The Boiling Frog

The boiling frog is a simple tale that illustrates the danger of gradual change: if you put a frog in boiling water, it will quickly jump out to escape the heat. But if you place a frog in warm water and gradually increase the temperature, it won’t notice the change and will eventually cook itself. Might the decline in cash usage be construed as an example of this tale?

As long as individuals can freely transact with each other and conduct purchases and sales without intermediaries¹ such as with cash, our freedoms and rights remain secure from potential threats posed by the payment system. However, as we have seen in several countries such as Sweden over the past 15 years, the use of cash and the amount of banknotes and coins in circulation have decreased . All to the benefit of various intermediated¹ electronic alternatives.

The reasons for this trend include:

• The costs associated with cash usage has been increasing .
• Increased regulatory burdens due to stricter anti-money laundering regulations.
• Closed bank branches and fewer ATMs .
• The Riksbank’s aggressive note switches resulted in a situation where they were no longer recognized .

Market forces or “market forces”?

Some may argue that the “de-cashing” of society is a consequence of market forces. But does this hold true? Leading economists at times recommend interventions with the express purpose to mislead the public, such as proposing measures who are “opaque to most voters.”

In a working paper on de-cashing by the International Monetary Fund (IMF) from 2017 , such thought processes, even recommendations, can be found. IMF economist Alexei Kireyev, formerly a professor at an institute associated with the Soviet Union’s KGB (MGIMO) and economic adviser to Michail Gorbachov 1989-91, wrote that:

• “Social conventions may also be disrupted as de-cashing may be viewed as a violation of fundamental rights, including freedom of contract and freedom of ownership.”
• Letting the private sector lead “the de-cashing” is preferable, as it will seem “almost entirely benign”. The “tempting attempts to impose de-cashing by a decree should be avoided”
• “A targeted outreach program is needed to alleviate suspicions related to de-cashing”

In the text, he also offered suggestions on the most effective approach to diminish the use of cash:

• The de-cashing process could build on the initial and largely uncontested steps, such as the phasing out of large denomination bills, the placement of ceilings on cash transactions, and the reporting of cash moves across the borders.
• Include creating economic incentives to reduce the use of cash in transactions
• Simplify “the opening and use of transferrable deposits, and further computerizing the financial system.”

As is customary in such a context, it is noted that the article only describes research and does not necessarily reflect IMF’s views. However, isn’t it remarkable that all of these proposals have come to fruition and the process continues? Central banks have phased out banknotes with higher denominations. Banks’ regulatory complexity seemingly increase by the day (try to get a bank to handle any larger amounts of cash). The transfer of cash from one nation to another has become increasingly burdensome. The European Union has recently introduced restrictions on cash transactions. Even the law governing the Swedish central bank is written so as to guarantee a further undermining of cash. All while the market share is growing for alternatives such as transferable deposits¹.

The old European disease

The Czech Republic’s former president Václav Havel, who played a key role in advocating for human rights during the communist repression, was once asked what the new member states in the EU could do to pay back for all the economic support they had received from older member states. He replied that the European Union still suffers from the old European disease, namely the tendency to compromise with evil. And that the new members, who have a recent experience of totalitarianism, are obliged to take a more principled stance - sometimes necessary - and to monitor the European Union in this regard, and educate it.

The American computer scientist and cryptographer David Chaum said in 1996 that “[t]he difference between a bad electronic cash system and well-developed digital cash will determine whether we will have a dictatorship or a real democracy”. If Václav Havel were alive today, he would likely share Chaum’s sentiment. Indeed, on the current path of “de-cashing”, we risk abolishing or limiting our liberties and rights, “including freedom of contract and freedom of ownership” - and this according to an economist at the IMF(!).

As the frog was unwittingly boiled alive, our freedoms are quietly being undermined. The temperature is rising. Will people take notice before our liberties are irreparably damaged?

Cover image created with Grok