(pictured above: the $100.000 bill, still the largest legal tender of the US – but one that can only be used for transactions between Federal Reserve Banks)


Self-proclaimed objectivist philosopher Ayn Rand once wrote that the “trade by means of money is the code of men of good will”. When putting these words in the mouth of her character Francisco d’Anconia (if for anything at all, I recommend reading Atlas Shrugged just for Francisco’s tirade about honor and money), Rand was actually reiterating a tried and tested idea of mainstream economics: that more than anything, money is a convention – a guarantee of reciprocated lawfulness in the transactions that occur between people.

What Rand made clear in building her character’s discourse was that, in the end, money doesn’t give one a “code of values” and nor will it provide one with “a purpose”. Money  (i.e. cash) is to be seen as a recompense to good men and women that strive to attain it by using their abilities in a lawful manner. But what of those that use their abilities in unlawful ways?

Wrongdoers know that they’re doing something illegal and will go to great lengths to not be caught by authorities. This requires anonymity and the ability to not leave any traces of breaking the law – not only with respect to the activities these people might do (clues for the police), but also in how they attain the benefits of their actions (making sure the money they get can’t be traced).It’s for this reason that criminals almost exclusively require cash to further their affairs – at least when the amounts involved aren’t that large. And yet the numbers point to something Rand couldn’t have foreseen in her days: the fact that we’re in the middle of a paradigm shift, one by which the concept of money has started to become more and more something akin to a digital record, rather than a physical bill or coin.

It’s for this reason that criminals almost exclusively require cash to further their affairs – at least when the amounts involved aren’t that large. And yet the numbers point to something Rand couldn’t have foreseen in her days: the fact that we’re in the middle of a paradigm shift, one by which the concept of money has started to become more and more something akin to a digital record, rather than a physical bill or coin.

chart_us-evolutions

Given the context of modern finance and banking where we see certain trends that might point to a steady decline in cash usage in favour of money in digital form (i.e. debit and credit cards, to name a few), where the former is untraceable and the latter linked to one’s identity, a question arises that maybe not all of us have pondered: does taking away physical money also make crime more unlikely?

Cash is becoming a limited resource, so criminals might covet it more and more

Cash money is popular because it’s palpable: you can see, feel and even smell it, and that gives people a more reassuring feeling than does handing it in digital form.

But using a card is also nice. It’s easy to keep on you at all times (as compared to thick wallets full of cash), it’s pretty much as universal as a means of payment as is paper money – at least in developed nations, it can’t be (ideally) used by people who either steal it from you or find ones that have been lost, and it enables commerce to go digital – as more and more of us are going exclusively online for certain purchases.

chart_spending-category

Other than facilitating easy payments, tech has also enabled millions of people from all over the world to access banking services, something they couldn’t have hoped for without the advent of the internet and cards. What’s more, cash sometimes carries hidden costs that the average consumer can’t perceive with ease. Research by the Institute for Business in the Global Context has shown that poor Americans who lack access to formal banking carry larger amounts of cash money and also pay the highest fees for cash transactions. What’s more, unbanked individuals are four times more likely to pay more to get access to their own money.

On the opposite side of the spectrum, well-off Americans are reported as carrying far less cash money, traveling less to access cash money and paying little fees per transaction. All this goes to say that, as the study authors put it, “the cost of cash is higher for the poor and the unbanked”.

chart_household-income

And yet research points to the fact that almost one in 10 US households do not use a bank at all. People stay unbanked typically for the same reasons. These include poor credit histories, outstanding payments not fulfilled, poor understanding of how banks work with customers, language barriers (for first generation immigrants), lack of ID so as to be able to open a bank account, or just so little income that banking becomes more of a cost than a benefit.

It’s believed that due to all of these factors, money gets used in such an inefficient way by the unbanked (and thus, not so well-off) members of society, that it’s creating a self-referencing problem: the less money you have, the less chances you have of being able to use that money with ease or without losses, the smaller your odds of being able to get out of poverty or access benefits you might be missing out on, and hence the more prone you (and your community) are of being witness to crimes such as burglary.

