Does Moving To A Cashless Society, Also Mean Less Cash?

The direction we’re heading is clear. Cashless society.

The International Monetary Fund (IMF) in Washington has published a Working Paper on de-cashing the economies and the implications. If this is a discussion paper, then you can be sure that governments worldwide are considering this. And while they do this under the context of corruption and terrorism, the real reason is taxation. And that also means less cash for you.

Although some countries most likely will de-cash in a few years, going completely cashless should be phased in steps. The de-cashing process could build on the initial and largely uncontested steps, such as the phasing out of large denomination bills, the placement of ceilings on cash transactions, and the reporting of cash moves across the borders. Further steps could include creating economic incentives to reduce the use of cash in transactions, simplifying the opening and use of transferrable deposits, and further computerizing the financial system.

Here is a summary of the paragraphs, over 50 – so just read the headline key points from the paper (I don’t suppose you’ll read the full thing anyway):

  1. Cash is still used extensively across the world, in particular for small transactions.
  2. Cash remains popular for technical and symbolic reasons.
  3. The use of cash differs substantially depending on the denomination.
  4. Large denomination banknotes pose institutional risks.
  5. Cashless transactions have also gained importance across the world.
  6. The authorities of many countries have already taken the initial steps to limit cash in transactions.
  7. The private sector also seems to prefer to do away with cash.
  8. In monetary statistics, cash is synonymous to currency.
  9. Currency is part of money.
  10. Both currency and transferrable deposits are part of broad money and, as any money, has four basic functions.
  11. The amount of currency placed into circulation relative to deposits is determined by demand for currency.
  12. Electronic money is a special case of transferrable deposits and is classified as deposits rather than currency.
  13. Therefore, currency and transferable deposits are very similar and both meet the definition of broad money.
  14. The differences between currency and transferrable deposits are also remarkable.
  15. One way to look at the macroeconomic implications of de-cashing is through the prism of the System of National Accounts (SNA).
  16. In any economy, there is supply of resources and demand for resources or their use.
  17. The outcome of the saving and investment balance depends on the performance of the public and private sectors.
  18. The saving-investment balance of the public sector broadly reflects the government’s budget position.
  19. The current account is a crucial component of the balance of payments and the external balance.
  20. The saving-investment balance has an important impact on monetary accounts.
  21. Finally, the saving-investment balance of any country is closely linked to the level of the exchange rate of its currency.
  22. How does de-cashing enter into this simple framework?
  23. The initial macroeconomic impulse of de-cashing would originate from a drop in demand for currency.
  24. Therefore, the de-cashing incentives should be explicitly included in the demand for currency estimations
  25. De-cashing may help improve the transmission mechanism of monetary policy.
  26. After de-cashing, the banking system laden with fresh deposits would be able to boost lending.
  27. The only useful function of currency, which can be lost with de-cashing, is that demand for cash may help predict financial crises.
  28. Finally, de-cashing may have implications for central bank independence, mainly in emerging economics.
  29. De-cashing would have an impact on growth, which may be both positive and negative.
  30. At a more granular level, the GDP is produced and spent, and currency is used as a medium of exchange in this process.
  31. On the demand side, de-cashing would affect both private consumption and private investment.
  32. De-cashing will have an impact on the fiscal balance of the de-cashing country.
  33. In principle, de-cashing should improve tax collection by reducing tax evasion.
  34. The magnitude of possible improvements in tax collection is hard to estimate.
  35. With de-cashing, governments may reduce their interest expenditure because of de-cashing due to lower interest payments to central banks.
  36. De-cashing may reduce the government’s non-tax revenue through lower profit on currency issuances.
  37. Finally, de-cashing may lead to budgetary costs.
  38. Overall, fiscal implications of de-cashing seem ambiguous.
  39. The impact on de-cashing on most balance of payments flows most likely will be marginal
  40. The balance on the primary and secondary income accounts would be affected mainly through income transfers.
  41. Finally, de-cashing may reduce a very profitable impact on the balance of payments of certain countries from the international circulation of their national currency.
  42. De-cashing may lead to increased financial inclusiveness.
  43. De-cashing should help reduce illegal migration.
  44. De-cashing can help improve the environment.
  45. However, social implications of de-cashing can be substantial.
  46. De-cashing would remove a tacit means of social support.
  47. Finally, currency substitution can become quite possible.
  48. De-cashing by a shift towards transferrable deposits reflects a natural drive towards economic flexibility and growth.
  49. The private sector led de-cashing seems preferable to the public sector led de- cashing
  50. The macroeconomic impact of de-cashing would depend on the balance of its costs and benefits, but most likely will still be positive on a net basis.
  51. On the side of the costs, de-cashing may create temporary frictions in all sectors as the well-established cash procedures have to contract.
  52. Coordinated efforts on de-cashing could help enhance its positive effects and reduce potential costs.

Source: Alexei P Kireyev