1 Introduction

There are clear signs that the use of cash is being increasingly restricted inside the European Monetary Union (EMU). For quite some time, not only financial institutions, but also authorities, have being exerting pressure on both businesses and consumers to refrain from using cash. Even statutory rules have been passed to prohibit the use of cash exceeding a certain, albeit rather low, limit. The following examples may illustrate the rich host of obstacles that can be observed:

  • Financial institutions impose fees or charges for withdrawing cash from a bank account or depositing cash into it.

  • Businesses refuse to accept cash, especially, higher denomination banknotes .

  • Government entities require permission to charge taxes, fees or other dues from a bank account,Footnote 1 and do not accept cash.Footnote 2

  • Tax administrations refuse to disburse refunds other than to bank accounts.Footnote 3

  • Limits for using cash in business transactions have been introduced in several Member States by law; sometimes with partial exemptions for visitors, or private persons in general.Footnote 4

  • At least one case is known in which German law enforcement authorities considered the mere possession of 9000 € to be sufficiently suspicious to trigger intense criminal investigations, although the possession of such a sum of money is entirely legal in Germany .Footnote 5

  • On 5 May 2016, the Governing Council of the ECB decided to end the production and issuance of 500 € banknotes .Footnote 6

These measures have been successful to varying degrees in the Member States of the EU whose currency is the euro. In some countries, they have led to the replacement of cash as a means of payment or storage of value, on a large scale. In other Member States, such as Austria and Germany , cash is still widely used.Footnote 7 Here, the extent to which this is due to a difference in the intrinsic preferences of the acting persons has to be left open.

The next, and considerably more incriminating, step would be the total abolition of cash . Macro-economists, such as Lawrence Summers ,Footnote 8 Kenneth Rogoff , and Peter Bofinger , have explicitly demanded such an interdiction.Footnote 9 In a purely theoretical world of macro-economics, this might be an advisable step, especially from a predominantly Keynesian perspective. The existence of cash is seen as an effective zero lower bound on nominal interest rates . This lower bound might even be a few basis points to the negative, as there are costs of holding cash. In the real world, staggering impediments and detrimental downsides of such a decision are visible.Footnote 10

In addition, experience shows that this would probably not be the last step. In some countries at least, the chances are high that the population would try to protect itself and use other commodities as a means of payment or as a store of value: seashells, paintings, cigarettes, liquor, precious metals, jewels, vouchers, special drawing rights, foreign currency , just to name a few. In essence, any tangible object which is relatively rare and cannot be produced without an input of resources may serve. As a consequence, the possession and the use of precious metals as bullion or coins was also interdicted, often in combination with the threat of draconian measures in cases of disobedience. The same was true for the possession or use of foreign currency . Two well-known examples from the twentieth century may be given:

  • The possession of gold coins, gold bullion, and gold certificates within the continental United States exceeding five troy ounces was made a criminal offence for all private persons from 1 May 1933 onwards by Executive Order 6102, signed by President Roosevelt on 5 April 1933.Footnote 11 Immediately thereafter, the U.S. dollar substantially depreciated against the price of gold . In effect, this was an (indirect) expropriation of savings .

  • In Germany , all foreign currency (and all financial instruments denominated in foreign currency ) were confiscated in the course of the hyperinflation of 1923. The regulation of 25 August 1923 was based upon Article 48 of the constitution,Footnote 12 which allowed emergency legislation by the president (Notverordnungsrecht). Earlier, the Reichsbank had been granted the power to require, under certain circumstances, the exchange of foreign currencies or precious metals into—by that time already almost worthless—domestic currency , as per Section 9 of the regulation of 8 May 1923.Footnote 13

At a first glance, the sketched barriers can be divided into three groups:

  • Factual or indirect impediments;

  • Restrictions based upon statutory rules closing channels for the use of cash or making them less viable;

  • Outright interdictions by law.

