How Much Cash Do You Have in Your Wallet?

Exploring the thought of moving toward a less cash society in the wake of India’s 2016 demonetization

Supplying Economics on Demand

On Nov. 8, 2016, Indian Prime Minister Narenda Modi made an unexpected announcement for demonetization. People had about 50 days to turn in their 500 and 1000 rupee notes, representing approximately 86 percent of India’s currency, for new currency notes. Demonetization moved India towards a less cash-intensive society while also temporarily halting the economy.

Why demonetization? One goal was to promote modernization. Modi believed that businesses could become more competitive with electronic payments. Another goal was to keep people safer. Keeping cash in drawers makes homes more attractive targets for robbers. The most important goal, however, was to combat corruption and tax evasion.

90 percent of business transactions were made in cash at the time of the announcement, many of which were in the underground economy. Only 1 percent of the population paid taxes. The sudden demonetization and daily cash change limit of U.S. $60 worth of notes was meant to target criminals with lots of large denomination notes by allowing minimal time to transfer black money into alternative funds. The policy still caused common people to suffer greatly, however; during the 50 day period, many left work to stand in long lines to change out cash. Some even died from shock or suicide when they could not change all of their cash on time.

Was demonetization effective? Only about 1-2 percent of India’s black wealth was in cash before the November announcement. According to Arun Kumar, a Delhi-based economist, criminals and the corrupt find alternative ways to store their wealth. Modi’s goal of targeting corruption and black money was likely not as successful as he would have wished.

India’s move toward less cash has been discussed extensively in the U.S. as well, as it intensifies debates about the feasibility of moving toward a cashless society. A less cash world would reduce the role of the shadow economy, provide more flexibility for monetary policy, and reduce inequality. Scandinavia is already a less cash society success story, boasting one of the lowest rates of corruption and inequality worldwide with only around 5 percent cash in circulation.

In general, more advanced economies are using less paper money, yet the cash in circulation is not decreasing. Most of the total value of all U.S. dollars is stored in $100 bills. For every person in the U.S., there exist 34 $100 bills. Yet most of us hardly handle cash anymore, much less $100 bills. So where are they?

Most are in the global underground economy, which, according to Harvard economics professor Kenneth S. Rogoff, supports a laundry list of crimes, including tax evasion, bribery, terrorism, the drug trade, and human trafficking. Since transporting or hiding a suitcase of $100 bills is easier than doing the same with five suitcases of $20 bills, cash of smaller denominations can hinder underground activity.

Many law enforcement officials and central bankers, including former Federal Reserve Chairman Ben S. Bernanke ’75 and former University President and Treasury Secretary Lawrence H. Summers, support less cash economies. Replacing large denomination bills with electronic transactions would lead to increased transparency and government monitoring that might prevent black market activities. Though privacy concerns exist, smaller denomination cash notes will still allow for non-electronic transactions. Likewise, though some disapprove of increased government control over money, past decisions don’t necessarily predict the result of future decisions.

Less cash also adds an additional tool to the Fed’s toolbox: negative nominal interest rates. These may be effective for recovery from recessions and financial crises, though it is hard to be sure.

In India, the economy is recovering from its initial slowdown six months on, though it still has problems. Nevertheless, we cannot assess India’s success from solely short-term observations. It will take time before we can observe long-run effects. But even when we do have perspective, we must remember that India’s results cannot be directly related to potential effects in the U.S. Significant differences exist between the two countries.

Fear of change may be a significant obstacle in moving toward a less cash society, and in India protests followed Modi’s announcement. But long-term effects may pay off. We should encourage open-minded thinking and approach the implementation of a less cash society gradually, cautiously, and with ample planning.

Lydia Wang ’20, a Crimson business editor, lives in Kirkland House.

Tags

Recommended Articles