The Australian Government has been looking to demonetise Australia’s $100 notes. This follows a report by financial services analysts and Investment bank, UBS who describe themselves as, “…providing financial advice and solutions to wealthy, institutional and corporate clients worldwide.”
Among the reasons given is that it will reduce crime, welfare fraud, increase tax revenue and bank deposits and cites for its argument the increasing use of digital payment and credit systems leading to a reduced usage of cash.
Unsurprisingly this appears to be a good for the banks solution to a rather non-existent problem promoted by a private investment bank to a government.
As an Australian, I can say $100 notes, of which there are some 300,000,000 in circulation are rarely seen while $20’s are seen daily. Even though there’s almost twice as many $100 notes than $20 notes in circulation this kind of makes sense. Not many ATM’s issue them and being the largest denomination, you never get them in change. The RBA apparently has lost track of a great deal of these $100 notes and so presumes they must be stuffed under the mattresses of criminals, terrorists and money launders and good people alike.
A $30B stuffed-under-the-mattress dark cash economy argument doesn’t really make much sense given that even criminals have to exchange. What I’ve not seen in the arguments is how much is being held in foreign and corporate cash reserves and which I imagine is a percent far greater than would fit in any number of Aussie mattresses.
Furthermore, why is the perfectly naturally and legitimate use money as a storage of value, being attacked at all?
Is There a Problem?
The problem is sold as dark money being hoarded and or used to fund criminal activity and even terrorism. The more likely problem is that banks can’t charge fees on peer to peer cash transactions they don’t see. Neither can governments collect tax for the same reason.
As to the the first problem, nations have always issued cash, which makes them entirely complicit in fostering the criminal activities that it enables. Knowing this, they should really either, shut up about the dark economies and stop persecuting the criminals they have fostered, or actually do something about it. Now that the world has traceable electronic transfer technologies, demonetising is certainly doing something about it, but at what costs, in whose interests and is there an alternative?
Unfree Trade
Any trade association will loudly profess that free trade is a principle paramount to healthy economies. And so true it is. But in their sense, they mean the fewer encumbrances to trade, such as import tariffs and government intervention, the wider their wealth accumulation channels can be.
However the very principle of free trade has its foundation in the physical exchange of value between peers. Any attack upon that, such as demonetisation of cash and the enforcement of fee charging third party transactors, is a direct attack upon the free trade of an entire people.
How’s India Going?
India is most definitely a test case here and I dare say most other countries will be following in their foot steps regardless of the huge suffering and deaths it continues to cause the Indian people.
India has been sold and totally swallowed the dark money argument even though 80~90% of their daily domestic exchange is necessarily in cash. The plan was to flush out cash hoardings, which are a manifestation of money as storage value. But this has predictably resulted in destroying the inseparable function of money as value exchange which the vast majority of good Indians require in order to live.
The only winners here are the banks who have been searching for years ways to force the vast Indian population into the fee charging banking system. Even though the government can write off trillions in cash liabilities, they’ve totally fucked the economy and lives of the entire nation.
The end goal India desires is a western style well banked economy in which everyone has a bank account and conducts their non-trivial spending online or with chip-and-pin cards.
I’ll be in India next month, probably a little too soon, but I’ll be sure to pack my VISA card and swipe it in every street beggars’ chip-n-pin reader that I see! Oh wait, it was reported that after Modi’s attack on cash, all Delhi’s street beggars ‘disappeared’. I guess they must have made a run on chip-n-pin readers….or died trying. They were replaced of course by throngs of new beggars which included politicians, foreign tourists and the general population who can’t access their money either.
As bold and dubiously desirable as that plan might be, Indian society is socially and technologically structured as a P2P economy. It simply doesn’t have the social and technological infrastructure to replace cash overnight or even over years.
The point is, abstracting value into centralised accounting and aggregated spending models (e.g. banks and supermarkets) and relying on human-non-readable active technology (electronics) is a complete denial of the requirement and simplicity of physical cash exchange in a physical world.
Can’t See it = Can’t Tax it
The dark money problem India and other governments are trying to address is that you really never know how much cash is in active circulation, how much is being stored, how much is being swapped legally and illegally, how much is being lost or destroyed and most of all, how much tax is being avoided. These are kind of strange properties for something governments are suppose own.
Furthermore, there is no real way to recall issued notes apart from voluntary deposits through the banking system which, as India has shown, can be highly incentive's by demonetisation, no matter the social costs.
Government Helps Banks Rob the Poor
Demonetisation amounts to a direct attack on P2P in favour of financial aggregation economics of centralised institutions. That should never be the policy of a government whose task is to service the interest of all its citizens, not just the richest.
So why is India in particular doing this? They are the most populated P2P economy in the world and simply don’t have the social and economic structures and infrastructures that is required for a working well banked economy. While there has no doubt been powerful financial industry proponents, the drive is reported to have come from a home grown mechanical engineer at a think tank called Artha Kranti or Economic Revolution.
The Artha Kranti plan actually has two demonetisation phases. The first is to flush out all the dark money and force it into the banking system from which it can be withdrawn using newly designed cash notes. The second is to demonetise the new notes also, once the well banked economy is established.
Artha Krani’s argument for demonetising 1000, 500 and 100 rupee notes is because the average Indian only spends 44~88 rupee a day and so shouldn’t need higher denomination notes! I can’t imagine a case in history when such an extraordinary abuse of statistics has had such devastating effects upon a people and their economy (but I’m sure there are plenty). It completely ignores the transaction and cash distributions dynamics where lower income brackets might only get paid infrequently and often have nothing to spend at all. Imagine a foreman trying to pay 100’s of labourers once a month using only 20 rupee notes?
