Germany Is Still Obsessed With Cash

The national disdain for plastic has become a proxy for profound concerns about trust, privacy and the role of the state.
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The building that might be the spiritual heart of the German economy is a 30-minute walk from Frankfurt’s towering financial district, down a five-lane road lined with squat apartment blocks of exquisite ordinariness.

Located in an annex of the Bundesbank, Germany’s central bank, the Money Museum is a sprawling homage to the virtues of sound monetary management, a 10,800-square-foot series of carefully curated displays about the history of currency, the evils of inflation, and the inevitability that policymakers must occasionally make enemies to contain it. On one wall, a looping feed of an impeccably dressed male teller explains gravely why banks must be careful not to lend too much. On another, visitors are invited to try their hand at a curious video game, set to a Mario Kart-style electronic soundtrack, in which the goal is to keep a rolling €1 coin upright while dodging villains that include real estate appreciation, oil shocks, and spiraling food costs. Lose your balance, and the caroming coin flips dejectedly onto one side, felled by a failure to maintain, of course, price stability.

Illustration: Mike McQuade for Bloomberg Markets

The game may be a crude metaphor for the complexities of central banking, but it does speak to an important truth. For Germans, more than for the citizens of virtually any other Western economy, “money” still means, above all, physical cash. The average German wallet contains 103 physical euros, the European Central Bank estimated in November, more than three times the figure in France. Cash is still the means of payment in some 80 percent of point-of-sale transactions, compared with only 45 percent—and falling fast—next door in the Netherlands. Using cash is a habit deeply resistant to regulatory intervention; mild suggestions in 2016 that it might be restricted in certain circumstances in Germany ignited passionate protest from almost every point on the political spectrum.

In a world that for most of us is moving inexorably toward electronic payments for almost everything, Europe’s largest economy remains a remarkable holdout, still dominated by a form of commerce that’s existed for millennia. It’s an odd distinction for a country that’s in most respects on the economic vanguard and a rebuttal to any assumption that, all other things being equal, the most advanced economies are generally less cash-­dependent.

Yet for many Germans, the convenience of electronic payment is beside the point. Rather, the use of cash has, to a surprising extent, become a proxy for profound concerns about trust, privacy, and the role of the state. Whereas in most countries the choice of how to organize purchases is basically a question of utility, in Germany it’s freighted with much deeper connotations. “Cash, to me, is an important public good by which you measure the transparency and legal order of a society, and also the respect for the individual and the private sphere,” says Max Otte, an economist in Cologne who leads Save Our Cash, a national campaign that opposes measures to restrict the use of physical currency. “ ‘Why do Germans like cash?’ is the wrong question,” he adds. Instead, Otte asks, “Why have others shifted to a cashless society so quickly?”

The short answer: It varies. Even as the electronic payment landscape explodes into a multiplicity of new options, whether prepaid debit cards, novel services such as Apple Pay, or the peer-to-peer transfer platform Venmo, countries are adopting them at sharply divergent rates. Germany’s co-champion in resisting electronic payments may be Japan, where the equivalent of more than $7,000 in bank notes and coins is in circulation for every inhabitant—more than four times the volume in South Korea or the U.K. A small clutch of tech-savvy northern European countries, led by Sweden and the Netherlands, are on their way to becoming effectively cashless societies. In Sweden, central bank statistics show, the number of ATMs plunged 17 percent from 2012 to 2016, while the Dutch use contactless payments for 10 percent of all retail transactions, by far the highest proportion in the euro area, according to the ECB. With the exception of Austria, the other European Union countries that share Germany’s reliance on notes and coins are concentrated in the bloc’s far poorer eastern and southern tiers.

The U.S. lies somewhere in the middle, because of its size, fragmented banking system, and the relatively high percentage of residents who don’t have payment cards. A little less than half of U.S. payments, with a bias toward smaller transactions, are made in cash, researchers from several central banks estimated in 2016. Payment behavior in the land of Apple, Google, and Facebook continues to exhibit an unusual analog quirk: the relatively wide use and acceptance of paper checks, something many younger European consumers have never seen.

And then there are a few truly strange outliers such as Zimbabwe, where a critical shortage of U.S. dollars, which the country adopted as its quasi-official currency in 2009 to combat the hyperinflation of its own dollar, has driven explosive adoption of mobile payment services. The most popular, EcoCash, boasts more than 7 million customers, or about half the population. It’s helping to keep commerce flowing in a country where using an ATM can mean waiting in line all day.

India and China are both driving hard toward a cashless future, for different reasons. Prime Minister Narendra Modi’s government is trying, with mixed success, to implement a slate of policies to move transactions to electronic formats, in theory to squeeze out black-market commerce. In China, the push comes from innovative companies such as Alibaba Group Holding Ltd. and Tencent Holdings Ltd., whose mobile-wallet services are wildly popular.

