Professor Kenneth Rogoff’s Curse of Cash convincingly argues that we pay a high price for our commitment to cash: Over a trillion dollars of it is circulating outside of US banks, enough for every American to be holding $4,200. Eighty percent of US currency is in hundred dollar bills, yet few of us actually carry large bills around (except perhaps in the Bay Area, where the ATMs do dispense 100s…). So where is all this money? Rogoff’s careful evidence gathering points to the hands of criminals and tax evaders. Perhaps more importantly, the availability of cash makes it impossible for central banks to pursue negative interest rate policies—because we can just hoard our money as cash and have an effective zero interest rate.
What to do about this? Rogoff does not argue for a cashless economy, but rather a less cash economy. Eliminate large bills, particularly the $100 (interesting fact–$1mm in 100s weighs just 22 pounds), and then moving large amounts of value around illegally becomes much more difficult. Proxies for cash are not very good—they are illiquid, heavy, or easily detectable. And what about Bitcoin?—not as anonymous as people think. Think Rogoff’s plan is impossible? Well, India Prime Minister Modi just implemented a version of it, eliminating the 500 and 1,000 rupee notes.
As you might imagine, Rogoff’s proposal angers many privacy advocates and libertarians. His well written, well informed, and well argued book deserves more than its 2 stars on Amazon.
My critique is a bit different from the discontents on Amazon. I think Rogoff’s proposal offers a good opportunity to think through what consumer protection in payments systems might look like in a less-cash world—this is a world I think we are entering. Yet, Rogoff’s discussion shows a real lack of engagement in the payments and especially the privacy literature. For Rogoff’s proposal to be taken seriously, we need to revamp payments to address the problems of fees, cybersecurity, consumer protection, and other pathologies that electronic payments exacerbate.
The Problem of Fees
One immediately apparent problem is that as much as cash contributes to crime and tax evasion, electronic payments contribute to waste as well, in different ways. The least obvious is the cartel-like fees imposed by electronic payments providers. All consumers—including cash users—subsidize the cost of electronic payments, and the price tag is massive. In the case of credit cards, fees can be as high as 3.5% of the transaction. I know from practice that startups’ business models are sometimes shaped around the problem of such fees. Fees may even be responsible for the absence of a viable micropayment system for online content.
Fees represent a hidden tax that a less-cash society will pay more of, unless users are transitioned to payment alternatives that draw directly from their bank accounts. Rogoff seems to implicitly assume that consumers will chose that alternative, but it is not clear to me that consumers perceive of the fee difference between standard credit card accounts and use of debit or ACH-linked systems. For many consumers, especially more affluent ones, the obvious choice is to choose a credit card, pay the balance monthly, and enjoy the perks. Rogoff’s policy then means more free perks for the rich that are subsidized by poorer consumers.
Taking Cybercrime Seriously
Here’s a more obvious crime problem—while Rogoff is quick to observe that cash means that cashiers will skim, there is less attention paid to the kinds of fraud that electronic payments enable. Electronic payment creates new planes of attack for different actors who are not in proximity to the victims. A cashier will skim a few dollars a night, but can be fired. Cybercriminals will bust out for much larger sums from safe havens elsewhere in the world.
The Problem of Impulsive Spending and Improvidence
Consumers also spend more when they use electronic payments. And so a less cash society means that you’ll have…less money! Cash itself is an abstract representation of value, but digital cash is both an abstraction and immaterial. One doesn’t feel the “sting” of parting with electronic cash. In fact, there is even a company making a device to simulate parting with cash to deter frivolous spending.
The Problem of Cyberattack
Rogoff imagines threats to electronic payment as power outages and the like. That’s just the beginning. There are cybercriminals who are economically motivated, but then there are those who just want to create instability or make a political statement. We should expect attacks on payments to affect confidentiality, integrity, and availability of services, and these attacks will come both from economically-motivated actors, to nation states, to terrorists simply wanting to put a thumb in the eye of commerce. The worst attacks will not be power-outage-like events, but rather attacks on integrity that undermine trust in the payment system.