We’re already seeing some pack leaders when it comes to removing physical cash from the market

And yet the trend of digital money continues to grow. Estimates state that 2016 will be the first year ever when plastic will become more popular as a means for consumers to pay for what they buy. Worldwide, the volume of money being used for transactions comes in at about $22.6 trillion – with plastic (i.e. debit and credit cards) at a cool $23.2 trillion.

chart_the-rise-of-paper-and-plastic

It must be mentioned that in some situations this preference for plastic can be explained, at least in part, by government policies that have promoted plastic payment over the past decade (as it’s a lot easier to keep track of taxes like this, thus avoiding some of the hassles of doing business with paper money). South Korea is such an example, where the government has pushed hard for people to use cards more just to avoid the cost of moving money around and maintaining a steady supply. But I’ll get to that in a minute.

The truth of the matter is that technology, more than anything else, has had the biggest impact on how people choose to pay for what they want to get. The internet and its derivative technologies have made the act of buying, selling and transferring money something that one can do from the comfort of one’s couch. It’s really no surprise that cash is becoming ever more unpopular.

But despite the recently found equilibrium between paper and plastic in terms of just how much volume they generate, about 80% of all transactions worldwide are still conducted in cash, with the US averaging out at about 40%. So while more money is being moved around by means other than cash, it’s still the case that cash gets used most of the time.

chart_payment-instrument

This means that not all countries of today have the same predisposition to shifting to a cashless model. A Mastercard study that looked at nation-readiness to go cashless found four major pre-requisites:

  1. Access to financial services
  2. Macroeconomic and cultural factors
  3. Merchant sale and competition
  4. Technology and infrastructure

… so that not all nations today might have the same head start in their renouncing physical money. Even so, there are cases that stand out.

Canada is one. It has stopped printing currency in 2013, and this has happened for a couple of reasons. One is that Canada isn’t encountering a demand for new currency to be issued. Of course, the plastic form of their dollar also makes for a longer life for the money already out there. But the real reason why they’re doing this is because 56% of the people in Canada prefer using plastic to paper (so to speak, I’m talking about cards). Compared to the global average of 40%, Canadians use their cards in roughly 70% of the transactions they complete.

South Korea is also an addition to the cashless club; a country where government policies over the past years have encouraged people to use means alternative to paying with cash money (such as preferential VAT taxes for those who pay with cards). Between 2002 and 2006 alone the amount of cash available in the Korean market has dropped from 40% to 25%.

And maybe surprisingly, it isn’t only well-developed economies that are going cashless. Newly formed Somaliland is also reported to be one of the most cashless countries in the world right now, and that’s because of an informal banking system built around mobile phones that has changed the way they use money.

But out of all of the nations currently undergoing the shift to digital money, there’s one that keeps standing out time and time again – Sweden. As I myself found out whilst vacationing in Stockholm, Swedes use plastic to pay for almost anything. You can’t even pay cash for public transportation in some situations.

The numbers point to the fact that just 2% or 3% of all money exchanges in Sweden last year were completed via cash. Visa say that the average Swede pays more than three times more often with means other than cash money.

table_swedish-money

What’s more, 56% of Swedish banks nowadays no longer keep cash – or take cash deposits; and in rural areas they don’t even run ATMs anymore. Circulation of their national currency, the Swedish krona, has fallen since 2009 by 24% and it looks set to keep going down.

chart_swedish-krona

There are also direct incentives for banks to stop the flow of paper money and instead gently push the population towards a digital model altogether. Research shows that no specific influence group (so neither the general population nor government) has clear agendas on the issue of going cashless – and that leaves banks with the “greatest potential to set the agenda for changing cash habits”.

