Sunday, April 29, 2018

St. Louis Federal Reserve Bank: "Cash has many advantages, but its end might be near"

By Robert Wenzel

The St. Louis Federal Reserve Bank is out with a new paper, The Case for Central Bank Electronic Money and the Non-case for Central Bank Cryptocurrencies by Aleksander Berentsen and Fabian Schär.

In the paper the authors write:
Cash has many advantages, but its end might be near 
There are political and technological reasons why the use of cash may be diminishing.
Cash is being condemned by many politicians and economists. According to Berentsen andbSchär (2016), the argument of these cash critics essentially is based on three claims: First, the use of cash is inefficient and significantly more expensive than electronic payments. Second,vcash promotes crime and facilitates money laundering and tax evasion.10 Third, cash hindersvmonetary policy by limiting the central bank’s ability to use negative nominal interest ratesvas a policy option.

Technological reasons also apply: In the near future, a close cash substitute will be developedvthat will rapidly drive out cash as a means of payment.
Although they state cryptocurrencies may develop the technical elements to be used at scale, they reject the notion that a cryptocurrency should become a central bank medium of exchange that replaces cash:
A contender [to replace cash] is Bitcoin or some other cryptocurrency. While cryptocurrencies still have many drawbacks, such as high payment fees, scaling issues, and poor adoption, these issues could rapidly disappear with the emergence of large-scale off-chain payment networks (e.g., Bitcoin’s lightning network) and other scaling solutions,...we argue that it makes little sense for central banks to issue cryptocurrencies even though it would be straightforward from a technological point of view to do so. 
They argue that a central bank issued electronic money is the most desirable alternative:

If the use of cash is restricted for political reasons or vanishes because of technological
innovations, the somewhat strange situation arises that households and firms have no access to legal tender. Today, in most countries, the population can pay only with legal tender through the use of cash. If cash disappears, the population is forced to make all payments with private money. By offering transaction accounts, central banks enable the general public to hold legal tender in electronic form. A large part of the population will consider it a close substitute for cash, and this will make it easier to say goodbye to cash...

Overall, we believe that implementing “central bank electronic money for all” is straightforward since these accounts can be used only for making payments. No credit can be obtained,and so almost no monitoring is needed. (Of course, some standard regulations would still apply.) All transactions would need to be initiated electronically.

One of the reasons the authors argue for “central bank electronic money for all” is that they believe the adoption of a central bank cryptocurrency system, even Fedcoin, would allow for anonymous transactions. This is likely an error in the thinking on the part of the authors. Cryptocurrencies are highly trackable and indeed it is possible that a cryptocurrency, especially a Fedcoin, would be completely trackable.

That said, we see from this paper where the thinking of Fed is when the authors write:
In general, we don’t think that a central bank should be in the business to satisfy the
demand for anonymous payments.
The paper ends with an odd twist. After suggesting that cash (which is anonymous) will disappear and that central banks should not create a cryptocurrency replacement that but rather a fully trackable electronic money, they add this:
History and current political reality show that, on the one hand, governments can be bad actors and, on the other hand, some citizens can be bad actors. The former justifies an anonymous currency to protect citizens from bad governments, while the later calls for transparency of all payments. The reality is in between, and for that reason we welcome anonymous cryptocurrencies but also disagree with the view that the government should provide one. 
What is bizarre in this conclusion is that the actors who want to eliminate cash want to do so because they want to make all transactions trackable and be able to fully control the money supply.

If the government eliminates cash and sets up a “central bank electronic money for all,”  there is not going to be the option of operating on the central bank's grid or alternatively in an anonymous cryptocurrency.

If cash goes, transaction privacy will go.

Robert Wenzel is Editor & Publisher of and Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Ban .and most recently Foundations of Private Property Society Theory: Anarchism for the Civilized Person Follow him on twitter:@wenzeleconomics and on LinkedIn. His youtube series is here: Robert Wenzel Talks Economics. The Robert Wenzel podcast is on  iphone and stitcher.


  1. A cashless society would be a disaster for liberty, and would be the beginning of another Dark Ages.

  2. Every private transaction would be outlawed and there would be a swarm of secret police running around everywhere enforcing the diktat. Just like Cuba, Cambodia, and War Communism.

  3. Wait Wenzel, I thought you were for companies being able to do whatever they want with their property? If the Fed and its member banks are privately owned corporations, do they not retain the right to eliminate cash, or is this just another exception that you personally don't like?

    1. Through the tax code, one is forced to use illegal and unconstitutional funny fiat dollars in all regular transactions. The insinuation that the government making cash transactions illegal under severe penalty of law is somehow a "private contractual matter" is just silly. Actually, just plain stupid. But par for the course for 99.99% of anti-Rothbardian musings.

    2. No, Paul makes a great point here. What if the private banks go along with a cashless system?

    3. Hey Lab Manager, serious question, what color is the sky in your world?

  4. @Bob Roddis
    I would say it's as stupid as calling out the government for being evil by protecting its borders, but then saying that the same government should do something about the homeless people that Wenzel has to step over. Wenzel is an ancap of convenience.

  5. Apparently Pauk Hansen is to economics as the band Hansen is to music.

  6. has anyone here read this entire report?

  7. "History and current political reality show that, on the one hand, governments can be bad actors and, on the other hand, some citizens can be bad actors..."

    It also shows that bad acting citizens do much less damage than bad acting governments. Also, bad acting citizens can be stopped quickly and with relatively little effort. Bad acting governments cannot. This means we should always be lean heavily towards limiting governments and not individuals.