The Cash Revolution: De-monetisation and the war against cash.

The cash dispenser — otherwise known as the Automated Teller Machine (ATM) — celebrates its 50th anniversary this year. Here, James Shepherd-Barron, son of the ATM’s inventor and disaster management consultant, explores demonetization in India and what it means for the cashless society.

 

To those critics with an interest in seeing the end of physical currency, cash is a pointless relic. It is, they argue, highly inefficient, being expensive to produce, process, and protect. Even worse, it allegedly props up the shadow economy due to the anonymity it provides for illicit transactions. As a direct consequence, governments around the world are increasingly placing restrictions on its use. They cite that such restrictions increase accountability, make good governance more transparent, and helps in their battle against terrorism, money laundering, tax evasion, drug dealing, and the criminal underworld in general. On top of that, at the macro-economic level too much cash in circulation prevents central banks from setting monetary policies that stimulate economic growth. Apparently, too much of our cash is being hoarded under our mattresses and is therefore not being used to bolster production or stimulate consumption. This is putting a brake on the world’s economy. The sooner we get rid of the stuff, the better.

The trouble is, most of us haven’t read the memo. As with the printed book and vinyl records, it turns out that cash has not been rendered extinct by the smartphone at all. In fact, people – including millennial’s – like cash more than ever. Apart from a few places such as Sweden and Australia, cash is still overwhelmingly the dominant method of payment around the world.

Strange, then, that on 8 November 2016, India’s Prime Minister, Narendra Modi, followed the European Union’s decision to stop printing the 500 Euro note by announcing he was taking high-denomination banknotes out of circulation, effectively rendering 86% of the country’s currency illegal. In a single stroke, this ill-advised attempt at social engineering eroded the livelihoods and savings of almost half a billion people. Given that 95% of all transactions in India are made with cash and where an estimated 45% of the economy is informal, this was bound to have serious unintended consequences.

In a stinging rebuff of this misguided policy, Forbes magazine’s editor-in-chief Steve Forbes dismissed this overnight move as “the most extreme and destructive example yet of the anti-cash fad currently sweeping government around the world.” The Wall Street Journal also slammed the banknote ban. In an editorial, the newspaper pointed out flaws in the implementation of what it termed India’s “bizarre war on cash” and referred to a guest column written by Amit Varma in the Sunday Times of India where he called the move, “A humanitarian disaster.” Varma highlighted how the poorest in Indian society – the farmers, landless labourers, and daily wage workers – have been rendered helpless by the move, and how they have had to resort to begging and bartering to survive as liquidity evaporated and ATMs ran out of money.

As demonetisation unravels into a spiralling disaster, the government is looking for new narratives to justify the policy. The latest justification that it will enable quick transition to a cashless society seems to be gathering momentum. But, as in other countries seeking the same ‘cashless’ solution, this argument is based on a number of inconvenient considerations which don’t get the airtime they deserve:

First, a cashless society is not necessarily in the best interests of the majority, as it tends to favour a few at the expense of the many. These are usually the poorest in society who end up paying a ‘poverty premium’ for accessing their digital money. One of the groups that clearly stands to benefit from cashless transacting is the financial sector. Whether payments are made using mobile wallets, debit cards, or wire transfers, there are middlemen involved in every transaction. The fees charged for this intermediation will result in huge gains in revenue for everyone involved, including the banking, credit card, telecoms, and payments sectors. This additional revenue will have to come from somewhere … and of course it will come from the pocket of the average consumer.

And while it is true that transaction fees could drop as more people use electronic banking, they will never be zero; there will always be a social price to pay when going cashless. This is probably why the ATM industry Association holds the view that a cashless society would almost certainly deepen already fragile social divisions between rich and poor, have and have-nots, between the banked and unbanked, and along the digital divide. “The abolition of cash,” they say, “could seriously endanger social cohesion and set back any upward mobility between the informal and formal economy.”

There is also the real risk that any shift of resources and power to the financial sector will increase income inequality. High volume and low margin deposits from ‘the bottom billion’ generated through top-down financial inclusion strategies will enable more lending but this is unlikely to be available where it is needed most – to the poorest in society – as the risks involved will still be considered too high, and the returns too low.

