Living Without Paper Money

Kenneth Rogoff recently produced a book, The Curse of Cash, in which he argued that the world would be a better place if we gradually eliminated paper money (cash) starting with the largest-value notes first.  He concluded that eliminating cash would make tax evasion and numerous other crimes much more difficult, and would facilitate national monetary policies by making significant negative interest rates possible.  The latter topic is best left to economists to argue.  Here the interest is in the benefits and inconveniences that arise when a plan such as Rogoff’s is implemented.  There are countries that have already decided that they are going to purposely favor digital financial transaction and purposely inhibit cash transactions.  The experiences of those countries will also be discussed.

There are two major issues associated with a plan to phase out paper money.  The first involves the logistics of taking the notes out of circulation, the second involves dealing with the fact that many people do not currently have access to modern banking and are required to have cash available for financial transactions.  The solution to the latter issue is to provide what Rogoff refers to as “universal financial inclusion.”

Rogoff provides a short summary of his phase-out plan.

“All paper currency is gradually phased out, beginning with notes of $50 and above (or foreign equivalent), then next the $20 bill, leaving only $1, $5, and (perhaps) $10 bills.  These small bills would be left in circulation for an indefinite period.  In the final phase, small bills would be replaced by equivalent denomination coins of substantial weight.”

The point of eliminating cash is to eliminate financial transactions that cannot be monitored.  It turns out that 80% of the paper money in distribution in the US is in the form of $100 bills, a denomination that is rarely used in everyday transactions.  Rogoff argues that a significant fraction of those bills are involved in illegal activities. 

“A million dollars in $100 bills weighs approximately 22 pounds (10 kilos), and, if stacked, rises to 43 inches, (or 109 centimeters).  Obviously, with $20 bills, all measures would be five times as much; with $10 notes, $1 million is suddenly 220 pounds (100 kilos), and 430 inches (1,090 centimeters).  It is also proportionately costlier to count, verify, handle, and store….Properly designed, the weight of coins, though quite modest for ordinary day-to-day transactions, would make them awkward for transporting large amounts or conducting large anonymous transactions.”

The elimination of large notes begins with the decision to not print any more.  The ones in circulation can be withdrawn slowly or quickly depending on the degree of the crime problem.  India suddenly decided to render all 500 and 1000 Rupee notes invalid essentially instantaneously just a few days ago.  The stated motive was to fight corruption.  Rogoff anticipates a transition that could take decades.  The period must be timed with the transition to universal financial inclusion if it is to work.  The government could merely set a date by which all bills must be exchanged or else they will expire.  There are a number of ways to facilitate the exchange so it goes smoothly and without great inconvenience.

Most people, particularly the young, are already decreasing their use of cash and would not find the transition particularly troublesome.  However, the large number of people without bank accounts would make the goal of universal financial inclusion more complicated.

“In the United States, more than 8% of households were unbanked in 2013, according to an FDIC survey.  Another 20% were underbanked, meaning they also used alternative financial services outside the banking system, including prepaid cards, payday loans, pawn shops, and check-cashing services.”

Being unbanked can be a very expensive way to execute transactions.

“Unfortunately, the cost of not having bank access is high.  Check-cashing services charge exorbitant fees; for immigrants and others who need to wire funds abroad and transfer money to relatives, the transaction costs can amount to 10-15% or more.  Storing cash at home and carrying cash greatly increases the chance of theft.  The risks of being subject to fraud are much higher outside the regulated financial sector.  The poor may benefit from being able to use paper currency, but overall, financial exclusion implies large costs for basic services.  In sum, the status quo is extremely regressive.”

The solution is to have a federal program that subsidizes accounts for the poor so they have access to the electronic equivalent of currency. A rather simple way to implement such a system would be to create debit accounts (or an equivalent) at existing banks and have the government deposit the costs of maintaining the accounts directly into them.  The cost of such a program might seem large, but is really rather small compared to the amount of taxes being evaded, and the amount that potentially could be recovered or saved by the move to a cashless society.

