceable record of transactions, police find it much more difficult track down suppliers of stolen goods or drugs, even if they can catch individual criminals in the act. Cash also allows criminals to stockpile their ill-gotten gains easily; tens or even hundreds of thousands of pounds in cash is regularly seized from drug dealers across the country. When a million pounds in £50 notes fits in a large backpack, even the most lucrative criminals can still inconspicuously hide their wealth.

Banning cash would create a fundamentally more hostile environment for criminals to operate in; the European Central Bank have already stopped issuing the €500 note specifically over concerns of money laundering and terrorist financing. Organised crime would still be able to convert their profits into other physical assets, like gold, diamonds, or property. However, all of these are much less liquid and so increases transaction costs and the difficulty of remaining undetected.

Finally, cash has a limiting effect on the government’s monetary policy. Currently, the Bank of England experiences something called the zero lower bound problem, i.e. they cannot cut interest rates much below 0%.

Imagine a recession hit and your bank started offering negative interest rates, so that you would be charged simply for holding money in their accounts. You’d want to withdraw your money as soon as possible, right? Alternative stores of value like stocks and shares are likely to be falling too and the economic situation is uncertain. However, cash is only eroded by inflation, so it effectively has 0% real interest rate. Maybe the hassle and difficulty of storing the cash would put you off if you were only losing a few pence a month but there will be a point where the amount draining out of your account is untenable. So, when the Bank of England tries to set negative rates, balances are converted into cash and the effective interest rate is 0%.

This has left central banks across the world hamstrung trying to deal with recent crises, as once they hit 0%, they can no longer jump-start the economy anymore by stimulating demand, i.e. compelling people to spend, as there is relatively less to be gained through saving. This has forced them to turn to more esoteric and untested approaches like quantitative easing, which have efficiency and distributional costs. Without cash, this problem can be avoided. The central bank would be able to slash interest rates to combat deeper deflationary spirals and counteract systemic financial credit crunches like that of 2007. There would be greater short-term pain, but a much swifter economic recovery would benefit everyone in the long-term, rather than leaving us still feeling the effects a decade on.

Like ending the gold standard or central bank independence, this would represent a clear shift in monetary policy making. While trying to evaluate the optimal interest rate is no easy feat, it would still greatly simplify the decision-making process and leave the UK better prepared to combat future recessions.

Clearly, the economy has some significant issues which could benefit from the removal of cash.


How would we do it?

We can’t just cancel cash overnight. In November of 2016, India suddenly and without warning announced that their two largest notes, the 500 and 1000-rupee denominations, were no longer legal tender. With only around 3-4% of Indians paying income tax and its shadow economy at an estimate 20% of GDP, this bold move to invalidate 86% of currency by value hoped to leave tax evaders and criminals with worthless piles of cash.

However, even with limits on how much an individual could deposit and the element of surprise, the Reserve Bank of India estimates that through a variety of complex money laundering schemes, over 99% of the banned notes were deposited within the time limit. This scheme did pull billions of dollars into the formal banking sector and India has seen tax receipts rise, but ultimately left the bulk of the money in the hands of the tax dodgers, and it will trickle back out again in lower denominations and others assets. A slower scheme could achieve the same results, without the economic turmoil and the disruption to the poorest in society.

A sensible process of demonetisation must be transparently planned and announced well in advance. This may allow those currently stockpiling cash to avoid repercussions, but as India shows, they are capable of circumventing even heavy restrictions. Instead, we should slowly remove denominations from circulation, starting with largest. The Bank of England has already put much time and effort has into the new £5, £10 and £20 polymer notes, and there is little point cancelling them so soon after they have been issued. Banknote series generally have a run of around a decade or so before being replaced, which seems a reasonable schedule on which to withdraw them.

Therefore, rather than introduce a new £50 polymer note, the first, immediate step should to stop the issuance of any further £50 notes. At this point, you would give notice that all £50 notes in circulation will no longer legal tender after a reasonable period of time, e.g. a year. The new £20, due to be issued in 2020, would then have a rather short duration, with plans to be voided in 2025. The £10 would then get a full decade, taken out in 2027. Then finally, the £5 and all the small change would go around 2029. Though we won’t see the benefits so immediately, a smooth phasing out will retain consumer and business confidence.

This process would mean everyone will require some minimal form of bank account in order to function within society. There are already schemes to in place to aid this; the government’s basic bank account has, over the last three years, rolled out fee-free accounts, available to those ineligible for standard banking, increasing already high levels of financial inclusion in the UK. This, in combination with awareness campaigns and automatic banking registration through welfare services would provide the necessary foundation to ensure the move away from cash will not be detrimental to those worst off in society.


Now, this is admittedly a rather one-sided account of cash. There are some clear concerns left undiscussed. Without cash, there will be a record of every transaction; vulnerable to being searched by governments or private entities. This has obvious privacy concerns, especially for those with legitimate reasons to want to avoid being observed; however, advocating keeping cash is like trying to close the stable door after the horse has bolted. Existing surveillance and data controlled by governments and firms like Google and Facebook already leave us traceable by any concerted effort and so whether one more stream of data makes that much difference is debatable.

A more serious objection is what happens in the event of blackouts or natural disasters, where people are left without the necessary technology to engage in electronic transactions. In these circumstances, a simple ledger could be kept or a temporary physical currency could be issued, depending on the severity of the incident, but it is definitely something that would need to be considered in any implementation.

And perhaps it might be all for naught anyway. Bitcoin’s meteoric rise has brought it and other decentralised cryptocurrencies into the mainstream, and while very volatile now, they may in future provide a stable and liquid store of value difficult (though not impossible) to trace to its real owner. So, removing cash may simply be playing whack-a-mole.

Still, it is a debate worth opening up. The left is often accused of having its economic policy stuck in the 70s and this is a chance to show we have a 21st century economic policy, that embraces the new opportunities presented by technological change. Transitioning to a cashless society is by no means a cure-all, but I believe it is a useful and practical step in the right direction.


Elliot Jones is a Young Fabian member. Follow him on Twitter at @Elliot_M_Jones

Further Reading


  • Kenneth Rogoff – The Curse of Cash
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