With one of its tasks being precisely that of issuing money, the Swiss National Bank (SNB) will soon be putting the new 20 franc note into circulation. But is it appropriate to launch such denominations when fewer and fewer payments are being made in cash?
An elderly woman goes into one of the big banks in the Place Saint-François in Lausanne. She goes to the counter and asks the cashier for a four-figure sum because she needs to pay her monthly bills. Having pocketed her ward of cash, she crosses the square to the post office where she takes out her paying-in slips and pays her bills in cash. Is this a scene from a bygone era? Far from it. Even though many Swiss people now make their payments via their banks’ online services, or pay for their holidays with a credit card and pay for their shopping with a debit card, they are one of the nations who make the most use of notes, or “cash”, as it is usually called.
The Swiss love cash
In Sweden, for example, it is estimated that only 2 to 3% of transactions are still completed in cash – the total number of notes in circulation amounts to around 2% of the national GDP, according to figures quoted by L’Hebdo in an article published in January 2017. The European average stands at around 9.7%, with the Swiss remaining a little more attached to their cash, with 10% of our GDP passing between pockets and shops – despite having 16 million cards in our wallets. Even more surprising is that last year saw an increase of 7% in the total cash in circulation. In theory, there is still life in the old banknote.
How can this love of cash be explained? “I think the main reason is the security that has always prevailed on the streets of Switzerland,” suggests Jean-Pierre Danthine, Honorary Professor at the University of Lausanne and former Vice President of the SNB. “When I was living in the United States in the late 1970s, I never had more than 20 dollars in cash on me. Twenty dollars to hand over if I was mugged in the street was not a lot to lose. When I arrived in Switzerland, I was surprised at the amount of cash people carried about their person. There is nothing unusual about seeing people walk through the streets with several thousand francs on their way to the post office or to make a big purchase. And it’s possible, because it’s safe.”
In many countries, there is a real risk of being robbed – but the attachment to notes is also ingrained in culture: Sweden is not exactly the most dangerous country in Europe, yet it is the one that is closest to doing away with cash. So apparently, the Swiss are veritable traditionalists. People aged between 20 and 30, for example, are the ones who use cards least…
According to Philippe Bacchetta, Professor in Macroeconomics in the Faculty of Business and Economics (HEC) and at the Swiss Finance Institute, “the cultural dimension is significant, but there are also practical reasons that explain why, for certain types of payment, notes and coins will not completely disappear for a long time to come. I’m thinking, for example, of the 30 francs that you pay the babysitter when you come home from a night out or the 5 franc coin that you give to a child to buy an ice cream.”
Circulation of large denominations is increasing
The Swiss are not just fans of the small denominations, but are also extremely fond of the larger ones. The 1000 franc note has triumphed since the 2008 financial crisis. SNB statistics suggest that the number of these notes in circulation will increase by 79% in 10 years. Jean-Pierre Danthine bases his argument on a graph, also compiled by the SNB, explaining that people held the highest number of notes during the Second World War – around 25% of GDP. “Then peace came, the economy recovered and this ratio fell,” he reflects, analytically. From the 1990s until the crisis, the level stabilised at around 7.5%. Then, with the collapse of Lehmann Brothers in particular, as well as other banks, people lost confidence in financial institutions and some felt it wiser to keep their savings in cash. “So that explains this massive increase.
As well as this mistrust, Philippe Bacchetta also highlights the discretion afforded by cash and the difficulty in tracing cash transactions, whereas electronic or card payments enable the collection of various pieces of information, such as the amount paid or cashed, the place where the withdrawal or card payment was made, the date, the time, etc. “The demise of banking secrecy also stimulated the demand for large denominations,” he adds, “because it is a means of saving that is completely anonymous – there is a fiscal interest behind this appeal.”
Of course, it is also an opportunity for all industries associated with criminality, who prefer not to leave any trace of their payments so as to avoid more easily being brought to justice – hence the famous suitcase full of cash in crime dramas used to pay for drugs, ransoms, human trafficking and corruption. It is particularly because of the use of cash for criminal purposes that some economists, Kenneth Rogoff, in particular, well-known for his views and much cited on the issue, advocates its abolition.
Cybercriminals prefer bitcoins
Solange Ghernaouti, Professor of Cybersecurity in the Faculty of Business and Economics (HEC) and international expert, tones down the benefits of digital money to combat these activities: “Online payments do not resolve all the issues related to fighting crime – naturally, they are easier to trace and tax (which is what motivates their proliferation), but criminal opportunities remain, as do the technical facilities for escaping prosecution. The Internet generally provides criminals with a protective layer of isolation. I’m thinking particularly of casinos and some online services which really are vehicles for money-laundering, and of virtual money, such as bitcoins.
This virtual money effectively prevents the real identity of the people involved in a transaction from being established; it is not known who is making the payment nor who is being paid. Cybercriminals who take data or company PCs hostage often require this form of payment in their ransom demand. The purchase of illicit products, any sort of trafficking (drugs, arms, etc.) can be facilitated by the anonymity associated with this form of money. But even disregarding the more highly sophisticated cyber-crimes, one of the key issues involved in the digitisation of money and financial transactions is that, when people are subjected to a “cyber theft” of their personal or financial data, they are not necessarily immediately aware that it has happened. When a purse is stolen or a safe is opened by force, the incident is easily detected and the amount stolen is limited to the contents. With digital money, the impact can be both direct and indirect, immediate or delayed and potentially unlimited.”
Philippe Bacchetta also adds that another advantage of cash over credit is that, with a wallet full of notes, “there is no need to rely on any information systems. We’ve all experienced that moment when the tills go down in a shop – instantly, cards are no longer accepted. Paralysis and chaos quickly ensue. The disadvantage of cash, because it does have its drawbacks, is that we need to take care of it; it’s a logistics exercise: we don’t just have to transport it, we also need to transport it securely and then we need to ensure that the right number of notes are always in the right place – and that comes at a cost.”
Reviving the economy with cards
The other argument against cash is that it limits the action of central banks. “This argument favouring the abolition of cash has its supporters, including Kenneth Rogoff: without any notes in circulation, the central banks can introduce far more negative rates,” explains Philippe Bacchetta. Without going into too much technical detail, let us just say that the American economist advocates negative rates to be allowed to go as far as 6% to kick-start economies in recession. “In theory, it makes sense, but it is actually impossible to imagine in Switzerland,” comments Jean-Pierre Danthine. “As we have seen, people are very attached to their freedom to carry notes. If the decision is taken to abolish cash, there will be a referendum in any case, and people will argue against such a measure.”
All the specialists generally agree that both payment systems have their advantages, but that we shall nevertheless always be moving towards fewer and fewer notes being exchanged and more and more electronic payments, across all media. “It is not just money that is becoming ever more virtual; we are moving towards virtualisation everywhere: in banks, at work, in our relationships,” reflects Solange Ghernaouti, analytically. All our standards and courses of action are called into question by the use of digital technology and by the inescapable mediation of activities by service suppliers and Internet infrastructures, such as Google, Apple, Facebook, Amazon, Microsoft, Netflix or Uber. We need to assert our vision of society, equip ourselves with the means to influence, regulate or simply choose in full knowledge of the risks. For the time being, we are turning a blind eye, and that is never a good thing.”