In the present situation, some economists readily acknowledge the abolition of cash as useful and—as experts in constitutional law —quickly come to the conclusion that constitutional concerns are unfounded as a fundamental right for cash does not exist. This is not really surprising. In any case, the restrictions would serve, in the opinion of the supporters, a good purpose: they would grant to the “unconventional” monetary policy , which has been established by central banks on a large scale, finally the—so far not clearly visible—effectiveness.Footnote 14 Lawyers, on the other hand, are more in favour of the argument that the restrictions for using cash would hinder money laundering.Footnote 15 The former president of the German Federal Constitutional Court, Hans-Jürgen Papier, judges restrictions on the use of cash as non-justified intrusions into civil rights and lacking the undispensable proportionality.Footnote 16

It is definitely worthwhile taking a closer look at some of the puzzling questions of:

  1. 1.

    The nature of cash;

  2. 2.

    The conformity of an abolition with EU law ;

  3. 3.

    The conformity of restrictions with EU law ;

  4. 4.

    The requirements of German constitutional law ;

  5. 5.

    The legal consequences of not accepting cash.

2 The Nature of Cash

According to the State Theory of Money , only those signs (chattels) which serve the monetary functions that are created by a state are money, and all such signs created by a state are money. Friedrich Georg Knapp , professor of economics at the University of Strasbourg, is almost unanimously credited for this theoryFootnote 17 since he commenced his famous treatise on the “State Theory of Money ” in 1905 with these words:

Money is a creation of the legal system; it has appeared in history in various forms: a theory of money can therefore only be a work of legal history.Footnote 18

From this starting-point, it was well justified and consistent for him to re-iterate:

Money is a creation of the state. Only legal tender is money and all legal tender is money.Footnote 19

Following this definition, the term “money” is equivalent to that of legal tender —for all practical purposes.Footnote 20 It was, however, a now almost forgotten German law professor—at that time in Basel—who had made the same discovery using partially the same wording decades before Knapp . For the sake of academic and historical truth, it is Gustav Hartmann who should be credited with the “State Theory of Money ”.Footnote 21

The majority of economists has criticised this view as being too narrowFootnote 22 and instead favours a functional understanding of money: anything that is generally accepted as a medium of exchange, a unit of account, and a store of value has to be treated as money.Footnote 23 Good reasons exist to follow this path in economic analysis, but they do not justify the monopolisation of the term “money”.Footnote 24 From the legal perspective, money is widely acknowledged as a creation of law, as Knapp assumed.Footnote 25 Its “existence has to be understood within a legal framework”.Footnote 26 Sometimes, it is even contended that the “state theory of money ” has been accepted by “modern constitutions” “as a necessary consequence of the sovereign power over currency ”, “entrenched in modern constitutions”.Footnote 27 It may be left undecided whether this reasoning is entirely in conformity with the content of this “theory”. At its core, it is, however, true that a close conjunction of the definition of money and the legal system exists. Even if the cited constitutions do not use the term, money, in the legal sense of the word, it can be identified as a creation of the sovereign and as “legal tender ”.

It can be discussed whether deposits in an account at the central bank should be included in the definition of money in the legal sense, as, for all practical purposes, cash and such claims against the central bank may be interchanged at will. An insolvency risk does not exist, as a central bank is the only institution which may legally produce cash (legal tender ) in any amount, and cannot become insolvent. Then, the legal definition of money would get close to the economic category of base money, with the exception of legal tender held by credit institutions.

Within the European Union (EU ), only the banknotes issued by the European Central Bank (ECB ) or the national central banks with the permission of the ECB “have the status of legal tender ”, Article 128 paragraph 1 sentence 3 Treaty on the Functioning of the European Union (TFEU) .Footnote 28 For coins issued by the Member States whose currency is the euro, the status of legal tender follows from Article 11 Regulation 974/98.Footnote 29