So how has this shift affected Sweden? Well, the number of robberies involving banks has gone from 110 in 2008 to just 16 in 2011 alone. And that isn’t because Sweden has made any changes to how it ensures bank security, but because Swedish banks have stopped stockpiling money in their vaults. But the picture isn’t completely utopian, as reports say that cases of electronic fraud have grown as the use of cash has gone down in Sweden.

Given such evolutions, can we really say that taking away cash also makes crime diminish?

Cash shortages are making criminals hoard all the money they can

Ironically or not, the reasons why money has been so appealing to societies for centuries and millennia also makes it very attractive to criminals. Fiat money is something that the average individual doesn’t need to guarantee for – since it’s the government that does that – and so it’s usable the moment it gets in your hands. Moreover, money (as opposed to things like gems or gold) is very easily exchangeable by design, it can be broken up into smaller units and once it’s out of your hands, it becomes difficult for someone to trace it back to you – something criminals love and, indeed, rely on.

And while it might seem silly, you have to keep in mind that cash actually takes up space – it has to be stored and guarded just as you would gold or jewelry. It’s also dangerous to move it around – the US retail sector takes a yearly $40 billion hit from cash theft alone.

But that’s not the empty part of the glass by a long way, at least for consumers. The IBGC study found that personal cash theft is “a relatively minor problem” for Americans, who lose a little under $500 million this way on an annual basis – but pay up to $8 billion in bank fees each year, just from using ATM machines – something to which adults and senior citizens are more prone to do than are youngsters.

chart_age-group

What’s more, studies have estimated that for every US citizen there’s about $2950 in cash circulating around, but 85% of that money cannot be pinpointed at any given time. So where is it?

With a growing gap between the amount of money used in commerce and the amount left aside, a few thoughts become plausible: either people are losing their confidence in the banking system and have started hoarding their money (which, say economists, is a bad bet since they’d lose more of it in the long run), or – say some other economists – people have started to wise up to how the state taxes the way they move money around and have started hiding their activities. Which is to say that they’re avoiding taxes and creating a ‘shadow economy’.

And yet, taking everything into account, it seems that a more plausible explanation would be that US dollars aren’t being hoarded by people that for whatever reason don’t want it banked, but more by criminals and criminal organizations that don’t have the option of using bank accounts.

It’s impossible to say for sure, but research points to the size of the underground economy of the US on the order of 7–10% of GDP. Just how much of that is used for crime is a matter of speculation, but this still begs the question: would taking some of the cash away also make the shadow economy drop – and more importantly, would that make some crime rates drop as well?

Criminal activity is also going cashless

One of the most prevalent ways people all around us commit money related crimes is tax evasion – and it happens every time you give someone money for goods or services that don’t show up on the state’s radar. In effect, when parents pay their kids allowances for doing chores that would otherwise have some economic value, they’re making the GDP go down, even if by an incredibly small amount.

But the effects of the shadow economy are much more sizeable than all lemonade stands, and this problem is by no means endemic to the US. If not by outlawing money outright to counter criminal activity, countries all around the world have started removing banknotes of disproportionately high value from their currency systems. This trend has since caused the demise of the most valuable bill in the world, the Singapore S$10.000.

chart_transaction-amount

It’s common knowledge that criminals hoard big banknotes because of all their advantages to smaller ones. And in some instances, it’s been documented how criminals are willing to pay more than the bill’s value, just for the benefit of having to store large amounts of cash in very little space. People that aren’t doing anything illegal tend to do the opposite thing – paying in cash for small transactions, and shifting to alternative payment methods as the bill goes up.

And even though going digital would bring a great improvement in the way nations all around the world manage their cash supplies (as it costs money in the first place to actually print, issue and maintain money in circulation), there are growing concerns as to whether the transitioning to digital would be more a curse than a blessing because of the loss of anonymity behind going digital.