The Good Bits
The bait on Artha Krani’s hook which has been swallowed not just by the Indian government but also by vast popular (anti-corruption!) opinion is tootie-fruity flavoured. For one, endemic financial corruption becomes much harder to conduct when transactions can be traced, which for the average person doesn’t account for much. But where the real national benefit lays is the ability to have effective tax policy and collection. This actually gets good because the Indian government will finally be able to offer robust public services and infrastructure projects which have historically been so crippled by under funding and corruption.
It gets even better. India will be dropping all current taxes except for imports and replacing them with a single simple ‘financial transactions tax’. In a country where only 1~2% of people pay income tax, this will be a gargantuan shift in India’s ability to raise revenue and follow on to raise its people from the depths of poverty and free itself from its $480B debt to the World Bank.
With no income or corporate tax to collect, people are left to go about minding their own business rather than having to worry about how much money the government expects from them and how they will come to collect it.
Business activities will be taxed according to their turnover rather than their profit and so corporations only need one book to show shareholders their profits and not another to show the government their losses. All in all the government becomes much less interventionist, the pressure to defraud is greatly reduced and so too the costs of prosecution.
So is it, ‘Yay for a well banked economy?’ As I see it, not really and certainly not in the short term for India. All it is actually doing is outsourcing tax collection to private banks.
Banks as Private Tax Collectors?
One must remember that the very reason for a government to issue fiat currency is to legislate that it be the only currency with which taxes can be paid back and thereby force a people to conduct business using it. It is at least a step up from despots stealing peasants’ bushels of wheat.
The question that now arises though is, “Why should banks have any business in tax collection at all?” Shouldn’t the government manage its own core business completely independent of private interests? I mean, the greatest thing about fiat money is that it is ideally agnostic to the private sector usage of it. And so it should be. If you start farming out fundamental public functions to certain private institutions, those institutions would be inherently favoured over others and lead to widespread economic manipulations of self interest. Which is of course the fundamental problem of private banks to begin with.
What does a government do when a bank says, ‘We will give you your tax when your do … for us’ ? It’s really quite a scary thought.
Remind Me Again Why We have Banks
So why do we have banks? Historically because large amounts of cash are so hard to manage! They answered to the physical layer security problem.
As the roll of cash diminishes under the development of electronics payment networks, banks and those payment networks answer more to the transport and application layer of abstract money. However, with less cash, P2P exchange reduces and wealth aggregation increases, which is just to say, ‘The rich get richer, the poor get poorer.’
All this fuss just to try and solve cash’s two fundamental problems;
It can’t be tracked.
It doesn’t expire in predictable times and ways.
But what if it could?
The New Cash
In the past few years there has been an astounding growth in the number of physically transferable currencies in the form of prepaid ‘Gift Cards’. They are portable, spendable, anonymous and best of all they ‘expire’ and so can be lost or forgotten about meaning that the shop ends up with more revenue than sales. Lucky them.
Expiry aside, the other, anonymous value exchange properties of gift cards lend so much popularity to their use that they now constitute a fundamental component for laundering credit card fraud.
If cash were to ‘expire’ like gift cards, it would need to be voluntarily redeemed before that expiration. The issuing government would then know exactly how much cash is in circulation and in what denominations. Their mint could then print replacements in highly predictable amounts. ‘Dark money’ would no longer be held under-the-mattress for fear of it being forgotten and expiring.
Additionally, if the act of redeeming the cash value required physical destruction of the note in order to transfer its value to an electronic account, then tracking and transaction taxing becomes trivial while also supporting a reasonably anonymous P2P domestic economy of which the vast majority of transactions are none of the government or financial sectors business.
The Crypto Currency Solution
Crypto currencies are now an advanced enough technology which can offer physical cash with these properties.
Users of a crypto currency such as Bitcoin maintain cryptographic private keys to a public address. Values can be transacted from addresses in near real time by anyone possessing a private key to a particular public address in a way synonymous with bank transactions.
Furthermore, these keys can be printed on paper to make ‘paper wallets’. Anyone with a paper wallet can access the public and private keys and so can access the value stored at that address. The paper wallet however should be constructed in such a way as to easily allow value discovery but prevent the unintended disclosure of the private key.
A more sophisticated system than Bitcoin is the Ethereum platform upon which ‘Smart Contracts’ can be written. Smart Contracts are small programs that can execute arbitrary code in association with value transference. Such contracts can be used to create highly customised currencies and together with paper wallets can offer to cash the desired properties of predictable expiry, tracking on issuance and redemption and physical destruction upon redemption.
I suggest that self expiring, redeem by destruction cryptographic cash can be created as paper wallets in order to foster P2P economies which are again, the fundamental expression of the ‘freedom of trade’ principle.
The physical construction of such cash could be in two layers where an external code can be readily scanned to validate the human-readable denomination while the internal private key or smart contract redemption code is printed internally on opaque media. In order to redeem the value of the note, it must be torn open (destroyed) and the value ‘swept’ into the owner’s cryptographic account at which point the transaction is visible to the system and the system can act accordingly regarding tax and re-issuance of the note.
In such a way, a crypto-fiat currency can remain completely agnostic to private sector interests. Money can be transacted physically or digitally independent of third party manipulations and transaction taxes can be collected reducing the need for other interventionist taxes.
In short, transaction taxes and crypto-fiat cash have a great potential of keeping government services well afloat and reduce the impositions and interventions required upon citizens and business alike.