As a result, the term “cash”, i.e., banknotes and coins denominated in euro, is identical with legal tender and the term “money” in the legal sense of the word.Footnote 30 It is the only money which has to be accepted as fulfilment of a monetary claim.Footnote 31 Recent developments, especially the creation and diffusion of electronic instruments of exchange such as Bitcoins , do not yet require a modification of this delineation. Aside from other downsides, for example their extreme volatility,Footnote 32 they do not have the property of legal tender , at least not in Germany .Footnote 33 In general, nobody is obliged to accept Bitcoins.Footnote 34 Another question is whether specific statutes may be enacted to force certain providers of (public) services to accept bank-issued instruments of payments, such as credit cards .Footnote 35

3 The Conformity of an Abolition with EU Law

The legality of an abolition of cash will essentially depend on whether the EU or the European Central Bank are obliged to create cash denominated in euro. The answer to this question is crucial, since cash has been identified in the preceding section as legal tender , and legal tender may be essential. An in-depth analysis of the problem has not been undertaken to date.

3.1 Foundations

In applying EU law, a clear distinction between the “primary” and the “secondary” law of the Union has to be made. The primary law has been created directly by the parties adopting the European Treaties; initially, the Treaties forming the European Communities, especially the European Economic Community (EEC), and finally the European Union (EU ). As this body of law is comprehensive and specifically entrenched,Footnote 36 it is functionally equivalent to the constitutional law of modern constitutions. The provisions of the Treaties should be regarded as the constitutional law of the EU taking precedence over the law of the Member States.Footnote 37 It is the supreme law of the land. At present, it is enshrined in the Treaty on European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU ) Footnote 38 including the protocols and the annexes to the Treaties which form an integral part thereof (Article 50 TEU).

The secondary law is created by the organs and institutions of the Union. As these bodies “have to act within the powers conferred upon them by the Treaties”, it is “subordinate to those primary norms”.Footnote 39 This hierarchy of norms may be derived from Article 262 TFEU . Primary and secondary EU law also take precedence over all national law. Although this concept is not self-evident to lawyers in all jurisdictions, it is acknowledged by the Court of the EU Footnote 40 and has been familiar to other decentralised systems, such as the U.S., since its inception.Footnote 41 Only for the extreme cases of a severe (or evident) transgression of competences (ultra vires), or a violation of the core content of the constitutional identity (Verfassungsidentität) of Germany , has the Federal Constitutional Court of this country reserved the right to review the conformity of acts of institutions of the EU with EU law and a possibly resulting infringement of the Federal Constitution of Germany, the Basic Law.Footnote 42 Only in such cases may EU law not have precedence.Footnote 43

3.2 Safeguarding the Existence of Legal Tender

At first sight, it is not clear whether the primary law requires the existence of cash in the sense of banknotes and coins denominated in euro. Article 128 paragraph 1 sentence 2 TFEU only states that the “European Central Bank and the national central banks may [emphasis added] issue such notes” (i.e., euro banknotes ). For coins issued by the Member States, subject to approval by the European Central Bank (ECB ), the wording is similar in paragraph 2 of this article; but not identical. In addition, this language is re-iterated in Article 282 paragraph 3 sentence 2 TFEU which states: “It [the ECB ] alone may authorise the issue of the euro.”

Moreover, Article 128 paragraph 1 sentence 3 TFEU decrees that “the banknotes issued by the European Central Bank and the national central banks shall be the only such notes to have the status of legal tender within the Union”. From this, it might follow that the primary law pre-supposes the existence of legal tender , banknotes and of coins denominated in euro. But this reasoning might not be considered as a stringent argument. More important is the fact that the legal systems of the Member States build on the existence of legal tender created by exercising the lex monetae of the EU . They would collapse if legal tender no longer existed.Footnote 44

The following situation would be decisive: the ECB calls in all euro banknotes in circulation and stops issuing new banknotes . In addition, the Member States quit minting euro coins . The question would then be whether the EU or the Member States would be allowed to declare a substitute legal tender .

