Hugh Dalrymple (Y11) on the growing prospect of becoming a cashless economy

Are We Moving Towards a Cashless Society?

At the time of writing, on the 15th October 11:59pm, Britain phased out out the long-serving £1 coin, for it to be replaced by the new 12 sided coin. Not long ago, the crinkling £5 note was renewed and now the £10 note has followed suit. These expensive changes enacted by the Bank of England seem to raise the familiar question: why should we continue with using cash?

Paper and coin currency have long been the pinnacle of consumerism and monetary freedom, and we use them to portray gratitude to the likes of Her Majesty, Jane Austen and Sir Winston Churchill. 

The abolition of ‘cash’ currency is by no means easy but the case against cash isn’t new. The growing movement by banks and leading monetary academics is beginning to confirm the drawbacks and inconsistencies of paper currency. In the US alone cash accounts for just 14% of all transactions by value. “The argument is simple,” explains Jacob Davidson for the Everyday Money blog, “Cash is an untraceable means of exchange that enables (and encourages) a vast criminal economy.” Paper currency undermines its intentional value in society; however it is increasingly being used to oil the underground economy and the blurry black markets.

 “For individuals and organisations conducting illicit activities, cash is undoubtedly the preferred payment mechanism.” – President Sands, Harvard President (emeritus).

There is no other payment mechanism in the world that can simultaneously provide payment anonymity and be universally accepted. A cashless society would significantly impact on criminal resources, leaving them having to resort to banks and other means of electronic credit transfer and greatly increasing their chance of detection. Sand’s thesis argues that abolishing the high denomination notes – e.g. one hundred dollar and five hundred euro notes – would impose a significant effect on criminals, traffickers and launderers on making the transfer of money harder. The criminal would therefore have to increase the number of notes he uses. Fewer notes to carry, less weight on your Ryanair baggage allowance. More notes to carry thus increases the difficulty of transporting the cash. As Sand’s explains: “Crooks can easily tote $1 million in $100 bills in a single briefcase, for instance; the cash weighs just 22 lbs. But in $20 bills, that same $1 million would weigh 110 lbs. and fill four briefcases—too much for one courier to handle.” The only advance in correcting the use of cash in the Europe has been to abolish the use of the five hundred euro note nicknamed  ‘The Bin Laden’ for its associations with money laundering and financing of terrorism.

Professor Wright at the University of Missouri concluded research on the increasing correlation between the influence of cash, not only with major organised crime but with daily street violence. The conclusion comes from the distribution of United States Government welfare through a cashable check to a ‘preloaded’ debit card. Wright then compared areas that distributed the welfare by means of a cashable check or by electronic transfer to a debit card. They found that moving away from cash was strongly associated with a 10% drop in the total crime rate in that area.

Support for the elimination of cash, arose at the World Economic Forum last year when Professor Kenneth Rogoff of Economics at Harvard spoke of how a cashless environment would not only ‘thwart’ underground economies but improve global economic policy. Referring in particular to the post Financial Crisis of ’08’ but even in any case of a recession, a central bank (In this case the Federal Reserve) would lower interest rates encouraging consumer spending. However, If banks proceed to lower their rates below 0% meaning banks charge their customers, the bank’s clients are able to withdraw their funds and savings into hand held cash and curb the policy almost entirely. The effect is known as the Zero Lower Bound and is beginning to be considered as a serious limit to the effectiveness of monetary policy. Cash is beginning to limit the ability of central bank’s control over the economy.

Elimination of cash would inevitably make tax collecting easier for HMRC, but perhaps not for your gardener or electrician who may have to be that bit more scrupulous about filing their tax returns through their bank. It could transform the way HMRC collect VAT and instead take a tranche off each electronic payment in its place. In Greece where tax avoidance is on the up, the same method of retrieving tax from electronic payment would make it easier to collect the taxes.  Research by Moody’s analytics estimated that in 2015 higher card usage contributed an additional $296 billion to global consumption and consumer spending. This contributed to a 0.1% increase in global GDP during the same year.

The turnover of e-commerce was reported to be £110 billion in 2015 alone and is forecast over the next three years to improve to around £150 billion. In 2015, 82% of the UK’s online payments were made through alternative methods such as PayPal, Apple Pay, and Google Wallet. These progressive alternate methods are rolling out a new foundation of electronic payments, aside those of debit and credit cards.

It can be seen that in Sweden closely followed by their Scandinavian neighbors Denmark, Norway and Finland, a cashless society is emerging. Sweden is the closest developed country to achieving a cashless society. By 2020 the  Swedish government envisages an end to the use of paper and coin currency. Cash transactions in Sweden are already down to just 3% of the national economy, and buses and other public services are halting the distribution and acceptance of cash, whilst 3 out of 4 of Sweden’s largest banks are phasing out cash distribution in bank branches. 

Surprisingly similar operations have taken place in countries in Africa through the mobile phone based money transfer, financing and micro financing firm launched in March 2007- “M-Pesa”. In Swahili it translates to ‘Mobile Money’. The firm created by Vodafone dominates the world of currency in Eastern Africa most significantly in Kenya and Tanzania were these so called cashless communities combined to make a record 614 million M-Pesa transactions that were processed during December 2016. Since its reveal it has expanded through Eastern Africa to Afghanistan, South Africa, India and most recently in 2014 Romania and Albania. Poorer countries would also benefit and thrive off a new currency transfer system and the abolition of paper currency. This could enhance our economic relationships with our third world countries with a new universal digital payment transfer.

Any septic, however, will point that paper money and coins has existed since the Iron Age. In addition, research conducted by an economic body at the London School of Economics said how 10% of the British GDP is reliant on a black economy/market. However, much has changed: population levels, the increasing sophistication of criminals but most recently the development of digital technology. We are surrounded by a world of frauds, criminals, crooks, launderers and thieves and we must therefore adapt and move to more cryptic and sophisticated means of the securing our money. We should move towards a world that is able to reduce crime rates and enhance our development through technology and not have to live in a world where we take criminality for granted or as inevitable. A criminal world will never cease to exist, but if we channel the world’s currencies into one cashless medium we can advance technologically and also maintain the safety and security of our money.

 Interviewed by Jacob Davidson, writer for the Money Blog, Professor Wright finished off thesis by explaining: “You really only have to look around… My wife went to the post office to buy a stamp,” the professor recalls. “She had a $20 bill, and the woman looked back at her and said ‘don’t you have a credit card’?”

Hugh Dalrymple (Y11)