Limiting the use of cash

11th August 2021 • News

A contribution appearing in another section of the press and penned by a representative of the law firm Ganado Advocates described a judgment issued by the Court of Justice of the European Union regarding the requirement imposed by a German institution to its customers to pay their bills not in cash.

The Court of Justice did assert that when imposing such limitations on the use of cash, there need to be sufficient reasons which are in the public interest, while also asserting that the status of legal tender of the euro does not mean an obligation to accept payments in cash.

In recent weeks, we have also had the directive issued by the Central Bank of Malta regarding the use of cheques and which will become effective in 2022.

There is a link between these events because in both cases, the decision has been driven by the need to reduce costs. Both for the German institution concerned and for local banks, the processing of cash payments and cheques payments is a costly operation, which could well be done without.

However, this brings into question two economic considerations which are unrelated to these two events but are related to the use of cash, the amount of currency in circulation. There are some countries in the eurozone where the culture is to make use of credit cards or digital payments as much as possible. Such payments are fully traceable and, therefore, lead to less tax evasion.

Sadly, there are other countries where there is still much more currency in circulation than what the size of the economy warrants. In such countries, it is possible that a significant percentage of all transactions become untraceable and, therefore, go unreported, thereby leading to tax evasion.

We all know of cases where a supplier tells a client that if payment is in cash, the price is a certain amount, while if the payment is in a traceable manner, the price increases. We all love the discount offered to us and we thus might opt for a cash payment, not realising that we are actually abetting tax evasion.

Some governments have taken steps to reduce the use of cash for transactions by putting a maximum limit for transactions that can be paid for in cash and not by other means. They have, in fact, done this in order to address tax evasion.

As such, this is one important consideration to make. The less cash that is used for transactions, the better for the economy as there is likely to be less tax evasion. Limiting the use of cheques and ensuring their proper use are not enough. We also need to limit the use of cash in our economy to combat money laundering.

The second consideration to make is the link between currency in circulation and inflation. When central banks want to provide stimulus to the economy, they increase the money supply, which in effect includes more than just the currency in circulation. They do this by lowering interest rates and, more recently, through asset purchases.

However, a high money supply when compared to the productive capacity of an economy leads to inflationary pressures  ‒ the classical simplistic definition of inflation, “too much money chasing too few goods”.

This is what happened in our country with the price of property. Many did not know what to do with the cash they had and chose to buy property, pushing up its price to unsustainable levels and fattening the pockets of speculators.

Last week, I wrote about the need to regulate cryptocurrency as its use was one way of evading tax and of laundering dirty money. Today, I emphasise the need to limit the use of cash in transactions and to exercise effective control of the money supply as a means of fighting tax evasion and speculation. They may be unpopular measures in the short term but will prove to be highly beneficial in the longer term.


Source:  Times of Malta