3.2.1 Banknotes

In this case, the Member States, or their central banks , would not be allowed to fill the gap by creating new legal tender in the form of notes, as the European Central Bank has the “exclusive right” to authorise the issue of euro banknotes and no other euro banknote may have the “status of legal tender ”, Article 128 paragraph 1 sentence 3 TFEU . This clause precludes at least the Member States and the other institutions of the EU from issuing any kind of paper sign (token) with the status of legal tender . The monopoly of the ECB to govern the creation of euros is re-confirmed by Article 282 paragraph 3 sentence 2 TFEU with the term “alone”. In addition, it is widely accepted—but not beyond any doubt—that the competence of the ECB also includes the specification and design of the notes issued.Footnote 45 The division of responsibilities within the European System of Central Banks (ESCB) in view of the issue of banknote has been regulated by the ECB as well .Footnote 46

3.2.2 Coins

When framing the Treaty of Maastricht, there was consensus that the competence to issue coins denominated in euro should remain with the Member StatesFootnote 47 following an old tradition in Europe that this power was not vested in central banks but was reserved to the sovereign. A closer analysis of the wording of Article 128 TFEU shows that this difference has been acknowledged by the primary law: “authorise” in para 1 for banknotes , and “approval” in para 2 for coins.Footnote 48 As the issue of coins falls within the competence of the Member States, they do not need an authorisation. This was decided despite the fact that no material reasons existed anymore to justify splitting the competences for this specific type of legal tender between two separate institutions,Footnote 49 aside from pure fiscal greed as profits from minting coins can be collected directly for the state budgets in this way.Footnote 50

As only one monetary policy can rationally exist in a currency area, the EU and the ECB —notwithstanding—had to be given considerable powers in view of coins denominated in euro and issued by the Member States. They are part of the concept of creating a single currency . The volume of an issue needs the approval of the ECB , Article 128 paragraph 2 sentence 1 TFEU . The unitisation and technical specifications of the coins have been set by the EU Council.Footnote 51 The rules have to be based upon Article 128 paragraph 2 sentence 2 TFEU ,Footnote 52 which has priority over Article 133 TFEU ,Footnote 53 even if this provision has a wide enough scope since the Treaty of Lisbon.Footnote 54 From this, it follows that whether the Council has the competence to act as it did may be called into question.

Not only are the volume, unitisation, and technical specifications for euro coins set by institutions of the EU , but also the property of legal tender .Footnote 55 It would not legally be possible to pave the way for introducing other types of coins as legal tender by simply repealing or modifying these regulations , even though it is only secondary law in contrast to Article 128 paragraph 1 TFEU .Footnote 56

3.2.3 Creation of Legal Tender other than Banknotes and Coins by Member States

From Articles 128, 133, 140 paragraph 3 and 282 paragraph 3 sentence 2 TFEU , it can at least be derived that the primary law assumes the existence of only one currency , the “single” currency named the “euro”, within the Member States without a derogation.Footnote 57 Legal tender in other denominations should cease to exist after a transition period of six months.Footnote 58 From this, it follows that, if a sign (token)—other than notes—is declared legal tender , it must be denominated in euro. The regulations on the issue of coins as legal tender have respected this requirement of the primary law.Footnote 59 This, however, is not a final answer to the question of whether the primary law allows the Member States to define legal tender aside from notes whose issue is authorised by the ECB .

The exclusion of Member States or their central banks from implementing and issuing any other kind of legal tender may be derived from Article 3 paragraph 1 lit. c TFEU , which confers the “exclusive competence” in the area of “monetary policy for the Member States whose currency is the euro”, upon the Union. The term “monetary policy ” covers the creation of legal tender in the form of banknotes , Article 128 paragraph 1 TFEU , and, indirectly, of euro coins by regulating the issue of coins in paragraph 2 of the same article. Further details have to be delineated by secondary law based upon Article 128 paragraph 2 sentence 2 TFEU and Article 133 TFEU . Article 128 and Article 133 TFEU are specific embodiments of “monetary policy ” as they are systematically positioned in the chapter on monetary policy .Footnote 60 In addition, Article 128 paragraph 1 TFEU is the only clause which touches expressly within this chapter upon the topic of legal tender . The euro is the “key element” of the EU monetary policy .Footnote 61