“The long-run solution is to provide government-subsidized access to financial services for the poor, giving them equal access to electronic currency and, at the same time, helping to reduce some of the costs associated with financial exclusion….The cost of providing subsidized electronic currency accounts for low income individuals should be relatively modest, say, on the order of $32 billion per year (for example, 80 million free basic accounts at $400 per year).”

“If providing such basic services sounds spendthrift, remember, programs will be built in the context of a transition to electronic payment vehicles that would likely bring net revenue to the government overall, given higher tax receipts.  Shifting away from cash will also help reduce crime-related expenditures.”

A brief article in The Economist took note of Rogoff’s book and produced a summary of how the trend away from paper money was progressing in Europe.  It supplied this chart indicating the degree to which consumers in various countries had embraced electronic transactions over cash.

The Scandinavian countries are eager adapters and generally prefer using cards and smartphones over cash.  Germany and Italy seem determined to hang on to their cash.  France and Britain are somewhere in between. 

Clearly culture plays a role—and trust in government and banks as well.  Moving to electronic transactions eliminates the privacy associated with cash transactions.  This lack of privacy is what is needed in order to address criminal activities, but it also means that numerous small transactions that are, in principle, subject to government intervention like hiring a baby sitter or purchasing a bit of marijuana can now be observed by financial institutions and the government if they are so inclined

“Swedes rarely handle cash; the volume of card payments has increased tenfold since 2000 and only one in five payments—5-7% if measured by value—are made in cash today. In much of northern Europe the situation is similar, with “no cash” signs increasingly popping up in shop windows.”

“Most surprising is Germany’s reluctance to dispense with “real money”. Over three-quarters of German payments are still made in cash and “cash only” signs are not that uncommon.”

“….a deep-rooted aversion to being tracked—a scar left by the Stasi—lies behind German distrust. A recent survey by PWC revealed that two in five Germans don’t use mobile payments because of concerns about data security (and nearly nine in ten worry about it).”

Banks are generally in favor of the transition.  Cash is expensive for them to deal with, and more profit can be made from transaction fees.  Part of encouraging the transition involves banks and government collaborating in providing the tools for efficient transactions while minimizing the costs.

“In the Benelux and Scandinavian countries, banks were early promoters of electronic payments and made it easier (and cheaper) for customers to use cards. In thinly populated Sweden and Norway, maintaining a large branch and ATM network is costly; Swedbank, Sweden’s largest retail bank, has only eight branches that handle cash. Banks also helped to develop mobile-payment technologies, such as MobilePay in Denmark, an app now used on nine out of ten Danish smartphones.”

Electronic registering of transactions as they take place can eliminate the option retailers have of cheating on cash transactions.  Removing that opportunity clearly places cash in the nuisance category for both consumers and vendors.  Smartphone apps and chip and pin cards are much quicker than counting out change and handling coins and bills that many believe are a means of transmitting disease.

“Scandinavian authorities have helped facilitate card use. In Sweden the installation in cash registers of “blackboxes” that directly send sales data to the tax agency to fight VAT evasion, has helped make cash less attractive. In Denmark paying benefits onto debit cards aided the transition.”

“Dimitri Roes, the owner of ‘t Vlaams Broodhuys, a Dutch chain of bakeries, says the decision to become cashless was motivated by security and hygiene. ‘Bakeries are soft targets for robberies. For a few hundred euros you get a knife in you.’ Customers also didn’t like staff touching their croissants after handling coins. Some clients angrily threw their coins across the counter when bakers stopped accepting them, but over 90% didn’t care.”

It looks like this is going to happen.  Some groups will fight back against the phasing-out of paper money, but time and technology are not on their side.  Certainly the author of the article in The Economist agrees.

“Of course there are downsides to moving away from cash. Installing card machines can be costly. The poor, many of whom lack bank accounts, would need to be included. Concerns about losing anonymity are legitimate. And cash has always been the obvious contingency in case systems break down.”

“But the advantages of cashless commerce grow ever more apparent. Back in Stockholm, at the Radisson Waterfront hotel, two American seniors bicker over who will fetch ‘local money’ so they can get a taxi. If only they knew that cabbies here prefer cards and only 7% of Taxi Stockholm’s payments are made in cash.”

The interested reader might find the following article informative.

The Curse of Cash: Crime