Moving From Regulation Z to E
The consumer protection landscape tilts in the move from credit cards to debit and ACH. Credit cards are wonderful because the defaults protect consumers from fraud almost absolutely. ACH and debit payments place far more risk of loss onto the consumer, theoretically, more risk than even cash presents. For instance, if a business swindles a cash-paying customer, that customer only loses the cash actually transferred. In a debit transaction, the risk of loss is theoretically unlimited unless it is noticed by the consumer within 60 days. Many scammers operate today and make millions by effectuating small, unnoticed charges against consumers’ electronic accounts.
The Illiberal State; Strong Arm Robbery
Much of Rogoff’s argument depends on other assumptions, ones that we might not accept so willingly anymore. We currently live in a society committed to small-l liberal values. We have generally honest government officials. What if that were to change? In societies plagued with corruption and the need to bribe officials, mobile payments become a way to extract more money from the individual than she would ordinarily carry. Such systems make it impossible to hide how much money one has from officials or in a strong-arm robbery.
Paying Fast and Slow
Time matters and Rogoff is wrong about the relative speed of payment in a cash versus electronic transaction. Rogoff cites a 2008 study showing that debit and cash transactions take the same amount of time. This is a central issue for retailers and large ones such as Wal-Mart know to the second what is holding up a line, because these seconds literally add up to millions of dollars in lost sales. Retailers mindful of time kept credit card transaction quick, but with the advent of chip transactions, cash clearly is the quickest method of payment. It is quite aggravating to wait for so many people charging small purchases nowadays.
Mobile might change these dynamics–not not anytime soon. Bluetooth basically does not work. To use mobile payments safely one should keep their phone locked. So when you add up the time of 1) unlocking the phone, 2) finding the payment app, 3) futzing with it, and 4) waiting for the network to approve the transaction, cash is going to be quicker. These transaction costs could be lowered, but the winner is going to be the platform-provided approaches (Apple or Android) and not competitive apps.
Privacy is a final area where Rogoff does not identify the literature or the issues involved. And this is too bad because electronic payments need not eliminate privacy. In fact, our current credit card system segments information such that it gives consumers some privacy: Merchants have problems identifying consumers because names are not unique and because some credit card networks prohibit retailers from using cardholder data for marketing. The credit card network is a kind of ISP and knows almost nothing about the transaction details. And the issuing and acquiring banks know how much was spent and where, but not the SKU-level data of purchases.
The problem is that almost all new electronic payments systems are designed to collect as much data as possible and to spread it around to everyone involved. This fact is hidden from the consumer, who might already falsely assume that there’s no privacy in credit transactions.
The privacy differential has real consequences for privacy that Rogoff never really contemplates or addresses. It ranges from customer profiling to the problem that you can never just buy a pack of gum without telling the retailer who you are. You indeed may have “nothing to hide” about your gum, but consider this—once the retailer identifies you, you have an “established business relationship” with that retailer. The retailer than has the legal and technical ability to send you spam, telemarketing calls, and even junk fax messages! This is why Jan Whittington and I characterized personal information transfers as “continuous” transactions—exchanges where payment doesn’t sever the link between the parties. Such continuous transactions have many more costs than the consumer can perceive.
Professor Rogoff’s book describes in detail how cash leads to enabling more crime, paying more taxes, and how it hobbles our government from implementing more aggressive monetary policy. But the problem is that the proposed remedy suffers from a series of pathologies that will increase costs to consumers in other ways, perhaps dramatically. So yes, there is a curse of cash, but there are dangerous and wasteful curses associated with electronic payment, particularly credit.
The critiques I write here are well established in the legal literature. Merely using the Google would have turned up the various problems explained here. And this makes me want to raise another point that is more general about academic economists. I have written elsewhere that economists’ disciplinarity is a serious problem, leading to scholarship out of touch with the realities of the very businesses that economists claim to study. I find surprisingly naive works by economists in privacy who seem immune to the idea that smart people exist outside the discipline and may have contemplated the same thoughts (often decades earlier). Making matters worse, the group agreement to observe disciplinary borders creates a kind of Dunning–Kruger effect, because peer review also misses relevant literature outside the discipline. Until academic economists look beyond the borders of their discipline, their work will always be a bit irrelevant, a bit out of step. And the industry will not correct these misperceptions because works such as these benefit banks’ policy goals.