A reservation in view of the exclusive competence of the EU might, however, exist. In the older German literature, a distinction was made between sovereign acts in monetary law as part of the public law and the regulation of obligations denoted in money as part of the private law.Footnote 62 As a consequence, the power to define legal tender as the instrument which had to be accepted as a fulfilment of any monetary obligation might have been attributed to private law, which still belongs to the competences of the Member States. This distinction could not, however, be translated into the categories of the law of the Union. It was not, in its entirety, adopted by the law of the European Community and—later—of the European Union when creating the European Economic and Monetary Union. The public law of the Monetary Union supersedes the private law of the Member States.Footnote 63 All competences and powers to create a single currency and to safeguard its functioning were transferred in total to the European level,Footnote 64 irrespective of the wording of Articles 128, 133 and 140 paragraph 3 TFEU , which might be interpreted in a more narrow sense. This transfer includes the competence to define legal tender . The detailed and nuanced provisions in Articles 128 and 133 TFEU for euro banknotes and coins including the power of the institutions of the EU Footnote 65 to control their volume, unitisation, technical specifications and safety would largely run at idle if Member States were allowed to create other types of legal tender .

As a result, Article 128 TFEU has to be understood as an exclusive and exhaustive regulation of the matter with a limited exemption from the general rule: to wit, the exclusive competence of the EU , for the issue of coins by the Member States, confirmed by Article 282 paragraph 3 sentence 2 TFEU .Footnote 66 The sovereign power to define what (tangible) good or (electronic) instrument has to be treated as legal tender now resides with the EU . Member States whose currency is the euro do not retain the competence to define “legal tender ” or to prohibit the use of virtual currencies as endangering the single currency , the euro.Footnote 67

Even upon the basis of this interpretation, the competence of the Member States to define legal tender might be derived from Article 2 paragraph 1 TFEU . Although this clause provides that the Union may “empower” Member States to act within the domain of exclusive competences, it may not be construed as opening the door for the transference of core competences back to the Member States.Footnote 68 The creation of legal tender in the form of banknotes over the years had become one of the main reasons for establishing central banks at all.Footnote 69 Vesting this power outside the central bank would remove one of the characteristic traits of a central bank .Footnote 70

3.2.4 Creation of Legal Tender other than Banknotes and Coins by the EU

One possible backdoor still has to be examined: the EU could try to transform some kind of electronic construct into legal tender , following the due course of the legislative process. The EU —not the ECB —might have the necessary competence to do so, because of Article 3 paragraph 1 lit. c TFEU , but it would be highly questionable whether the EU has the power to create a type of legal tender which was unknown before.

Article 133 TFEU can hardly provide the necessary authority. This provision allows the European Parliament and the Council, “without prejudice to the powers of the European Central Bank ”, “to lay down the measures necessary for the use of the euro as the single currency ”. The referred powers of the ECB (as an institution of the EU Footnote 71) mainly concern banknotes , the authorisation of their issue and the fixing of their volume. In addition, it is widely accepted that they also comprise the specification and design of the notes issued.Footnote 72 The powers of the ECB with regard to coins denominated in euro are considerably more restricted. They consist mainly in giving consent to the overall volume of their issue, Article 128 para 2 TFEU . Design and technical specifications are left to the EU as a whole. This is also the reason why the respective legal acts were enacted by regulations of the EU Council,Footnote 73 and not of the ECB , in contrast to banknotes .Footnote 74

The EU may have the power to declare coins legal tender Footnote 75 even if this authority is not explicitly provided for in the primary law.Footnote 76 Article 133 TFEU is, however, not a suitable basis for declaring anything unknown to the primary law to be legal tender . Coins are a type of money which have been in use for several thousand years and—more importantly—coins are explicitly referred to in the primary law, Article 128 paragraph 2 TFEU . Both arguments are, however, not valid for entirely new instruments, such as some electronic structure chosen at will.

