OVER the past few months, cash, which still accounts for 90 percent of global transactions, has come under increasing fire from governments seeking to better control economies and stamp out corruption and crime.
Among the recent moves, India’s demonetization of 500 and 1,000 rupee notes was probably the most extreme, as it removed about 86 percent of the country’s cash from circulation and caused widespread chaos. Statistics compiled by The Money Project indicate that at least 112 deaths in India were directly attributable to the demonetization, mostly people who could not afford to pay for medication.
Other countries are also moving toward eliminating cash. The elimination of $50 and $100 denominations has been proposed in the US, while DNB, Norway’s biggest bank, proposed eliminating all cash by the end of 2016. That didn’t happen, but a great deal of currency was cycled out of circulation, and many banks began pulling ATM machines from rural areas, as did banks in neighboring Sweden. In the European Union, printing of the 500-euro note has already ended, and the bill will not be distributed after this year.
In this part of the world, Australia has proposed eliminating its $100 bill, Singapore already removed its $10,000 bill, and South Korea is working towards the elimination of cash by 2020.
There are three basic arguments in favor of a cashless economy. First, eliminating cash, particularly high value currency, makes it harder for criminals to carry out their activities. There are 10 billion US$100 bills in circulation worldwide; $1 million worth of them only weighs one kilogram. The total of illicit cash transactions annually is estimated to be about $2 trillion.
Second, cashless transactions give regulators more control over the economy. Money becomes more traceable, which eases tax collection, and every transaction can be monitored in some way, because no transaction can be made without some third party being involved. It also makes the imposition of interest rates by central banks more effective in managing inflation, simply because no transaction occurs that is not affected by an interest rate. For example, most transaction fees between financial services handling things like credit card transactions are indexed to benchmark rates.
Finally, cashless transactions are faster and require less human handling, saving the entire economy money. An estimate by the US Fed said that the “economic burden” of handling cash could be up to 1.5 percent of GDP.
There are several objections to the elimination of cash, beginning with privacy concerns. Because a third party is always involved, there is potentially greater government access to personal transactions and records.
Cashlessness also makes it easier for governments to bar certain types of transactions (such as gambling). In addition, people wishing to save money outside the financial system would no longer be able to do so, which many would perceive as putting their hard-earned savings at risk.
In terms of savings, cashless economies also limit the ability of savers to react to monetary conditions such as inflation, and since their money is “trapped” in the financial system, they would have no opportunity to “opt out” (by withdrawing their savings in cash form) financial bailouts of troubled banks.
At the same time, there are also serious security concerns over keeping all of one’s money in the financial system. Storing all wealth digitally increases the risk of cybercrime; all of one’s life savings could be lost with a couple of keystrokes from a hacker. Juniper Research recently released a report that the cost of online data breaches will reach $2.1 trillion annually by 2019. Breaches or other forms of attacks are already happening on a daily basis; just last week, at least two big banks in the Philippines were reported hit with DDOS attacks—a form of hack that renders an online system inoperable due to a massive overload of traffic—from hackers demanding ransom to end the incursions.
Through the next year or so, the efforts to eliminate cash will increase, driven by central banks seeking to maintain a firm grip on a huge and growing global economy. Whether or not that is the direction the world should be taking is subject to debate; cash is actually a fairly arcane concept, but it is a simple one, and in economics, simple usually works better. On the other hand, trying to stop the march of technology is usually a futile effort.
For now, I’ll continue to enjoy the convenience of having my pay magically appear in my account twice a month—but the folded-up 1,000 peso note I keep behind my driver’s license for emergencies isn’t going anywhere, either.