ECON430-Topic #1: Mo Money, Mo Problems

Do we really need cash at all? It might not seem like it, but people continue to use cash in the U.S., and around 85% of global transactions involve cash. There are a number of countries trying to do away with cash entirely. Both Sweden  (second story) Denmark, and Norway are actively trying to eliminate cash. Some have estimated that cash itself poses a real burden on the economy. While eliminating cash sounds nice in theory, in the US we have spent years debating the possibility of eliminating just the penny (they do cause problems). Without much sense of irony, people do not like the idea that the government is going to eliminate (or even change) the cash in their pockets.

Eliminating cash might have its benefits from the perspective of a central banker. In a world where central banks have begun to charge banks for holding reserves, instead of paying interest on reserves, hoarding cash has become a way of getting a higher nominal return than one would get in a bank. Thus, if a central bank could eliminate the usage of cash, they would have the ability to drive negative rates even lower. Pushing rates on reserves to negative territory gives banks an even greater incentive to make loans. This should increase economic activity, either through consumption, investment, or export/imports.

Questions You Might Consider

Remember, don’t try to answer all of these questions, just focus on one, provide some evidence, and support your opinion. NOTE: There is a delay between you posting your comment and it appearing, since I have to approve all comments by hand. Make sure you save your comment in a word processor file before posting it here. I cannot help you if  “the ether” ate your homework.

  • Do you think we need cash, or could we be a cashless society? Think about how this might play out in the U.S. Why are other countries in Scandinavia able to pull this off? What is the consequence of such a move?
  • Do negative interest rates potentially influence the economy? If the central bank is charging banks for sitting on reserves, what does this really mean for the banks? Do you expect banks to start charging retail clients for holding deposits at banks? What happened to the “zero lower bound” on nominal interest rates?
  • As a question, one might consider the debate over putting Harriet Tubman on the $10 or $20 bill. Currently Alexander Hamilton is on the $10, and Andrew Jackson is on the $20. You might discuss the history of the Treasury and central bank to explain why the Treasury ultimately decided to eliminate Jackson instead of Hamilton. Sadly, it may have been the Tony-award winning “Hamilton: The Musical” that helped save his image, and push Jackson off the $20. Who should be replaced? Why? What is the logical argument for any of these people to be on our money?

Tip: Do not capitalize all the letters of “Fed” since it is not an acronym. This really bothers me…

13 thoughts on “ECON430-Topic #1: Mo Money, Mo Problems”

  1. Moving to a cashless society is not yet possible in the U.S. or in other parts of the world since reliance on cash, in the absence of other practical forms of payment, is too great. The largest impediment to a cashless society is the imbalance of access to cashless financial transaction technologies. As MasterCard notes, there is a divide between developed countries who have cashless infrastructure, such as Nordic countries, and developing countries, such as those in Africa, where internet, smartphones, and debit cards are a luxury. As the article on Sweden’s shift to cashless transactions shows, hyper-connectedness is one of the key factors that drives and makes possible the move to cashless transactions as most people have smartphones and access to apps such as Swish that make it advantageous to go cashless.

    However, the U.S. would experience problems on this front as Pew Research found that 13% of Americans (47 million) do not have internet access and Americans in rural areas are twice as likely not to use the internet; consequently, as a paper by the San Francisco Fed shows income is an important factor as those with lower incomes find cashless transaction services too expensive. Moves to cashless transactions would alienate and marginalize those who could not readily adopt the required technology. The uneven ability to transition to cashless transactions and the skewed distribution of benefits , as noted by the World Economic Forum, conferred by the switch show that cash is still vital to facilitate transactions between those who are more and less digitally evolved.
    Links to Article Used:
    https://www.fastcoexist.com/3052540/will-sweden-be-the-first-country-to-get-rid-of-cash
    https://www.weforum.org/agenda/2016/06/these-are-the-countries-that-would-benefit-most-from-a-cashless world/?utm_content=buffer1b05f&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer
    http://www.mastercardadvisors.com/_assets/pdf/MasterCardAdvisors-CashlessSociety.pdf
    http://www.pewresearch.org/fact-tank/2016/09/07/some-americans-dont-use-the-internet-who-are-they/
    http://www.frbsf.org/cash/publications/fed-notes/2014/april/cash-consumer-spending-payment-diary

