In a classic account of why prohibitions and other economic restrictions harmful to consumers arise and persist, economist Bruce Yandle noted that such restrictions are often promoted by a coalition between two groups. The first group are morally motivated do-gooders (“Baptists”) who think that the restrictions will promote the public interest. The second group are profit-motivated business people (“bootleggers”) who may adopt the language of the first group but whose aim is to profit by legally quashing potential competition. In Yandle’s example, the prohibition of liquor in the United States during the 1920s was loudly promoted by Baptists and others who considered liquor consumption sinful, and quietly backed by bootleggers whose profits from rum-running depended on the absence of legal liquor.
In today’s organized effort to restrict or prohibit the use of cash we can see the same kind of coalition. The metaphorical Baptists include leading economic advisors like Kenneth Rogoff (recently labeled by one Indian writer “the high priest of demonetisation”) and Larry Summers. They argue that banning cash would fight crime and helpfully give additional power to monetary policy-makers (by enabling negative nominal interest rates). I have criticized these arguments for currency prohibitionism before. Other presumably disinterested advocates advance the implausible claim that reducing the payment options of the world’s poor by banning cash will benefit the poor by promoting “financial inclusion.” I scrutinize this claim below.
The metaphorical bootleggers are the participating governments that expect to gain tax revenues by driving transactions into “digital” forms that are trackable by tax authorities, plus the participating payment processors — banks, credit card networks, mobile payment providers — that expect to gain transaction fees.
In the historical case of liquor prohibition the bootleggers operated behind the scenes, but in the present-day efforts at cash prohibition both parts of the coalition are openly working together under the umbrella of the Better Than Cash Alliance (hereafter BTCA). German journalist Norbert Häring has recently claimed on his blog that the BTCA was a prime mover behind India’s shock demonetization program. (See my previous commentary on that program here and here.) The evidence he provides for his claim is not wholly convincing. Even so the BTCA is a curious public-private undertaking worthy of critical examination by anyone who values freedom of choice in payment media or is skeptical of development programs that seek to impose the rule of experts on the world’s poor.
On its Twitter page, the BTCA describes itself as a “UN-based Alliance promoting the shift from cash to digital payments to reduce poverty and drive inclusive growth.” Promoting a shift sounds innocuous, but the Alliance’s literature is permeated by the idea that the goal of promoting the growth of digital payments justifies the means of forcibly restricting the use of cash. Created in 2012, the BTCA is currently funded by a mixed group of seven “resource partner” institutions. Some partners have reported giving $1.5 million per year. Two are tax-funded:
- United Nations Capital Development Fund
- US Agency for International Development.
Two are charitable offshoots of major IT and payment players:
- The Bill and Melinda Gates Foundation (fortune from Microsoft)
- Omidyar Network (fortune from eBay and PayPal).
Three are giant commercial payment processors:
- Citi (Citibank and its affiliates)
Mastercard was not an original founder but joined in 2013. The Ford Foundation was a founding member of the Alliance, but is not currently listed among its partners on the Alliance’s webpage.
The BCTA’s list of “members” includes 24 nation-states in the developing world, and 21 “International Organizations” including:
- Clinton Development Initiative
- European Bank for Reconstruction and Development
- Inter-American Development Bank
- International Fund for Agricultural Development
- United Nations Development Programme
- United Nations Population Fund
- United Nations Secretariat
- Universal Postal Union
The financial advantages of digitizing payments to tax-collecting governments are sometimes mentioned in BTCA reports or public relations materials, but I cannot find an instance where the interests of fee-collecting payment processors are mentioned.
The eagerness of the US government to suppress cash use in the developing world is puzzling on financial grounds, given that US currency notes are a very popular form of cash there. An estimated 55% of Federal Reserve Notes (by value) circulate abroad, mostly in the form of $100 bills. At the current level of FRN in circulation, this means an $827 billion interest-free loan to the US Treasury. Perhaps the Treasury is unaware of the efforts to quash the overseas use of cash by USAID, which operates as an independent agency within the foreign policy arena, although this seems unlikely. Or perhaps Häring’s hypothesis is right that USAID on this issue is captive to the interests of American payment firms or of the US surveillance establishment:
The business interests of the US-companies that dominate the global IT business and payment systems are an important reason for the zeal of the US-government in its push to reduce cash use worldwide, but it is not the only one and might not be the most important one. Another motive is surveillance power that goes with increased use of digital payment.
There is probably little point in urging Visa, Mastercard, and Citi to forego profits by severing their ties with efforts to limit the payment options of the world’s poor (although an organized boycott might get their attention). Likewise there is probably little point in telling governments to forego potential revenue by not forcing citizens to make their incomes more readily detectable.
There is some hope that well-meaning non-profits and government agencies are open to the argument that the restriction of payment options is not plausibly a means appropriate to the ends they seek. That is, suppressing cash will not plausibly make the poor wealthier or better off. The BTCA seems nowhere to consider this possibility. Transition to digital payments is there treated as a good thing without consideration of the costs or compulsion involved.
