Money is a tool, or a unit of account, that is used each and every day by people all across the world to make exchanging goods and services a simple task. Without money, goods and services would be exchanged through barter, the exchange of two similarly valued products.
Money, for the last few thousand years, has generally taken the form of currency, either coins or paper bills. Today, as coins and paper bills are being used less and less, “cash” as a medium of exchange is being targeted by economists and nations alike in a move to replace it with electronic money.
Unlike cash, credit and debit cards, along with online money transfers made using services like Venmo, Paypal or Snapcash, are able to be traced and provide no anonymity for buyers and sellers. While some argue that the elimination of cash is in an effort to stifle corruption, drug trafficking and even terrorism, others make the argument that the elimination of cash would allow for further government surveillance and taxation.
On Nov. 8, Indian Prime Minster Narendra Modi told his fellow countrymen in a televised speech that the Indian Rupee 500-1000 notes were no longer valid currency, and citizens would have mere hours to redeem them for bills of lesser value. This sudden evaporation of cash from a primarily cash based economy has wreaked havoc on day to day life in India. Prime Minster Modi told Indians that the elimination of those denominations of bills would greatly reduce the amount of corruption and illegal transactions going on in India’s underground economy.
The Indian cash elimination is predicted to severely impair the economy to the tune of a three percent loss in growth, as predicted by Ambit Capital. The elimination of the bills has led to many Indians being unable to conduct day to day transactions for necessities such as food or housing. Although the Indian government has said that the bills are exchangeable for lesser denomination notes until the end of the year, a severe shortage in small denomination bills has resulted in long lines at banks and a shortage in cash.
The Prime Minister also told citizens that they could deposit the 500-1000 Rupee notes into bank accounts for electronic transactions, but many Indians do not have bank accounts and primarily use cash. Modi’s “demonetization” of India will have lasting effects both positively and negatively.
A positive effect, for some, will be the increase in tax revenues. A sizable amount of everyday transactions in India are conducted “under the table” and are not taxed by the government. If these transactions are now conducted electronically, the Indian government will be able to tax them more effectively than a cash exchange. Conversely, the negative effect demonetization has already had on India’s economy may not be worth the positives of a cashless society.
Both American and European economists have begun to argue for the reduction of high denomination notes in their respective nations. Back in May, the European Central Bank, or ECB, decided to phase out the circulation of the 500 Euro note, a bill commonly associated with money laundering and criminal enterprises. The economist Larry Summers has argued that the U.S. should phase out the $100 bill, as it could not be used for anything other than crime, and allows for vast sums of money to be moved without the government’s knowledge. Summers defends his position by stating that $100 bills are really only used by the wealthy and criminals, so a demonetization of those bills would not affect most Americans. What Summers fails to point out is that the value of the dollar, or any currency for that matter, is dependent on the confidence that every day people put in the issuing government or entity.
Transitioning from a tangible currency to electronic currency could diminish the confidence people have in the currency itself. What is not known is whether the all-important confidence will be shaken by eliminating tangible currency. The move may drive more transactions into an underground economy.
With services like Venmo and Paypal being used more and more frequently for everyday transactions, a cashless society may seem like an easy switch. Losing a wallet or purse would not jeopardize untraceable cash held within, it would only necessitate a phone call to your credit or debit card provider and a replacement drivers license. While a cashless society may seem convenient and desirable from an efficiency standpoint, the long term consequence of eliminating a tried and true medium of exchange are far reaching. A cashless society means more taxes, more control and less freedom. In a world where the vast majority of our actions are recorded and immortalized on the internet, surrendering economic freedom would be a yet another causality in the war on freedoms