Cash has undoubtedly proven a curse, irrespective of its color, for those who have been queuing up at the bank counters following the recent currency demonetization in India. The unprecedented cash crunch has made many wonder if cashless is the better way to the future? It may indeed be but despite the proliferation of alternate payment mechanisms – plastic currency and electronic cash transfer – unprecedented amount of paper currency is floating around worldwide. Most people like cash, holding Dostoyevsky’s The House of the Dead words ‘Money is coined liberty.’
If going paperless was the best option, developed economies would have phased out paper currency several years ago. Instead, citizens across both developed and developing economies have yet to give up fascination for cash-in-hand. In contrast to per capita holding of $4,200 in the US, average Indian holds an equivalent of $171 in cash. Half of this cash remains unaccounted for, beyond the purview of regular tax reporting. No surprise, therefore, that even the US looses $500 billion annually by way of tax evasion despite a well-developed tax regime.
Since information on the ‘underground economy’ remains obscure, efforts to dig it out have not been successful either. Across the world as a percentage of GDP the underground economy continues to garner a significant share. If it is a low of 7.1 per cent in the US, it is as high as 17.9 per cent in Belgium. Worldwide, underground economy averages 14 percent of GDP. Even a country like Sweden, which has witnessed a dramatic drop in cash usage, has not been able to cut down on its underground economy from the present 15 per cent of its GDP. Underground economy has remained an unresolved global phenomenon.
Making a case for going cashless to address the malaise, Harvard University Professor Kenneth Rogoff argues that there is need to have a hard look at its implications before taking a plunge. While maintaining privacy of paper currency in small transactions is critical for a large population, phasing out large-denomination notes can pave the way towards a cashless society in future. For this reason, the European Central Bank has stopped printing the 500-euro note.
To reduce mountains of cash floating all around, many European countries including Germany and Belgium have proposed a cap on the size of retail cash payments. But they have learnt that tax evasion is a much larger issue since 25 percent or more of all cash never gets tendered in any tax swoop. Is going cashless the answer? It may indeed be unless it gets demonstrated at a scale. Rogoff wonders if smaller advanced economies like Japan, whose currency is not used internationally, would take a lead in going cashless! Regulatory challenges would need to be addressed upfront before pulling paper currency out from circulation, though.
While governments’ aim is to recover tax, people tend to avoid falling into the tax-trap. Since the general notion is that ‘big fish’ evade tax nets, even law-abiding citizens see opportunity in evading paying tax. Come to think of it, no one wants to live in a society where rules are rigidly enforced. At a socio-psychological level, however, a tax regime is incompatible with peoples’ perception of living in a truly democratic society. Therefore, the mounting challenge is to balance an individual’s right to privacy with society’s need to enforce its laws and regulations.
Rogoff is seized of the prevailing fascination for cash, and yet makes a convincing case for advanced economies to start phasing out paper currency. Though the world is still far from creating a cashless regime, the fact that cash fuels crime and corruption is at the core of the argument. It is, however, another matter that crime syndicates often circumvent the legal economy, and corruption has ways of reinventing itself because it predates paper currency.
Putting cashless system into operation poses formidable challenges. The Curse of Cash takes a hard look at multiple implications of phasing out currency notes. How can something as antiquated as paper currency really matter when the total value of all financial assets dwarfs the total value of cash? After all, paper currency is but a zero-interest rate bond. Therefore phasing out paper currency, or charging negative interest rates on cash, remains an emotionally charged issue. On top, will the central banks surrender their monopoly over cash supplies without missing out on their key role to deliver growth and financial stability?
Phasing out paper currency may seem the simplest approach to clearing the path for tax regime to account for every penny in circulation, but the task is to first bring informal economy under the purview of the formal system. Further, any plan to drastically scale back the use of cash needs to provide heavily subsidized, basic debit card accounts for low-income individuals belonging to the informal economy. Raising challenging questions, this book provides thoughtful insights on a subject that is likely to engage monetary policy arena for time to come.
The Curse of Cash
by Kenneth S. Rogoff
Princeton University Press, UK
Extent: 283. Price: US$17.49