The BTCA’s report on “Accelerators to an Inclusive Digital Payments Ecosystem” stipulates that the goal is not just to improve digital payments, but to “promote cashless economies,” i.e. to eradicate the use of cash. After many non-coercive recommendations, it adds (#10): “Many countries are putting in place measures to encourage or require government entities, private businesses, and individuals to shift away from cash, sometimes in the form of policies that disincentivize cash usage.” A sidebar on the same page informs the reader of the success of the “Cash-less Nigeria” policy initiative in raising the volume of digital payments. A quick visit to the Central Bank of Nigeria’s website reveals that the policy consists of three restrictions on Nigerian citizens: it taxes cash withdrawals above a certain daily limit, outlaws unlicensed cash collection services, and prohibits banks from cashing large third-party checks.
The Omidyar Network’s website talks up the BTCA in these terms: “The organization focuses on shifting away from cash payments in order to improve the livelihoods of those in low-income areas who lack access to more efficient digital payments.” But improving livelihoods normally means adding attractive options, not pushing people away from what they currently consider the most advantageous practices. Welfare improves when “shifting away from cash payments” is a side effect of the public voluntarily adopting new payment options that they now prefer, but not when the shift is compulsory, the result of restricting cash so that people will do what the policy-maker prefers.
Basic economics tells us that voluntary trade is mutually beneficial. Government policies that compel or ban actions cannot be presumed beneficial. On the contrary, government presumably harms individuals when it reduces their range of options, including their range of payment options. A special argument (such as a “network externality” argument, discussed below) is needed to rationalize how blocking an individual’s desired trades can promote the individual citizen’s interest as the individual sees it. Thus measures to require private businesses and individuals to shift from using cash to using a currently less preferred payment option are presumably harmful, contrary to the stated BTCA goal of promoting “the transition from cash to digital payments in a way that improves lives.” It is hard to find any BTCA argument seriously attempting to rebut the presumption.
In a well-produced video, a variety of BTCA spokespersons try to articulate a rationale for the Alliance’s anti-cash agenda. Luis Ubiñas, then President of the Ford Foundation offers: “We know that electronic transfers work. When those payments go to banks, people save. It might only be fifty cents. It might only be a dollar. But they save. The people take those savings and build businesses.” But these are purely internal and not external effects. If making payments via banks really does better serve the ends of would-be savers and business-builders, informing them of this fact should persuade such people to open and use bank accounts. It provides no rationale for denying anyone the option of using cash. The same is true of UN Capital Development Fund’s Christine Roth’s claims that electronic payments “decrease the costs of the transactions” and are “a safer way for recipients to access money.”
There are two closer approaches in the video to an argument that government intervention can enhance welfare. The first is Ubiñas’s statement that “These kinds of transformations don’t happen easily. For these kind of [electronic] transfers to happen the backbone has to exist.” If “the backbone” here means a clearing and settlement system for deposit transfers, it already does exist in any country with checking accounts. But suppose enlargement of the infrastructure is warranted. It isn’t sufficient to point out that a fixed investment needs to be made in advance of doing a new business. Businesses do that every day. What would need to be explained is why private enterprise cannot sufficiently provide “the backbone.”
The second approach is the declaration by William Sheedy, Group President for the Americas of Visa Inc., that in the developing world “electronic payments are not migrating fast enough, because you are not seeing the right blend of government, NGO, and private industry partnership.” USAID administrator Rajiv Shah made a similar assertion in 2012 remarks at the Ford Foundation: “It took the credit card industry fifty years to gain traction in the United States. But this slow rate of adoption teaches us that collective action is necessary to drive transformational change.” These statements unfortunately provide no reason for considering faster migration better given the costs of acceleration (on what basis does Shah know that the experienced rate of adoption was too slow?), nor for judging in which direction the “right blend” of private and collective action lies. Transformation change is not ipso facto worth the cost.
In an op-ed in the HuffPost, BTCA’s managing director Ruth Goodwin-Groen defended the push to restrict the use of cash as a tax-enhancer:
In 2015, a global agreement for financing the Sustainable Development Goals recognized domestic resource mobilization as essential to inclusive growth. This makes regular tax revenue more vital than ever to the future of many low-income countries. … There is growing evidence that enabling people and businesses to pay taxes digitally can increase government revenue and produce a wide range of other benefits for society.
Increasing the size of real resource transfers from the private citizens to the government, needless to say, does not presumptively provide a net benefit to society.
I can imagine a stronger argument for accelerating the digitalization of payments. It would propose that the practice of paying in cash rather than by bank transfer is a kind of prisoner’s dilemma or coordination failure due to a network externality: each individual sticks with cash so long as his trading partners do, and vice-versa. Cash is then the inferior of two alternative equilibria, to which the economy has been “locked in” by historical accident. Intervention can establish the digital-payments equilibrium that everyone agrees is better but has been blocked by the need for everyone to switch together. Such tragedies are rare in practice, however, and the argument seems hard to make in the case of digitizing payments. In every country where banks offer checking accounts, non-cash payments have established a foothold. At the margin of transactions between unbanked and banked individuals, payments can migrate from cash to digital transfer, and will migrate once digital payments become more beneficial or less costly than at present, without it requiring any individuals farther from the margin to switch. Making digital payments less costly is an entrepreneurial challenge, not a collective action problem. The case for compelling everyone to give up cash is an empty box.
To conclude, I remain puzzled as to what argument or evidence convinces presumably well-meaning players like the Gates Foundation and the Omidyar Network to embrace the implausible proposition that suppression of cash will improve the lot of the cash-using poor. Herding people into a system they find unattractive presumably makes them worse off and not better off as they see things. If anyone can point me toward a serious attempt to rebut the presumption that suppressing cash will reduce their welfare, I would be much obliged.