My wife and I picked a bad time for our trip to India. In November 2016, right before we departed, India’s government had a brilliant idea: jumpstart a drive to push Indians away from the use of currency and toward the use of credit and debit cards, via the simple expedient of withdrawing the most commonly used currency notes from circulation.
From our standpoint as tourists, this was massively inconvenient. It was impossible to change dollars into rupees before our departure. Upon arriving at the airport, we headed straight to the official currency exchange, where after a ninety minute wait in line (at 3 a.m.) we were only able to get the equivalent of forty US dollars. That had to last us about ten days, until our guide was finally able to swing a black market deal to get us a decent amount of spending money. During that time, we frequently saw swarms of a hundred or more men, pushing and shoving, trying to get at an ATM machine that had just been restocked with cash.
What was an inconvenience for us was a catastrophe for millions of Indians, who worked hard, socked away money in the bank, and then couldn’t get at their own money because of the bureaucratic dictate. Some couldn’t earn money in the first place, because it was impossible for customers to get the cash to purchase their goods. And because most small sellers weren’t set up to take plastic, my wife and I were unable to support the local tourist industry by purchasing crafts and food items.
The Indian government wasn’t trying to be mean-spirited. It was trying, in a blunderbuss manner, to address real problems of corruption and tax evasion in India’s cash-saturated economy. A year and half later, analyses have shown the campaign to have been a failure—Indians rely on cash to complete transactions nearly as much today as they did in 2016.
In Scandinavia, by contrast, the move away from cash is not being driven by government at all, but by buyers and sellers in the marketplace. More and more businesses are simply refusing to accept cash, and insisting on some form of electronic payment instead. The large majority of consumers have no problem with this. One article predicts that by 2023, cash will be all but nonexistent in Sweden.
Here in the US, the trend against accepting cash is just beginning, but it’s encountering well-meaning resistance from progressive politicians. A bill was recently introduced in the DC City Council to require all businesses to accept physical cash as a form of payment.
Why? Because many poor, uneducated people rely exclusively on physical cash, and do not possess any kind of credit or debit card or even a bank account. A retailer who refuses to accept cash is effectively shutting these people out, reducing their freedom of choice.
Not making life more difficult than it already is for poor people is a worthy sentiment. But I’m not persuaded that forcing businesses to accept cash is a good idea. Businesses like to make profits. The only reason any business would decline to take cash is because it thinks it can increase profits that way—calculating that whatever sales they lose to people who only have cash are more than made up for by the reduced costs of not having to handle and protect piles of currency, and by the improved sales reporting that digital transactions provide. If not accepting cash is really that much more efficient—as most Swedish businesses and at least a few American businesses believe—then that efficiency will ultimately translate into lower prices for everyone, middle class and poor alike.
Requiring businesses to maintain a higher cost structure boils down to a scheme for forcing the middle class to subsidize the poor and uneducated. As such schemes go, it’s highly inefficient. Some subsidization, e.g. through food stamps, Medicaid, minimum wage laws, etc. is unfortunately necessary. Subsidization that adds costs and reduces efficiency for everyone across the board is not only unnecessary, it’s downright foolish.
A market-driven shift away from physical cash could have side benefits for the poor as well. Poor people are disproportionately the victims of violent crime. Reducing the amount of cash people carry in their pockets wouldn’t end violent robbery, but it would be a step in that direction. Making illegal drug transactions and other skullduggery less attractive by pushing more economic activity into traceable media, as India was trying to achieve, might also have beneficial effects for the poor, along with everyone else. The transaction costs that unbanked people endure in order to get their hands on cash—payday loans, check-cashing services, etc.—are far higher than those involved with a simple debit card.
This is not at all to say that we should ignore the poor altogether as we let free markets shift away from cash. We can and should take steps to make it easier for people without debit or credit cards to get them, and to get the benefits of banking services as well. There are some such programs in place already—a shift toward cashless retailing should lend them greater impetus. The marketplace itself is also taking up the challenge; Paypal this spring announced transaction-processing programs targeted at the unbanked. “We’re trying to bring more of those people into the digital economy,” their chief operating officer said. “For folks who don’t have bank accounts, for folks who don’t have credit and debit cards, we want to give them something so they’re not turning to prepaid cards, check cashiers and payday lenders.” We already have in place laws like the Community Reinvestment Act to encourage banks to promote economic development in their home areas—more regulation to encourage banks to reach out to the unbanked would be beneficial as well, especially if we remember (as India forgot) that carrots usually work better than sticks.