Second, the main beneficiary of a cashless society will be ‘Big Government’. One of the most likely unintended consequences of going cashless will be the increase in bureaucracy in the name of ‘accountability’. While lauded as a necessary part of the so-called “democratization of money” process, what this will mean in practice is further strangulation by red tape that is certain to impose ever-more complicated labour, licensing, taxation and other regulations, which, while increasing tax revenues in the short-term, will end up stifling entrepreneurship and innovation over the longer term.

Furthermore, by controlling people’s wealth through the banking system, governments will have complete control over taxation. In the short term, this will be no bad thing. There is already considerable evidence to show that tax revenues climb steadily when digital payments become the norm. But this will come at a longer-term cost, as it will become easier for governments to impose and collect additional taxes whenever they want. With their hands perpetually in the kitty, governments will be tempted to tax and spend at will. In a country like Sweden, where government is trusted, the legal system fair, and the infrastructure solid, this poses little threat. But the same cannot be said of a country like India … or Mexico, or Venezuela, or Nigeria, or Rwanda, all of whom have stated their intention to go cashless as soon as they can. Once the state has total control over its citizens in a cashless society, anonymity would be lost. At the same time, if a rogue government wants to penalise an individual or, worse, a minority group whose views they don’t agree with – think Turkey and the Kurds or Thailand and the Rohingya – it could do so very easily by freezing their access to digital money. That the state will have this power is the real risk of going cashless.

Third, there is a growing sense that the lack of privacy connected with use of electronic money hands too much information, and therefore too much power, to governments regulators and corporate enterprises. With digital money, all records of what you buy, where, and when can be accessed legally by the government and by direct marketers who want to sell you things you don’t need and can ill afford. Of course, the same information can be illegally hacked by anybody with the requisite skills, and used against you. The anonymity that comes with using cash will be destroyed, as will people’s ability to keep their finances and their purchasing history private. Cash empowers its users to buy and sell what they want without fear of surveillance.

Fourth, cash is universal and final. It is accepted by nearly all businesses around the world, especially small businesses for whom a daily positive cash-flow is essential to survival. Cash offers small businesses instant, free, and guaranteed transaction whereas digital money does not. Cash payments are also ‘final’ in as much that payments cannot be reversed unless by mutual agreement. Going cashless demands a reliable, universal, and fully functional e-payments infrastructure. This doesn’t exist, even in high income societies, and, barring Australia and a few Nordic and north European countries, probably never will.

Fifth, relatively speaking, cash is extremely secure. Of course, the threat of armed robbery is not very pleasant to consider, but it has to be measured against the online insecurity that comes with paying electronically. The risk of having your money stolen through cyber-fraud is thousands, if not hundreds of thousands, of times greater than the risk of being mugged … at least, in monetary terms. Compared with the scale of cyber-crime – some estimates put the cost of cyber-crime to the global economy at more than $445 billion – robberies involving cash are peanuts. Given this, it can be argued that, far from being a liability, cash provides a bulwark against cyber-crime.

And finally, cash empowers people … especially poor people. Ask the young wife in a Mumbai slum who hides spare cash from her alcoholic husband, or the old mother in Moscow who stuffs banknotes under her mattress because it gives her a sense of autonomy. Ask the small business entrepreneur in Zambia who feels that knowing how to use a cash recycling ATM makes her connected to the future.

All this begs a few questions: Why, when 80% of the world still prefers to use cash when making small purchases; when the number of ATMs around the world is growing at the rate of one every three minutes; when cyber-fraud is becoming a serious threat; when cash remains the only viable means of exchange in times of crisis, when systems are down and electricity in short supply, are governments intent on doing away with cash? Is it just about control? Isn’t removing physical currency from our pockets and purses a self-defeating act of economic sabotage?

When the misperceptions outlined here are factored into the mix, it becomes clearer that the imposition of a ‘cashless society’ is inequitable as well as being economically and socially backward. Abolishing physical currency in favour of its digital equivalent is antithetical not just to economic liberty and freedom of payment choice, but to the core social values of privacy, protection and empowerment. Worse is the lasting damage to the fabric of society which will be brought on by limiting access to cash.