  2. The movement towards a cashless society, while potentially beneficial in lowering crime and aiding in the effectiveness of negative rates, is one that may be a good idea but incredibly difficult in practice. While attempting to achieve the desired effect of negative interest rates is a suitable reason for the elimination of common currency, it’s difficult to place the reasoning solely on a central bank tool that is relatively fresh and thus unconventional. I believe the public would be hesitant to support a policy that nominally lowers their wealth and would likely be wary of a system forced on them that lacks something “tangible” (even if it is no different than money in the bank).1 As an example, Japanese citizens have ramped up money safe purchases to combat their deterioration of wealth.2 Furthermore, while the Time article points out a “roughly 10% drop in the total crime rate” associated with cash, I believe criminals would likely find a way around traditional illegal trade, which that may rise from the recent advent of cryptocurrencies or some sort of equivalent system (potentially barter). Lastly, there would be high replacement costs from immediately switching to a non-cash system for services such as parking meters, vending machines, laundromats, and small vendors.3* While I see the benefits to moving towards a cash less society, I believe there are numerous hurdles the government would have to overcome to effectively implement the system but that the goal may be more painlessly achieved in the long run.

    1 – https://www.technologyreview.com/s/427088/why-well-never-get-a-cashless-society/
    2 – http://fortune.com/2016/06/01/negative-rates-safes/
    3 – https://www.gobankingrates.com/personal-finance/9-businesses-still-cash-only/

    *I have no doubt in my mind that I was placed on some sort of money laundering suspect list for blatantly googling “cash only businesses” for ideas.

  3. After much debate, Secretary of the Treasury Jack Lew announced on April 20, 2016 that Harriet Tubman would replace Andrew Jackson on the $20, rather than replacing Alexander Hamilton on the $10. While both Jackson and Hamilton are successful in their own right, though only one has an award winning Broadway play, the decision to place an individual’s portrait on a United States bill should be dependent on merit and accomplishment as it pertains to the United States monetary system. Based on this criteria, it is evident why Hamilton remained and Jackson was ousted. While Andrew Jackson was the seventh President of the United States and a hero in the War of 1812, he was an outspoken supporter of slavery and advocate for the removal of Native Americans. Hamilton, in contrast, was not only a staunch supporter of the eradication of slavery but the first Secretary of the United States Treasury. Hamilton’s involvement in the development and implementation of the United States Treasury came at a critical point in our then newly found nation’s history when war debts threatened to cripple the U.S. economy. It would have come as a shock if the current Secretary of the United States Treasury removed the portrait of the first Secretary of the United States Treasury while keeping the portrait of a man who embodies the ideals stemming from a time in the United States that many wish to forget.

    Sources:
    http://www.womenon20s.org/
    https://www.treasury.gov/about/history/Pages/edu_history_brochure.aspx
    http://www.huffingtonpost.com/2015/06/18/andrew-jackson-20-bill_n_7608904.html
    http://www.politico.com/story/2016/04/treasurys-lew-to-announce-hamilton-to-stay-on-10-bill-222204
    http://www.huffingtonpost.com/2015/06/18/andrew-jackson-20-bill_n_7608904.html

