Link to Suparit Suwanik’s blog “Through the Eyes of a Central Banker”

I am pleased to host another student guest post, this time by Suparit Suwanik. This is the 11th student guest post this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link. This is Suparit’s second guest post. Don’t miss “Suparit Suwanik: Putting Paper Currency In Its Proper Place.”

With the world still suffering from the economic slowdown, it is good to see many major central banks, including the European Central Bank, implementing negative interest rates. This creates wide speculations on change in related policy, that is, paper currency. The change in cash policy is a necessary condition to release the power of negative interest rates. From what I wrote in “Putting Paper Currency In Its Proper Place”, stating that from Mario Draghi to Larry Summers, they were planning to get rid of the large notes, for example, €500 notes and $100 bills, until today, here is another development: the German central bank, the Bundesbank, supports a gradual phaseout of the €500 bank note!

Bundesbank President Jens Weidmann once said “the current discussion over [the €500 note] must be kept clearly separate from this monetary policy-motivated discussion on the abolition of cash.” However, in my humble opinion, this is a big step closer to cashless society in the Eurozone. And here are the reasons:

First, it is the Bundesbank, the most influential central bank in the Eurozone, which is normally perceived as very conservative. Its president remains a key player in crafting Eurozone monetary policy at the ECB. If the idea is supported by the Bundesbank, the rest of the central banks in the Eurozone are likely to follow.

Second, it is Germany, where cash payments remain very common and people place a high premium on individual privacy. According to a recent Bundesbank study, 79% of payments in Germany are made in cash – compared with only 48% in Britain. Even among 14- to 24-year-olds, two-thirds say they prefer paying in cash to electronic means. Of course, resistance is expected to be fierce against any change in paper currency. But the resistance will be much lighter if the change is at a gradual, yet steady, pace. In order to unleash the powerful effect of negative interest rates, it is the right time to start changing the policy.

Finally, it remains in doubt whether terrorists or criminals can really be stopped because large notes are eliminated, though it is claimed that the change in paper currency policy will be significant help in hindering money laundering and organized crime. In general, the criminal world tends to use small notes to avoid suspicion from authorities. Though I’m a supporter of negative interest rates, I agree with a German professor, Max Otte, who is strongly against the change in cash policy, that the elimination of the €500 note is becoming ever more likely and constitutes the start of the elimination of cash.

All in all, the sooner the change in cash policy is in effect, the better the economic effect of negative interest rates which the ECB is really hoping for. May the transition to electronic money society be smooth and glorious for the Eurozone!