Why? Firstly because using plastic makes certain behaviors associated with money a thing of the past as well. Take borrowing money – debit cards make it a lot more difficult. They also make spending less sensory, as you never actually feel the money leaving your person; and this, in turn, can cause heavy overdraft penalties which make the experience of using debit or credit worse than just having an empty wallet.

Secondly, cash is still useful in certain situations – namely those when the digital infrastructure which enables people to use cards are down. Speaking for Science Nordic, Royal Swedish Institute of Technology researcher Niklas Arvidsson reiterates something that visionaries mostly miss: “people would need to be able to pay even during power cuts, or when electronic systems crashed or were hacked. Currently, cash payment is the only system that never fails…”.

Even so, advancing tech doesn’t necessarily take away the anonymity given by paper money. Take stored-value cards – cards that act like normal issue debit cards, but are destined for single use – and aren’t traceable. That might sound very tempting if you’re looking to get hold of something which falls outside the law.

Moreover, some people don’t think that going fully digital would decrease crime at all – at least when it comes to how much money criminals steal. Back in 2012, lawyer and money laundering expert Ellen Zimiles was quoted as saying that, if anything, going cashless will only increase financial crime, given how you can move huge amounts of money over the internet in practically no time at all, and it’s more technically challenging to catch someone in the act.

With all of this back and forth in attempting to get a holistic perspective on whether crime rates decline or not, along with a cut in cash circulation, it’s worth going through a particular example.

Practical test: a look at crime rates after paper money is taken away

The ramifications of this issue make it very difficult to study with a reliable methodology so as to be fully credible. And yet some have attempted this exact feat. A study that looked at welfare data from Missouri between 1990 to 2011 found that as benefits shifted form from paper checks to debit cards, crime rates did go down by 9.8%. Lower numbers of arrests stand to indicate that the police didn’t just start enforcing the law harder all of the sudden and that the shift from paper to plastic had the biggest impact on the lawfulness of the community.

chart_results

Disputable as the results might be, the researchers measured relative relationships between crime and cash access and found that indeed, the overall crime trend was going down after the program implementation – albeit with a few hiccups along the way.

table_results-and-detail

Contextual test (and an endnote): is there any real link between cash and crime?

It’s too close to call for sure, but there seems to be definitive proof that reducing the amount of cash moving freely in the economy does reduce certain types of crimes which are necessarily physical – such as assault or burglary. But it also seems that in the absence of cash, internet fraud, and other such crimes start to go up.

So it’s worth mentioning that after taking from the previously mentioned Mastercard Advisors study that measured nations’ progress towards going cashless (in Advanced, Tipping point, Transitioning, and Inception), and adding complementary levels of information, I found that ultimately it’s a combination of factors that make crime decrease after a nation starts renouncing paper money.

chart_overall

Internet crimes, while more prevalent in Advanced countries, are overall more severe in nations that aren’t that ready to go cashless. Conversely, crime rates were indeed the lowest in nations that had low cash flows in their currency system.

In very few words, it seems that the more ready a nation is to go cashless, the less cash it does use, the less crime it encounters – and while this might bring about internet crime, it seems that it’s also more manageable than in cases where there’s still a preference for cash.

table_preconditions

This all goes to show that it’s not just our preference for money that is changing along with technology. 2016 might see the shift in favor of plastic over paper, but cash money is in many ways engraved into how we function as a society. It’s true that as tech develops more and more and plastic becomes ever cheaper and reliable, people will slowly renounce paper money – or at least use it in fewer instances. We’re already seeing this happen today, as paper money gets used primarily for small transactions. And yet the implications of this shift on crime are not yet fully understood.

While taking away cash is proven to have a sizeable effect on crime rates that are physical, who’s to know how the void in criminal activity will be filled once technology starts becoming easily accessible in places that have long-standing criminal cultures?

Will the cartels of tomorrow disappear if we outlaw money? It’s hard to say for sure. Will they take to hacking? Maybe not – but they’d have to enlist some good IT specialists if they’d plan on making any money. As Francisco d’Anconia said in the ending parts of his monolog, “money will not serve the mind that cannot match it”.