Moreover, a completely new type of legal tender would almost certainly undermine or circumvent the elaborated safeguards to secure the stability of the euro, especially the extensively guaranteed independence of the ESCB and its organs. The safety and stability of this new type of legal tender would be unknown and wide open for undisclosed and almost impossible to detect manipulation by criminals and governments.Footnote 77 Article 128 TFEU might, however, cover the issuance of these types of instruments by the ECB parallel to traditional banknotes since the ECB would retain control over its volume, safety, and security overriding Article 133 TFEU as lex specialis.

Furthermore, it should be remembered that, despite the alleged decline of the relative importance of banknotes in several Member States, and despite the introduction and dissemination of payment cards and other electronic means of payment, the issuing of “paper money ” was, from the beginning, considered one of the characteristic tasks of central banks ,Footnote 78 including the newly created ECB . The development of these new instruments was already well known at the time of adopting the relevant clauses,Footnote 79 and an extension to include other means of payment could have been adopted, but was refrained from.

Finally, the fundamental principle of proportionality would be infringed in the event of an abolition of banknotes and coins as legal tender ,Footnote 80 as it is enshrined in both the primary law of the EU Footnote 81 and the constitutional law of the Member States.Footnote 82

To sum up, a legal obligation to issue banknotes as legal tender or to authorise their issuance has to be acknowledged. It may be called an “institutional guarantee” of legal tender.

3.2.5 Secondary Law

The Council Regulation introducing the euroFootnote 83 and the Council Regulation specifying euro coins Footnote 84 both clearly pre-suppose the existence of cash denominated in euro. Their existence blocks the abolition of cash by the ECB and the Member States as well.

3.2.6 Interim Result

The abolition of cash would not be in conformity with the laws of the EU . Nor would the Member States have the legal power to enact any changes in the definition of legal tender. This power belongs to the “ius monetae” transferred in total to the EU as its exclusive competence.

4 The Conformity of Restriction with EU Law

Although a total abolition of cash would not be consistent with the law of the EU , it is still to be questioned whether it would be in conformity with EU law to impose restrictions for its use or to erect obstacles which would de facto prevent the use of legal tender .

Quite frequently, restrictions imposed by Member States are justified with reference to a recital used by Regulation 974/98.Footnote 85 In fact, recital 19 of Regulation (EC) 974/98Footnote 86 declares “limitations on payments in notes and coins, established by Member States for public reasons” not to be “incompatible with the status of legal tender of euro banknotes and coins, provided that other lawful means for the settlement of monetary debts are available”. This line of argumentation is, however, not convincing, mainly for two reasons:

  1. (1)

    First, it is questionable whether these considerations are compatible with the primary law of the EU . They would allow the (partial) removal of an essential trait of legal tender : the virtue that it has to be accepted for settlement of any kind of monetary obligation.Footnote 87 In contrast to all other monetary instruments, it has to be accepted by the creditor if it is offered to him or her. Complementing this characteristic, the creditor of a monetary obligation only has a claim for legal tender . This also holds for payments to a government entity, authority or agency. In 2010, the EU Commission explicitly accepted this trait:

    The creditor of a payment obligation may not refuse euro banknotes and coins unless the parties have agreed on other means of payment.Footnote 88

    The expectation that legal tender has to be accepted, namely, by cashiers of government entities, has been considered as its inherent characteristic.Footnote 89 These traits are perfectly consistent with the “State Theory of Money ” as outlined above.Footnote 90

    In its judgment on the admissibility of introducing the euro, the German Federal Constitutional Court considered, as an essential trait of “money”, that it can be “freely” exchanged into other goods. In this context, it emphasised the special protection of this type of legitimate expectation (Einlösungsvertrauen), which it derived from the fundamental protection of property by Article 14 of the Basic Law (Grundgesetz), of the German Federal Constitution.Footnote 91

  2. (2)

    The second argument follows from the nature of a recital. A recital is legally not part of the norm. At most, it gives some insight into the motives of the lawmaker and may serve as argument in interpretation, but it is in no way binding. However, interpretation is only possible if a norm or a clause is open for interpretation and is in need of it; mainly because it is vague, opaque or inconsistent. Such a norm or clause is, however, not in sight. Moreover, the theme of recital 19 is nowhere to be found in the normative part of the regulation to be expounded. For these reasons, arguments from recital 19 have to be dismissed. They lack any normative significance for the legal question to be answered here.

