The paper succeeds in offering a relevant backdrop for the use of cash today and a valuable framework for making sense of de-cashing’s potential effects on a country’s current account balance. But it misses the mark on many subjects. In Part 1, we tackled the flaws behind the author’s assertions of the obsolescence of cash and its supposed role in money laundering and tax evasion. In Part 2, I would like to consider some of the other premises behind the author’s conclusion that de-cashing “most likely will still be positive on a net basis.”
His main supporting argument? The idea that de-cashing would drive growth. According to this theory, electronic transaction systems would reduce costs, the informal economy would surely enter the formal sector and the private sector, services and consumption would benefit from a simplification of tasks. Put in those terms, the argument is tempting to believe. But, look no further for a real-life counter example than the case of India, where Narendra Modi’s decision in 2016 to remove all 500 and 1,000 rupee banknotes triggered a backlash, and has resulted in underwhelming growth figures. “It shows that demonetisation was a big mistake,” says Gurchuran Das, an economic commentator, in a June 2017 interview with The Guardian. “What this has done is put us back about six months. We should have been inching towards 8% annual growth, but have ended up around 7.1%.” With a decline of 3.7% in the cash-dependent construction sector, little evidence has surfaced showing progress toward the stated goal of a transition toward a formal economy in India. In fact, as soon as new banknotes were introduced, the volume and value of digital transactions declined
Moreover, the instantaneity of electronic transactions masks the hidden costs and fees that often come with them. The Nilson Report estimates a total of $21.84 billion in card fraud globally. More than 1 million instances of card fraud occurred in the United Kingdom alone over the first six months of 2016, representing a 56% increase from 2015. Protecting consumers throughout the whole value chain comes at a cost and many merchants are going to great lengths. The largest pay $225,000 annually for compliance related work, while 10% of the largest spend $500,000 or more. Other costs originate from prevention and management of data breaches or compliance with anti-money laundering regulations. In the United State payments industry, these AML regulations result in around $7 billion a year. More research into the total costs of electronic payments should be done before we can weigh the efficiency of electronic payments vs. cash payments.
Another of the paper’s arguments for the benefits of de-cashing is the imagined rise in efficiency for monetary policy following the conversion of currency into bank deposits. Not only would more deposits allow for banks to lend more easily and contribute to drops in interest rates, but central banks’ negative interest rate policies would be more effective in pushing consumers to spend. Should this really be a motivator in policymaking? Putting citizens in a bind in which both holding cash and keeping deposits are costly would undermine our role as free actors in the market economy.
The author also argues that de-cashing would be a boon for financial inclusiveness. Nothing could be further from the truth. The greatest barrier to financial access for the “unbanked” is simply a lack of sufficient funds. For the 2 billion individuals around the world without a bank account, cash is a means of survival and their best bet for accumulating the wealth they will one day need to qualify for a bank account. De-cashing would only serve to exclude even further the already financially excluded. Dana Kornberg, a Ph.D. Candidate in sociology at the University of Michigan has carried out field research with a community of informal garbage collectors in a Delhi neighbourhood who collect garbage for middle-class residents across the city. She stresses that «Cash is infused with extra meaning and also requires durable relationships and negotiations to function. Physical currency’s flexibility makes it amenable to negotiation in both timing and amount – a feature that requires more personalized relationships.» She concludes that cash « plays an important role in our modern economy, particularly among the poor, and those urging a cashless future should do so with great caution. »
The author does get one major point right: de-cashing should not be led by the public sector. Using cash is still seen by many as a fundamental right and the public has already shown suspicion toward top-down efforts that aim to restrict it. The outcry in Germany over a legislative proposal to limit cash payments, eventually forcing the government to shelve the idea, is proof of the strong resistance toward de-cashing that remains even in the most developed of economies.