  4. Do I think we will become a cashless society? Absolutely not. Do I see value in the U.S becoming a cashless society? Yes. We will not become a cashless society for years primarily because the public doesn’t trust the government enough to do so. To be paperless and means that the government would have to have access to all ways that the public spent their money. All apps and banking would be accessible to the federal government. Additionally, not all U. S citizens have access to gain a credit card, debit card, or mobile app (like what the Swedish adopted) and therefore would be at a huge disadvantage. The less affluent would have little knowledge of how those paperless systems worked and the government would face a lot of upfront costs to make it accessible to them. The U.S already faces mass amounts of debt and while many (although every article I read reported a different percentage) leans towards the paperless option, especially for large transactions, people tend to overspend forgetting that just because you are not holding the physical cash does mean that they are not spending that real value. Cash is a little bit of history so to take it out of circulation means destroying some history, as well the potential for hoarding that history to turn a profit. Cash is also a little bit of history in that it leaves no history. Those who don’t trust the government or others, or may have questionable financial statements would find the fact that paperless equals trackable very undesirable. Paperless means that transitioning into the country even on a tourist basis very difficult. Not everyone could come to the U.S if currency required technology or opening a credit/debit card. Visa versa it would be difficult for U.S citizens to travel to less developed areas, not being used to holding, and participating in paper transactions while abroad.
    The reasons to go paperless are fairly obvious. Crime rates would be lower due to less physical robbing (hacking is another story). More and more transactions are being done through the internet, from shopping for food to paying bills. No cash means most likely lower drug exchanges and less financial deviousness by large businesses because everyone’s finances are so easily traceable. It would cut down the cost of maintenance as far as ATMs and banks physical properties. People would also save time getting to destinations where cash can be withdrawn. So while there are upsides to go paperless the U.S is not ready for such a leap with the current government structure.

    http://time.com/money/4307717/getting-rid-of-cash/
    http://www.mastercardadvisors.com/_assets/pdf/MasterCardAdvisors-CashlessSociety.pdf
    https://www.fastcoexist.com/3052540/will-sweden-be-the-first-country-to-get-rid-of-cash
    http://www.nytimes.com/2015/12/27/business/international/in-sweden-a-cash-free-future-nears.html?_r=1
    https://www.weforum.org/agenda/2016/06/these-are-the-countries-that-would-benefit-most-from-a-cashless-world/?utm_content=buffer1b05f&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer
    http://www.businessinsider.com/how-negative-interest-rates-change-attitudes-about-money-2016-3
    https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf

  5. With the recent decision to put Harriet Tubman on notes, the choice to replace Andrew Jackson on the $20 bill is more logical than replacing Alexander Hamilton on the ten. Among the three, Andrew Jackson probably makes the least sense to be on U.S. notes because of his decision in 1832 to veto a national bank system. This versus Hamilton, the first Secretary of the Treasury, who suggested the formation of a national centralized bank which was ultimately chartered in 1791. Unfortunately, the initial campaign was not rooted in academia but rather had the aspiration to be completed promptly and as a result the initial push was to put Tubman on the 10 because it was the next note scheduled to be redesigned. Fortunately for Hamilton, the hit Broadway show Hamilton could potentially be credited with saving his spot on the $10 as its creator Lin-Manuel Miranda, lobbied heavily for Hamilton to remain on the 10. Putting people on money doesn’t make much sense other than being rooted in tradition, but if the U.S. Treasury is going to not include one of the two, it should choose to get rid of the National Banks executioner in Jackson, and not one of its originators in Hamilton.

    https://www.whitehousehistory.org/teacher-resources/the-bank-war-jackson-veto-and-websters-reply
    http://www.politico.com/story/2016/04/treasurys-lew-to-announce-hamilton-to-stay-on-10-bill-222204

  6. The effects that negative rates can have in the economy are numerous. Garbade and McAndrews discuss in an article for Liberty Street Economics that negative rates in the interest rate on excess bank reserves and the IOER (interest rate paid by the Fed on excess reserves) would lead to possible financial innovations and change of preferences. The financial innovations they mentions are a set of special-purpose banks that carry checks as a means of cash-like product. Another effect could be the push of commercial banks to lend their money out and nourish the flow of the economy; since potentially people will take out more loans and spend more.
    What I cannot see happening if there are negative rates is commercial banks charging those negative rates on their clients. People would just hoard the cash rather than pay a bank to hoard it. This was a big problem that many articles argued as a hurdle towards negative rates. John Mauldin insists that negative rate would lead to people holding on to their cash and this is troubling since holding cash is a deflationary move which would undermine the goal of the Fed fighting against such deflation, Garbade and McAndrews state that “The usual rejoinder to a proposal for negative interest rates is that negative rates are impossible; market participants will simply choose to hold cash.” And finally Voegeli and Foerster mention that in Switzerland, where they are experimenting with negative rates, people have been demanding insurance solutions for storing and hoarding cash and Koch in the same article adds that “Cash hoarding is a problem for monetary policy…It’s a question of efficiency: the more corporates hoard cash, the smaller the impact of negative rates.”