From the property of legal tender it follows that it must be accepted (Zwangsgeld).Footnote 92 Only marginal modifications, such as the amount of coins that have to be accepted for a payment and the obligation to change notes in cases in which not the exact amount of the owed sum of money is offered, may be consistent with the quality of legal tender in the framework of a “fiat” currency . It is the task of the issuing authority to enforce these rules regardless of whether Articles 128, 133, and 282 paragraph 3 sentence 2 TFEU are mainly interpreted as (mere) empowerments. Empowerments may not only be used at will by the beneficiary. In principle, they also contain an obligation for the empowered to use them. The wording of Article 282 paragraph 4 TFEU confirms this view.

A factual pressure to to refrain from using legal tender is legally questionable and undermines substantially the credibility of a central bank and its task to perform monetary policy. In the end, it would lose control over the currency. The idea of a “single currency” would be abolished if a multitude of different rules of the Member States on the use of legal tender had to be obeyed. The infringement of the fundamental rights of the individual, specifically, the right to privacy is apparent.

The somewhat more lenient view of the ECB in the past when asked for an opinion in the process of consultationFootnote 93 has to be questioned and is under scrutiny; without prejudice to the right of private parties to agree on different rules about how to settle a claim, as long as it is, in fact, a truly free consent and no monopolistic power is employed.

The ECB requires, however, proportionality of the measure under scrutiny. This principle is discussed in the context of civil rights (Sect. 10.5.1 below).

5 The Requirements of the German Constitutional Law

5.1 Civil Rights

The abolition of cash or restrictions of its use are encroachments of fundamental freedoms. The freedom of profession protected by Article 12 paragraph 1 Basic Law is touched upon, as such measures are, at least in part, aimed at professional activities. For measures changing the monetary system, the German Federal Constitutional Court has also drawn on the protection of property by Article 14 paragraph 1 sentence 1 Basic Law.Footnote 94 In any case, the general freedom of action protected by Article 2 paragraph 1 Basic Law could be relevant, not least in its manifestation as commercial freedom. The constitutional right to privacy is touched upon as well.

The severity of the encroachment depends on the nature of the specific measure. The abolition of cash would, of course, be the most intrusive. The indispensable constitutional justification appears to be questionable. Eventually, a final legal assessment would boil down to a test of the proportionality of the specific measure to be judged.

Applying the principle of proportionality, it has to be examined whether the measure under scrutiny has a constitutionally legitimate objective, is suitable to fulfil this objective, is necessary for attaining it, and is proportional in a narrow sense. This means, whether its benefits outweigh its burdens.

Arguments in Favour of Restrictions

  1. 1.

    The main argument in favour of reducing the use of cash was cost-effectiveness. The handling of cash was declared expensive and risky; mainly by economists. Empirical evidence is, however, scarce, and in fact tends to show the opposite; at least for small amounts of money to be paid.Footnote 95

  2. 2.

    Another important argument is fighting terrorism and crime in general. For money laundering, the use of cash or at least the availability of high denomination banknotes is allegedly essential. Sound evidence is, however, not visible, and the most dangerous criminals are sophisticated enough to use other means of payment, such as Bitcoins .Footnote 96

  3. 3.

    A third argument is not disclosed so much in public but is probably most important: making the use of cash more costly or abolishing it completely may finally bestow upon the present “unconventional” monetary policy the effectiveness that it appears to be lacking to date.

Arguments in Favour of an Unrestricted Use of Cash

  1. 1.

    Cash does not discriminate.

  2. 2.

    Cash does not imply the risk of insolvency of the issuer.

  3. 3.