My next post will be either about what airplanes are the most dangerous, which sex skips taxes more or the best-selling video game platforms of all time. If you feel like I’ve missed out on something about the current post, you can tweet me at alexgabriel_i.

 



Sources:

Cash Continues to Play a Key Role in Consumer Spending: Evidence from the Diary of Consumer Payment Choice By: Barbara Bennett, Douglas Conover, Shaun O’Brien, and Ross Advincula April 2014

Feige, Edgar L. 2012a. “The Myth of the “Cashless Society”: How much of America’s currency is overseas?” University Library of Munich, MPRA paper 42169.

THE COST OF CASH IN THE UNITED STATES – BHASKAR CHAKRAVORTI & BENJAMIN D. MAZZOTTA – THE INSTITUTE FOR BUSINESS IN THE GLOBAL CONTEXT

Measuring progress toward a cashless society – Author: Hugh Thomas; Contributors: Amit Jain, Michael Angus – Exclusive insights from MasterCard Advisors

LESS CASH, LESS CRIME: EVIDENCE FROM THE ELECTRONIC BENEFIT TRANSFER PROGRAM – Richard Wright Erdal Tekin Volkan Topalli Chandler McClellan Timothy Dickinson Richard Rosenfeld – http://www.nber.org/papers/w19996 – NATIONAL BUREAU OF ECONOMIC RESEARCH

Kiss your cash goodbye? This year is set to be a turning point for credit – http://www.marketwatch.com/story/this-year-will-be-a-turning-point-for-cash-2016-09-26?link=sfmw_fb

Here’s what would happen if America totally abandoned cash – http://www.marketwatch.com/story/how-the-us-and-china-could-benefit-from-going-cashless-2016-06-03

In-Depth: Reaching the Unbanked and Underbanked – https://www.stlouisfed.org/Publications/Central-Banker/Winter-2010/Reaching-the-Unbanked-and-Underbanked

Why we need less cash in the economy – https://www.theguardian.com/commentisfree/2015/sep/17/less-cash-shadow-economy-circulation

Would a Cashless Society Have Less Crime? – http://www.slate.com/articles/business/cashless_society/2012/03/living_without_cash_would_a_cash_free_world_have_lower_crime_rates_.html

New estimates of U.S. currency abroad, the domestic money supply and the unreported Economy – https://mpra.ub.uni-muenchen.de/34778/

Investopedia – Stored-Value Card – http://www.investopedia.com/terms/s/stored-value-card.asp

Less coin to purloin – http://www.economist.com/news/finance-and-economics/21600149-cashless-economy-leads-safer-society-less-coin-purloin

The Countries That Would Profit Most from a Cashless World – https://hbr.org/2016/05/the-countries-that-would-profit-most-from-a-cashless-world?utm_campaign=HBR&utm_source=facebook&utm_medium=social

Cash Is a Wasteful System, but Hard to Replace – http://www.nytimes.com/roomfordebate/2013/12/09/the-end-of-cash/cash-is-a-wasteful-system-but-hard-to-replace

Cash talk – http://www.economist.com/news/finance-and-economics/21693976-getting-rid-big-banknotes-not-easy-it-sounds-cash-talk

Sweden leads the race to become cashless society – https://www.theguardian.com/business/2016/jun/04/sweden-cashless-society-cards-phone-apps-leading-europe

Top 5 Cashless Countries – http://www.totalpayments.org/2013/07/08/top-5-cashless-countries/

The cashless society is closer than you think – http://sciencenordic.com/cashless-society-closer-you-think

INFOGRAPHIC: CASH VS. CARD – http://www.consumercredit.com/financial-education/infographics/infographic-cash-vs-card.aspx

Using and paying with debit cards – https://www.moneyadviceservice.org.uk/en/articles/debit-cards

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