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The Cashless Society – and Impediments

Attempts at creating streamlined, all-electronic payment systems have repeatedly fallen short of expectations. Will this time be different?

  • Jeffrey Kutler

In 2009, Harvard University economics and public policy professor Kenneth Rogoff made a major contribution to financial-crisis discourse with the best-selling This Time Is Different: Eight Centuries of Financial Folly, co-written with Carmen Reinhart of Harvard’s Kennedy School of Government. In his 2016 book, The Curse of Cash, Rogoff turns to a different, noncyclical kind of crisis.

He is hardly the first to observe that anonymous, large-scale cash transactions are at the root of societal ills and criminality, problems ranging from drug and human trafficking to illegal immigration, tax evasion, counterfeiting, and money laundering. The professor’s singular argument is that no set of policies would turn back these tides more effectively than would a less cash-dependent economy. He proposes getting there by initially phasing out the large currency denominations ($50 and above in the U.S.) that fuel illicit commerce, and ultimately replacing small bills with coins and ensuring electronic access for disadvantaged and unbanked populations.

On a positive note the cashless society that futurists have been envisioning for decades — one that was not materially advanced by credit cards and automated teller machines — seems to be coming into view. Consumers and retailers are embracing mobile payments, and there is widespread fascination with alternative currencies like Bitcoin and its underlying secure ledger, the blockchain.

“Does cash have a future as legal tender?,” a November 2014 economic commentary published by the central bank of Sweden, coincided with that country’s move to the forefront among industrialized nations in adopting “less cash” as a matter of policy. In emerging markets from Bangladesh to Kenya to Peru, case studies of digital-payment implementations are proliferating thanks to financial-inclusion advocates such as the United Nations–based, foundation-funded Better Than Cash Alliance.

“Soon you won’t be able to see or touch cash in the coming global cashless society,” predicts Gerald Celente, whose Trends Research Institute has a following among investors, corporate strategists, and other trend watchers. He lists “no more cash” as a top trend for this year, saying, “2017 will see the biggest advance yet toward a cashless world. Also fueling the trend: the absence of any substantial fundamental opposition.”

Absence of opposition doesn’t exactly fit with Rogoff’s scenario. He devotes 200-plus pages to cutting through and breaking down behavioral and institutional resistance to change. But Celente and Rogoff alike home in on central players in the drama: governments.

One reason for governments to like cashless payments is their auditability — a deterrent to crime and tax evasion but also, Celente warns, a loss of privacy. Big Brother would have no problem with that, yet “there is no substantial anti-digital-currency movement,” Celente says. At least not yet.

However, governments have a profit motive to hold on to their currency-printing monopolies. It is called seigniorage, and according to Rogoff, in 2015 the revenue amounted to 0.4 percent of GDP, about $70 billion, for the U.S., and 0.55 percent of GDP, or €60 billion ($66 billion), for the European Central Bank.

Preserving seigniorage is shortsighted, in Rogoff’s view: “The ‘profits’ governments reap by blindly accommodating demand for cash are dwarfed by the costs of the illegal activity that cash, especially big bills, facilitates. The effect of curtailing paper currency on tax evasion alone would likely cover the lost profits from printing paper currency, even if tax evasion fell by only 10–15 percent.”

A chart in The Curse of Cash shows that Russia earns the most seigniorage in relation to GDP, 1.37 percent. One country — Sweden — loses money, at the rate of 0.06 percent of GDP, having “rightly started to discuss why in the long run a central bank should be focused on the health of the overall economy and not on its profit-and-loss statement.”

Such reasoning did not figure in a $400 million payment that the U.S. made to Iran last year, repaying a portion of funds seized in a diplomatic dispute dating back to 1979. Because Iran was under sanctions and disconnected from global banking channels, the money was delivered in multiple paper currencies — by cargo plane. The Obama administration had to answer accusations that the payment was really ransom for released prisoners; it could have just as easily been criticized for not finding a way to use a more efficient, 21st-century transaction method.

India was on the right track with its November demonetization decree, targeting corruption and criminality by removing 500- and 1,000-rupee ($7.50 and $15.00) notes from circulation. The near-term dislocations may be outweighed by long-range benefits, but that could take years to sort out, Rogoff says.

Venezuela tried to follow India’s lead but halted its plan in December due to public unrest and failure to deliver new currency. It’s still all about cash.