    Cash protects privacy . It does not leave traces. This is an interest acknowledged and protected by constitutional law .

  4. 4.

    Cash is, in many situations, efficient. The functionality of other means of payments abroad is dubious, to say the least.

  5. 5.

    Tinkering with a currency , which is solely based upon confidence, is highly imprudent.

  6. 6.

    This holds especially for a multinational currency like the euro.

  7. 7.

    Restrictions unnecessarily augment anti-EU sentiments.

In the words of the German Federal Constitutional Court, money is minted freedom (“geprägte Freiheit”).Footnote 97 No sufficient grounds for such an intrusive measure as the elimination of cash are visible. The overall assessment by Kenneth Rogoff in favour of phasing out paper money is not convincing since it slanted towards the argument of fighting tax evasion and money laundering. To a lesser degree, but also similar, is the verdict on the restrictions of its use. The former president of the German Federal Constitutional Court, Hans-Jürgen Papier expressed serious doubts regarding the conformity of restrictions of the use of legal tender with German constitutional law. He judges them as non-justified intrusions into civil rights and doubts whether they are suitable and necessary.Footnote 98 The population has a right to be left alone by the government unless adequate and convincing grounds for onerous actions can be shown. The effectiveness of the restrictions for using cash in fighting (major) criminality has not been proven adequately and the argument that the use of cash serves as an incentive for vandalism and petty criminality is at best ambigous. It is more a confession of state failure.

What is most important, however, is that all substitutes for legal tender are issued by commercial institutions which potentially can become insolvent. This risk is an unnecessary burden for the economy and the population. It can be avoided by using legal tender. Using cash also allows the direct transfer of values from person to person without depending on a third party.

5.2 Social State

The same result may be derived from Article 20 paragraph 1 Basic Law (“social state”, Sozialstaat). Restricting the use of issued banknotes and coins denominated in euro would mainly affect the least affluent parts of the population. In particular, the aspired “financial repression” has substantial and largely disregarded distributional effects. The distributional effects of greatly reduced interest payments of governmental budgets are unclear, but zero interest on savings destroys retirement plans for the lower middle class. In Germany , at least, the main assets of this section of the population are bank accounts, life insurance, and other monetary instruments. On average, they do not own assets that have profited from the policy such as real estate or common stock. Clearly, the judgment has to differentiate: the abolition or repression of high denominated banknotes may be onerous for business but not in view of the “not so well-to-do” population, mainly protected by the principle of the social state. The existence of easy to handle legal tender with the legitimate expectation that it will be accepted at every business and at every government entity at face value is part of the social-state principle.Footnote 99

6 The Legal Consequences of not Accepting Cash

Euro banknotes and coins are legal tender in the Member States whose currency is the euro. They have to be accepted by all creditors of monetary claims—public or privateFootnote 100—with some (minor) exceptions such as the amount of coins that can be accepted or the use of high denomination banknotes for paying small debts.Footnote 101 If creditors refuse to comply, sanctions from public law or even criminal law might be imposed,Footnote 102 which cannot be expounded in detail here. For practical purposes, the consequences in private law are more relevant: the creditor does not lose his or her claim, but has to bear the negative effects of being in the status of “default of acceptance”. This may be an argument in favour of the decision of the Administrative Court in the case of the contributions for the public law broadcasting system in Germany .Footnote 103 For private persons, Section 293 of the German Civil Code would be relevant. In general, the issuer of legal tender , which does not have a material value close to the nominal value, must enforce the acceptance of this money, otherwise it is a deception of the public, who trust in the inherent promise that this token can be freely exchanged into goods and services.

7 Conclusion

From a legal point of view, the elimination of cash would be questionable. It would be an infraction of both the law of the European Union and of German constitutional law . In principle—albeit to a lesser degree and depending on the details—this also holds for mere restrictions of its use. They are, in principle, incompatible with the concept of legal tender whose issuance or authorisation is reserved to the ECB. Moreover they undermine the confidence in the currency and jeopardise the power of the central bank to execute its monetary policy.