Needless to say, none of these novel methods is widely accepted in Germany.

When the original members of the euro zone—Germany, France, and nine other EU states—set out in the 1990s to design the common currency, one question needed to be resolved quickly: What denominations of bank notes would replace the kaleidoscope of guilders, francs, deutsche marks, and pesetas then in use? In line with the U.S. dollar, it was obvious €5, €10, €20, and €50 notes would be necessary. The upper limit was harder to define. The Federal Reserve had retired its $1,000 bill in 1969, leaving the largest unit of American currency at $100, an early example of the long-lived global trend away from very high-­denomination bills.

Germany’s Bundesbank, however, had different ideas. West Germany began issuing 1,000-mark bills in 1964, and they soon became a popular tool for holding the savings being generated by the Wirtschaftswunder, or economic miracle, that transformed the postwar state. German officials concluded, as former ECB Chief Economist Otmar Issing explains, that a €500 bill would create psychological continuity with the mark, which was to be retired at an exchange rate pegged at a little less than 2 marks to the euro. After all, since having a single currency meant asking the citizens of Europe’s strongest economy to give up a monetary system that was a symbol of their prosperity, winning their confidence was deemed crucial.

Other euro zone countries objected, as did U.S. officials, including then-Treasury Secretary Larry Summers, who said providing such a large-denomination note in what was certain to be a widely respected currency would aid only money launderers, gangsters, terrorists, and tax evaders. (One million dollars in $100 bills weighs about 22 pounds; €1 million in €500 paper, less than 5 pounds—the difference between toting one’s drug-deal proceeds in, say, a chunky folder or in a suitcase.) But the Bundesbank prevailed, and the €500 note—subsequently nicknamed “the bin Laden” for the rarity of sighting one outside a mattress or safe—entered circulation along with its smaller cousins on Jan. 1, 2002.

The euro eliminated national currencies, but it didn’t eliminate national central banks, instead incorporating them as, in effect, provincial administrations in a broader monetary authority known as the Eurosystem. One of its ongoing responsibilities is to gauge national demand for notes, based largely on the volumes of commercial bank withdrawals and deposits, and to print them accordingly. In this respect the Bundesbank is the clear European leader. Since the introduction of physical euros in 2002, it has issued more of them than the rest of its peers combined; more than half the roughly €1.1 trillion in physical notes in use in 2016 originated in Germany. German issuance is a big part of the reason that the total volume of cash in the euro area continues to expand, despite the proliferation of electronic payment options. Cash currently in circulation is equivalent to about 10 percent of the euro zone’s gross domestic product, according to Deutsche Bank AG, double the proportion in 2003.

Issing, the former ECB economist, accounts for this demand by making reference to an oft-repeated German maxim: “Cash is printed freedom”—offering the ability to transact with autonomy and anonymity in a country with good historical reasons to value both. Under the Nazis, he points out, the use of foreign currency was heavily restricted.

Today’s German policymakers agree that there’s just something different about their compatriots’ attitude to cash. “German citizens value cash very highly, and that’s quite simply a fact,” Bundesbank President Jens Weidmann said in 2016. The central bank, he said, “sees its role in assisting and supporting the general public in using those payment methods which they wish to use,” rather than in placing its thumb on the scale in favor of any one mode. Many German businesses, however, haven’t always shared that goal, especially if the payment method a consumer wishes to use happens to be electronic. The ubiquitous supermarket chain Aldi and German branches of Ikea began accepting credit cards only in 2015 and 2016, respectively. Tens of thousands of restaurants, small shops, and service providers, from big cities to rural villages, are still cash-only.

It might be tempting to view the German attachment to cash as a relatively harmless cultural oddity—like, say, Japanese companies’ ongoing love affair with fax machines—but a growing number of academic economists argue that it has serious undesirable consequences. Because so many transactions don’t enter electronic records, “it’s easier to avoid tax in Germany than in the U.S.,” says Harvard economist Kenneth Rogoff, whose 2016 book, The Curse of Cash, argued for the abolition of large bills to, among other benefits, make it more difficult to conduct business under the table. “People all over the world buy apartments in cash, and it’s not because they don’t know how to use a bank, believe me,” Rogoff says.

He and others make an additional, key argument against cash: Limiting its availability removes one of the main obstacles to negative interest rates. Once the largely theoretical preserve of economics textbooks, sub-zero rates have become a more mainstream monetary policy tool since the 2008 global financial crisis as policymakers seek to press consumers and companies to spend their money rather than save it. Although the euro area—along with Sweden and Denmark, which are not part of the euro zone—currently employs negative interest rates, the true “zero lower bound,” economists say, lies some distance below zero, at the point where the cost of keeping large amounts of physical cash—in safes, armored trucks, and so on—is lower than the haircut that those same funds would be subject to in a bank account. Remove the option of cash, and deeply negative rates, kept in place for a long time, become far more practical, opening entirely new frontiers in monetary policy.

