The Less-Cash Society

Today I finally got to enjoy the latest episode of Freakonomics titled Why Are We Still Using Cash? The episode is motivated by Kenneth S. Rogoff’s latest book ‘The Curse of Cash’. Rogoff is a Thomas D. Cabot Professor of Public Policy and a Professor of Economics at Harvard who has been working on the problems of cash for many years. He published his first paper in this area back in 1998 (Rogoff cited in Dubner, 2016). Today he also advises the International Monetary Fund among others and writes op-ed articles for The Wall Street Journal.

The essence of Rogoff’s new book is that the use of cash as a means of payment in our economy comes at a real social cost. In particular, Rogoff argues that cash facilitates today’s most pressing social problems of tax evasion and crime, as well as illegal immigration and terrorism. Tax evasion, for example, is facilitated by the anonymity and portability of cash, its widespread acceptance and liquidity compared to ‘alternative currencies’ such as diamonds or bitcoins. Similarly, crimes like drug trafficking escape notice and do not leave any record due to the anonymity of cash. In addition, the ability to carry big sums in large denomination bills is an important advantage for illegal activities. On the other hand, illegal immigration is indirectly driven by the use of cash. This is because cash allows illegal workers to be paid off the books while avoiding social security altogether (Rogoff, 2016e). Hence Rogoff argues that the advantages of cash, like anonymity, portability, liquidity and near-universal acceptance, actually encourage a vibrant underground economy. Cash does more harm than good for society and it makes us poorer (Rogoff, 2016b).

Yet cash has its merits in our economy. First and foremost, cash allows for financial privacy and gives people the freedom whether to participate in the banking system or not (Henry cited in Dubner, 2016). At the moment they have a choice between holding cash or depositing the amount in an account at a bank. Abolishing cash completely would force every individual in the economy to possess at least a basic debit card account. Other concerns include the need for cash in cases of emergencies such as power outages or natural disasters as well as the convenience of cash for very small transactions (Rogoff, 2016b). This is why Rogoff does not advocate a ‘cashless society’ but a ‘less-cash society’. Rogoff’s plan is most concerned about large denomination bills. They tend to have the biggest share in the total currency supply, as shown in the figure below which is available from the data companion website of Rogoff’s book (see references).

less-cash-society
(Source: Rogoff, 2016a)

For example, in the US the largest banknote makes up almost 80% of the total currency supply. Yet the $100 dollar bill is rarely used for legal transactions, but a common means of payment for all sorts of illegal activities. Rogoff’s plan is to gradually phase out these banknotes, including 50 and 20 dollar bills in the far future, while keeping small denomination bills (Rogoff in Dubner, 2016). A second pillar of Rogoff’s plan is financial inclusion. In order to make the ‘less-cash society’ work, one needs to provide the poor with a free access to basic debit card accounts. While especially the poor rely on cash today, Rogoff points out that a ‘less-cash society’ would benefit these people disproportionately through the significant increase in tax revenues to be redistributed as well as the reduction in crimes (Rogoff, 2016b).

There are some countries like Sweden and India which are rapidly moving towards a ‘less-cash society’. India, for example, has paved the way for instant banking and financial inclusion to make the ‘less-cash society’ work (Nikelani cited in Dubner, 2016). Another example is the Eurozone. The European Central Bank announced the permanent production and issuance stop of the €500 banknote in May this year (ECB, 2016). However, the Freakonomics episode also points out that cash and access to cash is often seen as a human right (Arvidsson cited in Dubner, 2016). People tend to like their cash; it contributes to the identity of a nation and may have a longstanding history. That is why a ‘less-cash society’ as advocated by Rogoff seems to be a well-conceived plan to balance cash for small transactions with cashless payment for large purchases and other economic activities.

A ‘less-cash society’ might even have another benefit related to the efficiency of monetary policy. Rogoff explains that central banks would be able to control the economy more effectively. This is because it would lessen if not eliminate the zero lower bound on interest rates. It would make the manipulation of the interest rate a more efficient tool to stabilise the economy. It could be more effective at avoiding a deflationary spiral and at kick-starting the economy by stimulating demand through negative interest rates (Rogoff, 2016e).

I must say that I used to take a rather nostalgic viewpoint in this argument; plus preferring the convenience of cash for small transactions. However, the scale of currency outstanding and, in particular, the high proportion of large denomination bills makes me think twice about how much cash is optimal for society. Rogoff has done an outstanding job in showing the unintended consequences of the advantages of cash. Now it is up to governments and society whether to take in his insights. The judgment of whether the social costs of cash outweigh the benefits is unlikely to be an easy one. Yet, recognising that cash is a major driver of tax evasion, crimes, illegal immigration and terrorism among other things is probably the starting point for moving towards Rogoff’s plan of a ‘less-cash society’.

Jasse

 


References

Dubner, S.J. (2016). Why Are We Still Using Cash? Freakonomics Radio, [podcast] 28 September. Retrieved from: http://freakonomics.com/podcast/still-using-cash/ [Accessed 02/10/2016]

ECB (2016). ECB ends production and issuance of €500 banknote. Retrieved from: https://www.ecb.europa.eu/press/pr/date/2016/html/pr160504.en.html [Accessed 02/10/2016]

Rogoff, K.S. (2016a). Figure 3.5: Share of largest banknote in total currency supply [dataset/figure]. Retrieved from: http://scholar.harvard.edu/rogoff/curse_of_cash_data [Accessed 02/10/2016]

Rogoff, K.S. (2016b). The Curse of Cash: An interview with Kenneth Rogoff by Debra Liese. Princeton University Press Blog, 25 August. Retrieved from: http://blog.press.princeton.edu/2016/08/25/the-curse-of-paper-currency-an-interview-with-kenneth-rogoff/ [Accessed 02/10/2016]

Rogoff, K.S. (2016c). The Curse of Cash: An interview with Kenneth Rogoff (Part II) by Debra Liese. Princeton University Press Blog, 26 August. Retrieved from: http://blog.press.princeton.edu/2016/08/26/the-curse-of-cash-an-interview-with-kenneth-rogoff-part-ii/ [Accessed 02/10/2016]

Rogoff, K.S. (2016d). The Curse of Cash. Princeton: Princeton University Press.

Rogoff, K.S. (2016e). The Sinister Side of Cash. Wall Street Journal Online, [online] 25 August. Retrieved from: http://www.wsj.com/articles/the-sinister-side-of-cash-1472137692 [Accessed 02/10/2016]

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s