The case against cash

Financial Mirror (Cyprus) - - FRONT PAGE -

The world is awash in pa­per cur­rency, with ma­jor coun­try cen­tral banks pump­ing out hun­dreds of bil­lions of dol­lars’ worth each year, mainly in very large de­nom­i­na­tion notes such as the $100 bill. The $100 bill ac­counts for al­most 80% of the US’s stun­ning $4,200 per capita cash sup­ply. The 10,000 yen note (about $100) ac­counts for roughly 90% of all Ja­pan’s cur­rency, where per capita cash hold­ings are al­most $7,000. And, as I have been ar­gu­ing for two decades, all this cash is fa­cil­i­tat­ing growth mainly in the un­der­ground econ­omy, not the le­gal one.

I am not ad­vo­cat­ing a cash­less so­ci­ety, which will be nei­ther fea­si­ble nor de­sir­able any­time soon. But a less-cash so­ci­ety would be a fairer and safer place.

With the growth of debit cards, elec­tronic trans­fers, and mo­bile pay­ments, the use of cash has long been de­clin­ing in the le­gal econ­omy, es­pe­cially for medium and lar­ge­size trans­ac­tions. Cen­tral bank sur­veys show that only a small per­cent­age of large­de­nom­i­na­tion notes are be­ing held and used by or­di­nary peo­ple or busi­nesses.

Cash fa­cil­i­tates crime be­cause it is anony­mous, and big bills are es­pe­cially prob­lem­atic be­cause they are so easy to carry and con­ceal. A mil­lion dol­lars in $100 notes fits into a brief­case, a mil­lion dol­lars in 500euro notes fits into a purse.

Sure, there are plenty of ways to bribe of­fi­cials, en­gage in fi­nan­cial crime, and evade taxes without pa­per cur­rency. But most in­volve very high trans­ac­tion costs (for ex­am­ple, un­cut di­a­monds), or risk of de­tec­tion (say, bank trans­fers or credit card pay­ments).

Yes, new-age crypto-cur­ren­cies such as Bit­coin, if not com­pletely in­vul­ner­a­ble to de­tec­tion, are al­most so. But their value sharply fluc­tu­ates, and govern­ments have many tools with which they can re­strict their use – for ex­am­ple, by pre­vent­ing them from be­ing ten­dered at banks or re­tail stores. Cash is unique in its liq­uid­ity and near-uni­ver­sal ac­cep­tance.

The costs of tax eva­sion alone are stag­ger­ing, per­haps $700 bil­lion per year in the United States (in­clud­ing fed­eral, state and lo­cal taxes), and even more in high-tax Europe. Crime and cor­rup­tion, though dif­fi­cult to quan­tify, al­most surely gen­er­ate even greater costs. Think not just of il­le­gal drugs and rack­e­teer­ing, but also of hu­man traf­fick­ing, ter­ror­ism, and ex­tor­tion.

More­over, cash pay­ments by em­ploy­ers to un­doc­u­mented work­ers are a prin­ci­pal driver of il­le­gal im­mi­gra­tion. Scal­ing back the use of cash is a far more hu­mane way to limit im­mi­gra­tion than build­ing barbed-wire fences.

If govern­ments were not so drunk from the prof­its they make by print­ing pa­per cur­rency, they might wake up to the costs. There has been a lit­tle move­ment of late. The Euro­pean Cen­tral Bank re­cently an­nounced that it will phase out its 500 euro mega-note. Still, this long over­due change was im­ple­mented against enor­mous re­sis­tance from cash-lov­ing Ger­many and Aus­tria. Yet even in north­ern Europe, re­ported per capita hold­ings of cur­rency are still quite mod­est rel­a­tive to the mas­sive out­stand­ing sup­ply in the eu­ro­zone as a whole (over EUR 3,000 per capita).

South­ern Euro­pean govern­ments, des­per­ate to raise tax rev­enue, have been tak­ing mat­ters into their own hands, even though they do not con­trol note is­suance. For ex­am­ple, Greece and Italy have been try­ing to dis­cour­age cash use by cap­ping re­tail cash pur­chases (at EUR 1,500 and 1,000, re­spec­tively).

Ob­vi­ously, cash



for small ev­ery­day trans­ac­tions, and for pro­tect­ing pri­vacy. North­ern Euro­pean cen­tral bankers who favour the sta­tus quo like to quote Rus­sian nov­el­ist Fy­o­dor Dos­to­evsky: “Money is coined lib­erty.”

Of course, Dos­to­evsky was re­fer­ring to life in a mid-nine­teenth cen­tury czarist prison, not a mod­ern lib­eral state. Still, the north­ern Euro­peans have a point. The ques­tion is whether the cur­rent sys­tem has the bal­ance right. I would ar­gue that it clearly does not.

A plan for rein­ing in pa­per cur­rency should be guided by three prin­ci­ples. First, it is im­por­tant to al­low or­di­nary cit­i­zens to con­tinue us­ing cash for con­ve­nience and to make rea­son­able­size anony­mous pur­chases, while un­der­min­ing the busi­ness mod­els of those en­gaged in large, re­peated anony­mous trans­ac­tions on a whole­sale level. Sec­ond, any plan should move very grad­u­ally (think a decade or two), to al­low adap­ta­tions and mid-course cor­rec­tions as un­ex­pected prob­lems arise. And, third, re­forms must be sen­si­tive to the needs of low-in­come house­holds, es­pe­cially those that are un­banked.

In my new book, The Curse of Cash, I of­fer a plan that in­volves very grad­u­ally phas­ing out large notes, while leav­ing small notes ($10 and be­low) in cir­cu­la­tion in­def­i­nitely.

The plan pro­vides for fi­nan­cial in­clu­sion by of­fer­ing low-in­come house­holds free debit ac­counts, which could also be used to make gov­ern­ment trans­fer pay­ments. This last step is one that some coun­tries, such as Den­mark and Swe­den, have al­ready taken.

Scal­ing back pa­per cur­rency would hardly end crime and tax eva­sion; but it would force the un­der­ground econ­omy to em­ploy riskier and less liq­uid pay­ment de­vices.

Cash may seem like a small, unim­por­tant thing in to­day’s high-tech fi­nan­cial world, but the ben­e­fits of phas­ing out most pa­per cur­rency are a lot larger than you might think.

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