Presenting an easier path to negative interest rates as a benefit does not, to say the least, go over well in much of Germany, which is a net creditor to a large chunk of the euro zone. Using negative rates to drive higher inflation “is just another way to make us pay for the debts of others,” says Klaus-Peter Willsch, a member of parliament for Chancellor Angela Merkel’s Christian Democratic Union party. Cash, Willsch says, “gives you independence from people making monetary policy.”

In early February 2016, the German finance ministry unveiled a proposal that in most countries would be uncontroversial: imposing an upward cap of €5,000 on cash transactions. Elsewhere in Europe the concept is familiar. In France, payments larger than €1,000 may not legally be made in cash in most situations; in Italy the limit is €3,000. A related proposal, which the ECB later adopted, suggested phasing out the €500 note.

The reaction was ferocious. The tabloid newspaper Bild, which has a daily circulation of almost 1.8 million and enormous influence over the nation’s political agenda, introduced a “Hands Off Our Cash” campaign on its front page. Weidmann had to hurriedly intervene to make clear that cash in general was going nowhere. And politicians of all stripes objected, with no one making more of the issue than the Alternative for Germany, or AfD, a nationalist anti-immigration party that’s Germany’s answer to Britain’s UKIP. The AfD made “protecting” cash a significant plank in its 2017 election campaign, in which its better-than-­expected result seriously complicated Merkel’s efforts to form a stable ruling coalition. It’s not hard to see why: For a party such as the AfD, taking a position as a defender of traditional habits and against policies that could be associated vaguely with the desires of powerful outsiders was an opportunity too obvious to ignore.

“We are currently seeing the gradual abolition of cash,” Frauke Petry, a chemist-turned-politician who led the AfD until late last year, says on the sidelines of “The Day of Cash,” a November conference in Berlin organized by the national association of cash-handling companies. Such a development, she argues, would be toxic to frugality, a much-admired virtue in a country where, as foreign observers of its financial habits rarely fail to point out, the word for debt, schuld, means, literally, guilt. This supposed abolition is occurring, she says, “not according to market rules but in a politically motivated way, to hide the mistakes made by governments in recent years.”

This story appears in the February / March 2018 issue of Bloomberg Markets.
Photographer: Kelsey Henderson for Bloomberg Markets

Among defenders of cash, a certain fever-swamp conviction that something like a conspiracy exists to eliminate it is not uncommon. As Otte, the Save Our Cash founder, puts it, “A very strong coalition of forces”—central banks, data-hungry technology companies, commercial lenders eager to avoid the expense of handling money—is “working for a cashless or almost cashless society.”

But the passion for cash is equally strong within political factions that are far more reconciled to modernity than the AfD. Konstantin von Notz is in most respects the picture of 21st century Germany. In a meeting at his Berlin office on a frigid November morning, the Green party legislator wears a crisp, open-neck blue shirt under a V-neck sweater and a trimly cut gray blazer, his light brown hair artfully disheveled. Perched on a ledge on one side of the room is a large, framed sketch of Wrapped Reichstag, the artist Christo’s 1995 shrouding of the nearby building that now houses the German legislature in flowing silvery fabric—a daring physical meditation on national shame, the impossibility of full atonement for Nazi crimes, and the hope nonetheless for rebirth.

When it comes to money, however, von Notz’s attitudes are decidedly more traditional. He strenuously opposed the effort to limit cash transactions, in part because making purchases with cash, he says “is one of the last unsurveilled things” a citizen can do. That makes it an essential outlet of anonymity in a country where, “because of the two very harsh experiences with dictatorships, people have a broken understanding and relationship to government.” Privacy in Germany is a serious matter. Google ceased taking Street View images of German cities in 2011 after public complaints. In the limited areas where it does have coverage, the company gives German homeowners the option to blur out their properties, which many of them do.

The argument that restricting cash is essential to curbing criminality doesn’t convince von Notz. It’s not as if criminals need cash to make illicit transactions, he says, with alternative options ranging from complex corporate structures such as those revealed in the Panama Papers to cryptocurrencies like Bitcoin, of which Germans are enthusiastic users. Restricting every citizen’s use of cash to make life harder for a small number of crooks, in von Notz’s view, “is like using a cannon to shoot little birds.”