    Sources:
    http://www.businessinsider.com/how-negative-interest-rates-change-attitudes-about-money-2016-3
    http://libertystreeteconomics.newyorkfed.org/2012/08/if-interest-rates-go-negative-or-be-careful-what-you-wish-for.html#.V9hKjJgrKhf
    http://www.bloomberg.com/news/articles/2016-09-06/cash-in-a-box-catches-on-in-switzerland-as-negative-rates-bite?utm_content=business&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social&cmpid%3D=socialflow-twitter-business

  7. Negative interest rates could potentially influence the economy and the very nature of it. Due to the nature of negative interest rates, in that it punishes the lender and benefits the borrower (in a broad sense), people would begin to look for various interest-avoidance strategies, such as institutional investor taking their money abroad or people withdrawing their money causing instability in the economy. When investing abroad more so than usual, this could drive up the prices of stocks and create a bubble, putting the world on the verge of another financial crisis.

    The central banks that are currently imposing negative interest rates on commercial banks are doing so in order to stimulate the economy by either attempting to increase inflation or keep the price of its currency low. For this reason some banks have taken to interbank lending, and even still are lending at negative rates, simply because it is cheaper for them to do that than what it costs to pay the central bank to hold their excess reserves. Some banks are struggling to keep profit margins up, USB and Credit Suisse said that they may have to begin charging even the average Joe, but for now will be deferred to their wealthier clients. For the countries that have installed negative rates, there seems to be little to no evidence of economic growth. Thus I’d have to object against the U.S. following the breadcrumbs down that path.

    http://www.bbc.com/news/business-32284393
    http://libertystreeteconomics.newyorkfed.org/2012/08/if-interest-rates-go-negative-or-be-careful-what-you-wish-for.html#.V9heSj4rJ1P
    http://www.bloomberg.com/news/articles/2016-09-06/cash-in-a-box-catches-on-in-switzerland-as-negative-rates-bite?utm_content=business&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social&cmpid%3D=socialflow-twitter-business
    http://www.nytimes.com/2016/08/15/opinion/what-two-years-of-negative-interest-rates-in-europe-tell-us.html?_r=0

  8. Eliminating cash as a society would be a prudent move even if there are both costs and benefits to such a decision. Cash is a burden for the U.S Department of the Treasury to print and make (especially when considering the production of coins such as the penny). Billions of dollars could be preserved not only from the savings accrued from not having to spend physical resources to make the actual money, but also because we would no longer need to have entire departments of the government devoted to the making of such physical currency. It is estimated that a one dollar bill costs around five cents to produce per bill, and higher bills costing as much as thirteen cents. That is a very large sum when considering the U.S Department of the Treasury has stated they print approximately twenty five million currency notes per day. That comes to an average costs of one point three million dollars per day spent on printing paper notes alone (this is also assuming that we are only printing one dollar bills). If we include the costs of producing coins, transaction costs occurred with producing and transporting the money, and all others costs of guarding the money and devoting Secret Service members to chasing physical money down, it is easy to see that eliminating physical currency can be advantageous to society. While there are certainly costs to having no physical currency, including additional digital security needed to adequately protect are wealth, the monetary benefits of switching to digital currency still outweigh the costs.

