By Brendan Brown*
Big government, big banks, and big tech are now all on the same side in the war against cash. Government — we all know about already. Big banks — they do not want to see the users of cash in retail transactions (for goods and services) getting keener prices than the users of their electronic payment systems. They use their oligopoly power to suppress as far as possible any such differential emerging (as would be the case in a free market) and so expand the market for their plastic alternative. Big Tech — Amazon would suffer a hemorrhage if its present customers could get substantial discounts by taking cash instead to the mall rather than paying by card online. And advertisers on Facebook and Google would surely cut back if appearances on these platforms no longer had the same potential to initiate instant gratification as many viewers postponed any response until they made their next cash-laden journey to the physical market-place.
Common interest does not always mean mutual assistance, but we can decipher this in the case of the war against cash. Big government realizes that its efforts to limit the use of cash can only succeed if the alternatives (card payments and in particular their online use) are widely attractive. That depends on Big Tech and Big Banks (the latter the supplier of the top used payment cards). For cooperation between Big Tech and Big Banks, think of Amazon joining up with JPMorgan Chase (and Berkshire Hathaway) in health care provision. Are we to believe that as part of the wider deal Amazon would not strive to get a good terms on merchant fees paid to the JPM card provider and work towards these becoming standard for other card providers in their interaction with its platform? And who knows, Big Tech in its use of Big Data to expand advertising revenues surely can find new ways to exploit private data about customer payments transactions even if without individual names!
We can get a better idea of the common interests of the Big Three in the war against cash by asking how the economic and financial landscape would change were this war ultimately to fail.
If the World Became Pro-Cash
In particular, a US$300 or even $400 banknote could well become the principal means of payment — like the sovereign in pre-1914 Britain which at today’s gold price is around $330. Users of cash in retail transactions would get a substantially keener price than the user of cards (whether credit or payments) — consistent with the lower cost of the merchant handling cash than the fee to the card companies (which pays for a vast electronic payments infrastructure including anti-fraud systems and a profit margin on top) and costs related to fraud.
Online business and advertising on Google and Facebook would have shrunk substantially. The Big Banks would have much less revenue from their cards and they would also have lost business, in so far as one factor in the growing market share of the Big Banks has been individuals seeking to get their card services.
Governments would be fretting about loss of revenue due to an expanded cash economy, but the actual numbers may not prove this — especially if account were taken of the increased seigniorage from banknote issuance and a vibrant global demand for banknotes as safe haven. And with banks having to hold more cash towards meeting unexpected net withdrawals coupled with strong retail demand for cash the monetary base would again have become a potential pivot to a sound monetary system steered by automatic rules — meaning the end of central bank interest rate manipulation.
This is just a sketch, but there is enough to demonstrate the main losers in the private sector economy from peace in the War on Cash — Big Banks and Big Tech. Their unpopularity, now growing fast for Big Tech, is a source of hope for those opposed to the war on cash. The elected officials of Big Government, realizing the public loathing, could advantage in quiet on the cash front and attacking their allies instead. Problem: Big Banks and Big Tech have tentacles extending far into big government. And big tech has a capacity to delude and indeed manipulate its publics.
The Role of Central Banks, Bailouts, and Cronyism
Even so, we should not underestimate the extent to which monetary inflation has contributed to the formation of the Triple Alliance against cash. By the same token, the eventual passing of the present virulent asset inflation into its final phase of crash and recession should lead to its unwind. The empires of Big Tech with all their promise of actual or potential government-subsidized monopoly profit have been the subject of speculative narratives which have thrived in an asset inflation characterized by desperation for yield and the readiness of investors to dispense with normal rational skepticism.
The tales include a King Midas CEO who will turn to gold every business area he selects and who can thereby attract capital at such low cost that his company can afford to meanwhile gain market share by offering fantastic terms; genius tech leaders who for similar reason can afford to employ the smartest engineers and buy out any potential new or smaller rival. The lack of general prosperity despite all this gives the game away.
Yes, in many cases it is a negative sum game. The advertisers on Facebook for example find a substantially greater amount of their business now derives from this social platform than previously; but in total across all platforms and across all advertisers there are not aggregate net gains, rather losses in the form of greater-than-ever advertising expenditure.
No-one knows the full extent and location of mal-investment until the end of the cycle. But social and political resistance — including that to the abuse and misuse of private data — can also be opposed via asset inflation. But there’s a problem: mal-investment unwinds unless socialized. Bailout-supported cronyist ventures can remain well after the cycle ends, and indeed into the long-run, unless political forces rise up and destroy them.
That may happen in the final stage of this cycle. Populists will line up against Big Tech and the Big Banks, the winners through much of the preceding asset inflation. The strengthening of the role of cash — and the potential of that to be the catalyst to broader reform in the direction of sound money by re-pivoting high powered money to the monetary system — is essential to such an outcome and its preservation.
About the author:
*Brendan Brown is the Head of Economic Research at Mitsubishi UFJ Securities International.
This article was published by the MISES Institute
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