The flight from Berlin to Stockholm takes a little more than an hour. From the perspective of how people organize their financial life, it may as well be a journey into another universe. Sweden is closer to being a cashless society than virtually any country on the planet. Fewer than 20 percent of retail transactions involve Swedish krona coins or notes, and the majority of bank branches no longer handle cash—a boon to lenders that would rather not worry about the expenses of security and cash distribution in a large, sparsely populated country.

The move to a virtually cashless financial system hasn’t been without drawbacks: Credit card fraud is rising, and groups that represent the elderly have complained that the process is moving too quickly for some older people to adapt. But at this point it’s probably unstoppable. Although the Riksbank, Sweden’s central bank, insists cash will remain available and in production for the foreseeable future, it’s not at all outlandish to speculate that the day it turns off the printing presses for good will come sooner rather than later.

“I think I haven’t been to an ATM for a year and a half,” says Bengt Nilervall, a payment expert. The decline has become self-­reinforcing. As the volumes of cash in use slide, the costs charged to retailers for handling and transporting it are rising. For most Swedish businesses, the transaction costs of cash total about 2 percent or 3 percent of the amount concerned, Nilervall says, compared with less than 1 percent for cards. A rising number of retail establishments are actually refusing to accept cash—restaurants and bars operated by the Scandic hotel chain among the most prominent. (There were questions initially about the legality of such bans, but as long as businesses tell customers upfront, they appear to be on safe ground, says Bjorn Segendorf, a Riksbank policy adviser.)

Swedes’ embrace of digital payments has been accelerated by high levels of trust—in their leaders and in one another. Asked in a 2013 EU survey to rank their trust in their fellow citizens on a scale of 1 to 10, Swedes answered on average 6.9, compared with 5.5 in Germany and 5.0 in France. Asked the same question about their political system, the mean result in Sweden was 5.6, outstripping Germany at 4.9 and France at a mere 3.0. “Maybe we’re kind of naive,” Nilervall says. “We trust the government, we trust the authorities, we trust the banks. And that’s why we are where we are.”

Take the example of online shopping. When a Swedish consumer makes a web purchase, she has the option of skipping the tedious business of filling in an address and payment details by simply entering her social security number. Everything else is prepopulated, and an invoice can be sent by email for settlement via Klarna AB, a Stockholm-based electronic payment service. That such a system could catch on in the more privacy-minded U.K., U.S., or Germany is hard to imagine. Yet in Sweden—a country that stayed neutral through both world wars and which has been consistently democratic since 1909—the idea of giving the government potentially complete knowledge of one’s financial affairs just doesn’t seem very dangerous.

The battle to bring German attitudes about cash into convergence with the rest of the Western world is being waged, in part, from an attractive 19th century office block in Berlin’s hip Mitte district. The German offices of SumUp, an electronic payment company that provides low-cost, wireless card terminals, are straight out of startup central casting. A multinational group of twentysomethings in jeans and hoodies is clacking away at keyboards in a long, attractively messy open-plan office with hardwood floors and tall casement windows, through which light streams in from Friedrichstrasse, central Berlin’s main drag. In an adjacent meeting room, a bulletin board is packed with yellow Post-its bearing handwritten ideas and scraps of customer feedback: “Paying cash is a habit.” “I recommended SU to a doctor. … He was happy and recommended it back.”

SumUp’s co-founder, Marc-Alexander Christ, a Frankfurt native in a stylish black turtleneck and round glasses, is convinced Germans are on their way to giving up their cash fixation. “People do realize that you need a [credit card] terminal, especially in the big cities, where tourists just don’t expect to need cash anymore,” he says. The company is finding success in some surprising places, such as “a couple of thousand” German Tupperware sellers who’ve switched from cash to SumUp devices, finding they can sell far more of the containers to their friends as a result. And unlike in other countries where SumUp operates, in which the need for merchants to take cards is self-evident, in Germany the company is emphasizing the utility of its point-of-sale software, which helps retailers track and analyze purchases, with the card reader as a sort of add-on. He declines to provide country-specific figures, but Christ says SumUp’s growth in Germany is brisk, thanks in large part to generational change. “It’s definitely moving in the right direction, because I can tell you my mother never uses cards, and my brother always uses cards,” he says.

Yet even in the heart of Germany’s most dynamic and inter­nationally oriented city, there’s a long way to go. Leaving my meeting with Christ at almost 2 p.m., I crossed the street toward a row of storefronts in search of lunch. Dada Falafel, a hipster-inflected Middle Eastern spot, seemed to be the most popular option, a multicultural queue of elegantly dressed young Berliners spilling onto the sidewalk outside. I neared the counter, stated my order, and reached instinctively for my American Express. No such luck. “Sorry, cash only.”

 Campbell is a senior reporter at Bloomberg in London. With Kim McLaughlin, Jana Randow, Iain Rogers, and Lorcan Roche Kelly