Cash is no longer part of the “real” economy

There is no connection between cash and the real economy any more. We are in the era of “rump cash”.

MasterCard CEO Ajay Banga made a (to my mind) quite reasonable observation about the role of cash in society and why MasterCard is focussing in on getting rid of it.

“Cash is the dirtiest secret of the modern economy. It belongs to a 200-year-old economy. It’s being allowed to play a role because it suits vested interests,”

[From Why Killing Cash is Key to MasterCard’s Competitive Strategy]

I agree. But what are these vested interests? Criminals are one group. Tax evaders another. An old acquaintance of mine, who used to work for the police by the way, happened to mention to me that he was having some work done on his driveway. The contractors had quoted him two grand for the work but offered him a £400 discount for cash. When I bumped into him the town centre, he had just been to the bank and had £1,600 on him when we got talking. I said that I thought he should be prosecuted for conspiracy to defraud Her Majesty’s Revenue and Customs (HMRC) but he said that he shouldn’t, because he had no knowledge of whether the contractors would declare the income or not and that the fact that the payment was in cash did not constitute prima facie evidence of their intention to evade tax. I replied with the time-honoured legal phrase “pull the other one it’s got bells on”.

It’s time to get tough on the stuff. We need an actual government policy on getting rid of cash and we need to educate stakeholders as to why this is a good idea for all of them.

“We believe that government regulation will be required to break down the barriers. Under this scenario, governments and central banks would acknowledge the cost of cash to the economy and seek to actively reap the benefits of a cashless society.”

[From Cash Displacement: The Final Threshold – Financial Institutions Featured Article – A.T. Kearney]

The cost to the economy is gigantic. For those of us in the middle, the costs are disproportionate. We are taxed to the hilt to make up for the fact that a quarter of the economy is underground and there is a tax gap heading toward £40 billion per annum. Those builders getting paid in cash? I’m paying taxes so that their children can go to school etc etc.

“At least $8 trillion is spent in cash every year in black and informal economies globally – cash that is untaxed and untraceable.”

[From Public-Private Dialogue on Cost of Cash Progresses in D.C. | MasterCard Social Media Newsroom]

So given that the long-term trends are so clear, why are we pandering to the cash lobby? It’s not as if cash has any significant or strategic role in the future of transactions, commerce and society.

“Thirty years from now, if recent trends continue, cash could fall to just 10% of U.S. retail purchases.”

[From The End of Cash? – Barrons.com]

I saw in The Times last week (“Notes and coins will be overtaken by cashless payments within weeks”) that cash will shortly account for less than half of the retail purchases in the UK. Never mind peak cash, we heading towards “rump cash”.

Rump cash? Yes. I’d like to put forward the definition that rump cash is the cash that remains in use after the point at which cash ceases to be relevant to government policy because banknotes and coins are — to Ajay’s point —  essentially unrelated to the real economy. In which case, the evidence seems to be that we are already there.

“For this reason, as a modeling approximation, it seems wiser to think of cash holdings as disconnected from nominal (legal) GDP, than to found control of nominal GDP on control of cash balances not used for most of GDP.”

[From Monetarism]

This hadn’t occurred to me, since I don’t really know anything about economics or monetarism (although I do know a bit about GDP because of Diane Coyle’s excellent book on the topic). But it’s surely correct. We need a different mental model for thinking about cash. Not as a money, but as something else.  A statement, possibly. In that Times article, Kevin Jenkins of Visa is quoted saying that a decade from now paying for something in cash will be seen as “peculiar”. I’d go further. A generation from now, using cash in the supermarket will be like smoking — legal but frowned upon in genteel society — or drunk driving — illegal, but eradicated by changing social attitudes as much as law enforcement.

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