Cash is Key to the Future—and Present—of Democratic Economies
Aug 31, 2023
A cashless world is unlikely to reduce crime, or raise more tax revenue for governments, but it would be less private, reduce payment choice and risk excluding people from the economy. Planet Money’s The Indicator podcast on NPR recently discussed the issues in an episode titled ‘A Cashless Cautionary Tale.’
Hosts Darian Woods and Wailin Wong open by examining India’s 2016 demonetisation, characterising it as: ‘a massive experiment to invalidate 86 percent of the country’s paper currency [in] an effort to raise more tax revenue.’ An abrupt announcement from the government invalidated the country’s two highest-denomination bills, forcing people to either spend their cash, exchange it for smaller bills, or pay it into a bank account. Given the short notice, and the wide range of reasons for people holding cash—such as lacking a bank account, or trying to build up private savings—this was not possible for everyone.
Because so many businesses and farms paid in cash, when they couldn’t access the cash they needed, some had to stop paying their workers, who then had to quit.
Darian Woods adds that the hope of increasing tax revenue was also not realised: ‘tax collection did not increase substantially that year.’ Shruti Rajagopalan, Senior Research Fellow at the Mercatus Center of George Mason University, adds that people’s desperation to change their notes had direct and indirect negative effects, which disproportionately fell on the poorest members of society.
Over 105 people died just waiting in line, trying to exchange their notes… Bank tellers, some of them collapsed from exhaustion. If you look at the data from the Centre for Monitoring the Indian Economy, they found a sharp decline in labour force participation, and about 15 million workers dropped out… The households that didn’t have bank accounts experienced somewhere between 2–7 percent lower consumption than households that did have accounts.
Looking beyond India to other parts of the world, the hosts speak to Jay Zagorsky, Associate Professor at Boston University’s Questrom School of Business, who explains that a cashless society has implications for budgeting, privacy, and economic inclusion.
Firstly, the tangibility of cash makes it easy to count and keep track of spending, with ‘cash stuffing’ enjoying renewed popularity with younger generations. The very act of spending with cash causes psychological ‘pain’ which is also known to discourage frivolous expenditure.
There’s something called ‘the pain of paying’. When you pull out your credit card and tap it, there’s no pain. You pay cash, there’s a little bit of instantaneous regret… You tend to spend less.
There are also privacy concerns around the use of cashless payments, given providers log each transaction and routinely sell user data to third parties. Accessing them at all can also prove problematic, with people on low incomes, or a history of financial problems, often unable to open accounts.
Some [people say] “I just don’t trust banks”. By avoiding banks, they get more privacy. Others [say] I don’t have enough personal ID required to open an account… And then some [say] I can’t open an account because I’ve had past banking problems.
Ultimately, cash equals choice for all, regardless of income, age, or social status. Maintaining it alongside cashless options ensures everyone has choice (or, if cashless payments are inaccessible or undesirable for them, they are at least able to interact freely with the economy). Zagorsky has major concerns around economic inclusion when businesses are permitted to exclude cash customers.
Signs that say ‘no cash accepted’ are a new kind of discrimination. They basically mean: ‘If you’re poor, stay out of my business.’