    Sources Used
    http://time.com/money/4307717/getting-rid-of-cash/
    http://mentalfloss.com/article/68650/how-much-does-it-cost-manufacture-us-paper-money
    https://www.treasury.gov/resource-center/faqs/Currency/Pages/edu_faq_currency_production.aspx

  9. Becoming a cashless society would put an unfathomable amount of risk and burden on businesses, while adding more uncertainty into the economy. Businesses would need to spend large amounts of money to make sure electronic payment systems are properly running at all times. If their technology breaks down, which is almost certain to happen at one point or another, the opportunity cost could be extremely high. The uncertainty a cashless society would bring to the economy is unfathomable, illegal activity such stealing card information or personal information would increase substantially. The 2013 data breach of Target is a prime example of this, with 40 million people’s financial data exposed and up to 70 million people’s personal information being released. (1) Consumer to consumer transactions would also be heavily affected, cash payments are widely used in C2C transactions due to its safety when dealing with a stranger and efficiency, meaning there’s no processing time, once you have cash it’s yours. (2) The problems a cashless society
    would bring would destroy international business, with cash payments amounting for 85% of global transactions and cash payments in developing countries being even higher. (3) Only cashless payments would widen the inequality gab between developed and developing countries, making both types of countries worse off in the process. Developing countries don’t have the infrastructure such as technology,
    electricity, telecommunication, etc… to handle 100% cashless payments, because of this their economic growth and development would suffer. In return this would additionally hurt developed countries, due to the lost business with developing countries, it just wouldn’t be as severe. Overall a full cashless society would not be beneficial in a national perspective along or a global one

    Sources Used:
    (1) http://money.cnn.com/2015/03/19/technology/security/target-data-hack-settlement/?iid=EL
    (2) http://www.businessnewsdaily.com/5084-what-is-c2c.html
    (3) http://www.mastercardadvisors.com/_assets/pdf/MasterCardAdvisors-CashlessSociety.pdf

  10. With the purpose of advocating the elimination of cash, Jacob Davidson in the article “Why Killing Cash Makes Senses” states that moving to a cashless economy could help to reduce criminality and illegal activities, since with currency being out of the market, people engaging in illegal activities will be forced to use banks for transactions, increasing the probability of detection. While this may be true; I believe that the role of cashless economy in society would greatly generate more disadvantages than advantages.
    Despite of the strong capacity of the U.S to stand the cost that moving to a cashless economy would involve, such as: implementation of new information systems that satisfy the new method of transactions, I believe that citizens are just not ready to face a sudden transformation from currency to a cashless economy, where certainly all transactions now would be held electronically either through smartphones, computers or other financial applications. Moving to a cashless economy would involve higher cost to the citizens. For example, implementations such as the Swish App in the U.S could affect low income class who might not have smartphones, or internet, and have never been involved in electronic transactions; or those who lack of technological skills. There may be also additional costs to financial institution and government in offering proper training, and customer service to citizens regarding the usage and problems that may arise with the new electronic transaction method. In addition, moving to a cashless economy could negatively impact small and developing countries that has adopted the dollar as their currency because it may be necessary for those countries to adjust to whatever changes the U.S make, leading to an increase in their cost that they may not stand.

    http://time.com/money/4307717/getting-rid-of-cash/

    http://www.frbsf.org/cash/publications/fed-notes/2014/april/cash-consumer-spending-payment-diary

    https://www.fastcoexist.com/3052540/will-sweden-be-the-first-country-to-get-rid-of-cash

  11. The desire to become a cashless society is not new phenomenon. Since the early 1950’s, when Sweden became one the first countries to begin the widespread use of mechanical and electromechanical accounting machines throughout the Swedish savings banks, many proponents of eliminating cash across the globe began to push for a more efficient, cashless form of transacting across markets (1). Although certain Scandinavian countries such as Sweden, Norway, and Denmark have become open to the idea of eliminating cash from their economies given their relatively small population, such a system is too early to be adopted in the United States for a number of reasons.

