The End of Cash?
(Bloomberg) -- Do we need cash? Humans have used all sorts of things to exchange items of economic value — rare metals, strings of shells and even jugs of whiskey. Those objects have gotten more ephemeral, with paper money replacing most coins, and digital forms increasingly supplanting paper. Could physical cash go away entirely? Economists see great payoffs in a cashless society: lower transaction costs, new tools to manage economic growth and an end to tax evasion and money laundering. Critics see an erosion of privacy, frightening new powers for tyrants and an increase in inequality.
Sweden may be the most cashless society on the plant, with bank notes and coins accounting for just 1.7 percent of its gross domestic product. It churches were early adopters of donations via mobile phones, while its central bank is considering whether to issue a cryptocurrency. China’s city dwellers are rapidly going cashless, thanks to a system that uses encrypted codes on phones for transactions. A credit-card consortium is working to extend it globally. In India, 255 million people use Paytm, a seven-year-old startup backed by China’s Alibaba Group Holding Ltd., to make payments through a virtual wallet. India was rattled by the government’s decision in November 2016 to suddenly replace the larger bills that made up 86 percent of the currency in circulation to counter tax dodgers and counterfeiters. A shortage of replacement bills meant that companies struggled to pay salaries and millions of poor people couldn’t buy food. The government retreated in June 2017 after the fiasco cut into economic growth. In Australia, Citibank stopped accepting cash at its branches after most of its customers embraced digital transactions. And the European Central Bank has decided to stop producing the 500-euro note in 2018 to counter terrorist financing.
Since Roman times, people have tried out many alternatives to carrying loads of cash. Arab merchants developed bills of exchange for financing international transactions, a system that spread to Europe in the late Middle Ages. The earliest known example of a modern check was written by hand and drawn on an account at Clayton and Morris, a goldsmiths’ bank in London, on Feb. 16, 1659. The next revolution started with a forgotten wallet. In 1949, U.S. entrepreneur Frank McNamara visited the Majors Cabin Grill restaurant in New York and had an embarrassing moment before his wife paid the tab. But it gave him an idea, and months later he returned to the same restaurant, this time paying with a small cardboard card. Thus was born the credit-card industry. Shortly thereafter, banks began adopting computing systems that made it easier to keep track of money digitally. Then came the first automated teller machine, in London in 1967. Debit cards had been first tested the year before but only began to be issued in large numbers in the 1980s as ATM networks grew. Online banking took off in the following decade, ending the dominance of cash once and for all.
For governments, getting rid of cash would make it easier to crack down on tax evasion and drug trafficking. Businesses wouldn’t only save money on transaction costs but could benefit if friction-free payments led consumers to buy more. Some economists say that without cash, central banks could fight recessions more effectively by imposing negative interest rates — effectively a tax on savings meant to spur spending — if hoarding cash weren't available as a way to sidestep the penalty. Critics say that in a digital-only economy, governments and banks could take control of your financial life; with a flick of a switch, they could leave you without a penny. Networks can fail. And everybody could be vulnerable to a cyberattack or power outage, as residents of Puerto Rico found after Hurricane Maria destroyed much of the island’s electrical grid in September. For the world’s poor, arguments about going cashless cut both ways. Billions of poor people in the developing world depend on cash to buy goods for very small amounts, often mere cents. Not all of them can afford phones or other means of interacting with a digital cash network. That could make people who don’t have equal access to banking services into second-class citizens. On the other hand, services like Paytm in India and mobile-phone networks such as Kenya’s M-Pesa have let people in remote villages try out newer services like micro-business loans.
The Reference Shelf
- The portal for the Digital India campaign.
- A talk by Duke University Professor Dan Ariely on “The Psychology of Money.”
- A research paper on the cashless strategies of Swedish banks.
- A book review in an International Monetary Fund journal of Kenneth Rogoff’s book, “The Curse of Cash.”
- A Bloomberg QuickTake explainer on mobile payments.
First published Oct.
©2017 Bloomberg L.P.