The “bail-in” clause of the Financial Resolution and Deposit Insurance Bill (FRDI) has led to worries about the safety of bank deposits. Apparently, the Bill enables the government to confiscate the deposits of ordinary citizens in order to save troubled public sector banks. Yet, amidst all the economic punditry over the safety of bank deposits under the FRDI, a larger threat to the deposits of ordinary citizens has slipped under the radar. It is the push by governments towards a cashless society.
To understand why, it needs to be reiterated that by far the biggest challenge for a government launching a “bail-in” attack on deposits is that depositors can promptly withdraw their money from the bank by demanding cash. Such an event can lead to severe bank runs and destabilise the banking system because bank deposits are only fractionally backed by actual cash. In fact, under the pure gold standard, it was the threat of bank runs that forced commercial banks to keep their customers’ deposits fully backed at any time with sufficient gold in their vault. Such rapid withdrawal of cash deposits, however, may slowly cease to be an option for depositors as the world increasingly turns away from cash and towards digital money. When all, or even a predominant share, of money in the world is digital, there is no question of banks having to meet depositors’ demand for cash. So a cashless world will, once and for all, free banks from the obligation to meet cash demands from depositors, thus protecting them from any liquidity crisis. More importantly, it would also strip depositors of the power to withdraw their deposits in the form of cash to escape any tax or other forms of confiscation by the government.
Apart from the above reason, there are also other reasons why governments prefer moving towards a cashless society. For one, as pointed out by Charles Calomiris and Stephen Haber in Fragile by Design , banks have been a major source of funding for governments and their economies across the world. Most of such lending happens through loans which are not backed by savings but instead through fresh money creation, which in turn leads to economic crises and bank runs led by depositors. A cashless world, on the other hand, makes it easier for banks to carry out their business of credit creation without the risk of having to satisfy the demand for cash from depositors. Consequently, it prevents recurrent crises of liquidity that are faced by banks. Two, policies like negative interest rates, which would otherwise push depositors to rush out of banks to escape the tax imposed on their deposits, become more feasible under a cashless banking system in which depositors are essentially locked in by banks. Depositors in such cases will have no other option but to spend their money to escape a penalty on it. So, when it comes to the war on cash, there is a lot more to it than what just meets the eye.
