[Dave Birch] With my feet up and a cup of tea, I was relaxing reading David R. Warwick’s “The Case Against Cash” in the July edition of “The Futurist” magazine. He notes that of the $829 billion in US currency “in circulation”, two-thirds is outside the US. According to the Boston Fed, the average US consumer has only $79 about their person, with another $157 at home or in the office. Say $200 each for 200 million consumers, that comes to only $40 billion. Even if you calculate it at $300 each for 300m consumers, that’s still only $90 billion, which would imply that about two-thirds of the cash in the US in unaccounted for, a figure that tallies well with more detailed calculations made for some European countries. That means that if the US is as law-abiding as, say, Norway, then there’s about $200 billion of cash in the US that is only used for tax evasion, crime, money laundering and so on.
Mr. Warwick says that the biggest single benefit of the abolition of cash in the US will be the elimination of cash robberies, which costs the country about $140 billion per annum. This may be so, but personally, I think that the greatest benefit will be what he puts second on the list: financial inclusion. People trapped in a cash economy are not only discriminated against (because they pay the highest transactions costs) but they are cannot get on the financial services ladder. They have to take payday loans instead of bank loans, use cheque-cashing services and so on. Helping these people on to that ladder is a very positive outcome for the electronic payments industry (assuming that it can deliver the low-cost products that are needed to do this).
Naturally I sympathise with Mr. Warwick, but I don’t hold out much short term hope for the US getting rid of cash, although I can see that there are some interesting ways to make progress. A correspondent wrote, kindly, in response to a recent post I made about the role of e-payments in reducing cash evasion.
In addition to strict regulations that require POS technology to retain sales records (and criminal liability if they are found to be tampered), the Brazilian state of Sao Paulo created a program called “Nota Fiscal Paulista” which works by consumer demand. It encourages consumers to ask for their receipts, which pressures the business into declaring their sales taxes to the state tax collector. At year’s end the consumer gets a share of their taxes paid returned to them, as well as an entry in a larger lottery. I’ve had family members win sizeable pots simply for opting in to this receipt at check out.
Many merchants really dislike this scheme, presumably because it works, but they are obliged to offer it because of consumer pressure. There’s another similar scheme in Korea, whereby merchants who take more than some threshold (75%?) volume of their transactions electronically rather than in cash get a tax break. The government has presumably calculated that reducing tax evasion from cash sales more than makes up for the revenue reduction from the tax break. Perhaps in these straightened times the US tax authorities might begin to make similar calculations.
However, while the US may not be able to get rid of cash domestically—more’s the pity—it could at least start trying to get rid of cash in some other theatres. Perhaps a good place to start might be somewhere where, unlike America, there is a viable mobile phone-based alternative to cash: Afghanistan, where the M-PAISA scheme is up and running.
Electronic payments, if implemented properly, can bring transparency as well as efficiency. And transparency can have some unexpected consequences. Look what happened when the M-PESA service was launched in Afghanistan (as M-PAISA) and used to introduce efficiency into the process of salary payments for civil servants…
Another factor pointing to Afghanistan as the nexus for such an experiment is that the campaign against cash there may be able to co-opt a pretty powerful ally: the US military.
For the past few years the military has been striving to replace its cash transactions with electronic fund transfers and debit card payments in the hopes of achieving a “cashless battlefield,” in the words of Peter Kunkel, a former assistant secretary of the Army.
Right now, the battlefield is only cashless because all of the cash is being spirited away as soon as it arrives and (I’m sure) to no good purpose—as I heard our (former) man in Kabul Sherard Cowper-Coles pointing out on the BBC’s Start the Week programme recently—and there doesn’t seem to be any way to keep it in place.
Last month, a well-dressed Afghan man en route to Dubai was found carrying three briefcases stuffed with $3 million in U.S. currency and $2 million in Saudi currency, according to an American official who was present when the notes were counted. A few days later, the same man was back at the Kabul airport, en route to Dubai again, with about $5 million in U.S. and Saudi bank notes.
I love the title of the article, don’t you? It doesn’t seem that much of a “puzzle” to me.
Cash declaration forms filed at Kabul International Airport and reviewed by The Washington Post show that Afghan passengers took more than $180 million to Dubai during a two-month period starting in July. If that rate held for the entire year, the amount of cash that left Afghanistan in 2009 would have far exceeded the country’s annual tax and other domestic revenue of about $875 million.
There really ought to be more upset about the havoc that these billions of US dollars cause but not merely facilitating but actively encouraging corruption on such an enormous scale, yet even at the very highest levels there’s no sense (that I can find) of outrage. In fact, everyone (except taxpayers, presumably) seems quite happy with the seigniorage-powered status quo.
Karzai said cash transactions are quite normal and then-President George W. Bush was aware of the Iranian donations. The United States supposedly gives him bags of cash as well.
Interestingly, when he says “bags of cash” he isn’t speaking metaphorically: they actually do give him bags of cash, as do the Iranians apparently. I don’t think any of them are going to get behind my campaign to reduce the use of cash to the great benefit of society as a whole.
Suspicions of corruption in the Afghan government, with one cable alleging that vice president Zia Massoud was carrying $52m in cash when he was stopped during a visit to the United Arab Emirates.
Not mobile phone top-up vouchers or open-loop prepaid cards or high-street vouchers, but FIFTY TWO MILLION GREENBACKS. That made me wonder about his baggage allowance. How much would $52m in weigh? Could you fit it in cabin luggage or would you have to check it? After all 520,000 $100 bills take up a fair bit of space. I seem to remember from a previous discussion, that a cereal box can hold $500,000 so we’re talking about 100 cereal boxes at least.
In reality, restricting ourselves to $100 bills, the maximum is only $450,000 (the New Jersey ne’erdowells didn’t pack optimally!).
I don’t think you could fit 100 cereal boxes in the two checked bags that you’re allowed on British Airways, but I suppose vice presidents are allowed a couple more. But back to the point, which is…
Why does the world need 1 billion $100 bills? Indeed, why does the U.S. continue to print C-notes at all?
Look, I’m not making any sort of political point about Afghanistan, I’m arguing this general point. The US should cease printing $50 and $100 bills immediately. They have no function in supporting commerce.
And it’s not just that carrying around cash is inconvenient and time consuming. These days, one of its main functions is to finance the black economy: drug deals, counterfeiting, under-the-table employment and other nefarious activities. Because cash is anonymous, people can easily opt out of the taxable economy – leaving the rest of us to pick up the tab for their use of public services. Remove cash entirely, and you make it far more difficult to avoid tax, not to mention discouraging criminal activity.
I written before about a current example of large amounts of cash making a problem (that no-one would claim is caused by cash) significantly worse.
Ransoms are paid in cash, partly because Somalia has no functioning banking system, and partly to hamper American anti-money-laundering investigators
I have to say that this piracy is looking more and more like a viable career option to me. It is very well remunerated and there appears to be much less chance of going to jail than in, say, investment banking or management consultancy.
Of the 650 Somali pirates caught since late 2008, 460 have already been released, according to Lloyd’s Market Association
The English have a proud history of piracy, so I think I’d fit right in. Avast ye landlubbers!
These are personal opinions and should not be misunderstood as representing the opinions of
Consult Hyperion or any of its clients or suppliers
These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.