    According to a national survey conducted by FDIC of banked and unbanked households in the U.S., over 9.6 million eligible households still do not have bank accounts (2). Adding onto the lack of banking tools for some of the poorest individuals and households in the United States, roughly 13-15% of Americans still do not have access to the Internet according to a recent Pew Research survey data (3). According to the same survey, 58% of Americans above the age of 50 would be left struggling if the United States were to adopt a cashless system of banking in which transactions took place via chip cards and online shopping (3)(4). Such a wide generational divide in the use of cash, credit cards, and online shopping indicates that as long as there are people who do not have convenient access, or free access, to the Internet, there will still be a need for shopping with cash. Furthermore, the existing brick-and-mortar merchandising markets could not support a cashless system and still cater to the poorer segment of the country, as about 55% of small businesses in the U.S. still do not accept credit cards (5). Even if technology costs were to decrease and enable more small business owners to adopt cashless payment tools, the use of credit cards is not yet completely and robustly safe. A recent survey by the Ponemon Institute showed the average cost of cyber-crime for U.S. retail stores more than doubled from 2013 to an annual average of $8.6 million per company in 2014 (6).

    Although eliminating the use of cash is appealing, a closer assessment of the state of small businesses, the access people have to the internet, and the availability of cashless forms of payment indicate that the United States has to implement more effective institutional and structural changes in order to shift to a cash-free American economy.

    1. http://www.ebhsoc.org/journal/index.php/journal/article/viewFile/274/257
    2. https://www.fdic.gov/householdsurvey/
    3. http://www.pewresearch.org/fact-tank/2016/09/07/some-americans-dont-use-the-internet-who-are-they/
    4. http://www.dailydot.com/debug/americans-no-internet-access-digital-divide-pew-july-2015/)
    5. http://quickbooks.intuit.com/r/getting-paid/cost-benefit-analysis-of-accepting-credit-cards-for-your-small-business/
    6. http://www.heritage.org/research/reports/2014/10/cyber-attacks-on-us-companies-in-2014

  12. While eliminating paper currency may be a novel idea with real benefits, transitioning to a cashless society at this point in time would be a cumbersome endeavor that could undermine perceived integrity of money and disenfranchise large swaths of consumers.

    Let us consider the system that must be in place in order to make the move away from cash. First off, there would have to be a universally adopted method of electronic payment that is sponsored/endorsed by a legitimate authority (the government). How would the government incentivize the adoption of this technology as opposed to currently available payment methods? There are plenty of other convenient methods in existence today. What measures would be put in place to alleviate consumer concerns about privacy? There would likely be some consumers that would not voluntarily trust the government with their financial data. In addition to these concerns, whomever the issuing authority is would also have to engage in community outreach in order to get those who do not have access to the internet or smartphones to adopt the cashless model. The point here is that there are numerous steps the government and banks would have to take before the notion of a cashless United States can even be discussed.

    That being said, there are large benefits to this model. Crime would decrease as fewer people carry cash. Organized crime would be squeezed as cash becomes more of a novelty item and harder to come by. This could also be beneficial for central banks in near-zero/below-zero interest rate environments since people would, in a sense, be forced to spend their money rather than hold it in cash – a problem that countries like Germany face today.

    In conclusion, a cashless society is an interest idea with numerous benefits to both consumer and governments. However, implementing such a policy requires careful planning today in order to achieve progress tomorrow. A cashless society may not be a reality presently but it may be noble thing to aspire towards for decades to come.

    http://time.com/money/4307717/getting-rid-of-cash/
    https://www.fastcoexist.com/3052540/will-sweden-be-the-first-country-to-get-rid-of-cash
    http://money.cnn.com/2015/06/02/technology/cashless-society-denmark/

  13. Moving to a cashless society would be a difficult process, but it could be possible and would bring alot of benefits to society. Most criminal acitivty is encouraged and enabled by having cash; “no other payment mechanism simoltaneously provides anonymity for payor and payee, leaves no trace of transactions, and is so widley accepted”. Transactions made with cash are untraceable, and therefore is the primary means of payment for illicit activity. If all payments were to be electronic, there would be records of every transaction and would be easier to track any suspicious financial activity. Even just eliminating the higher value dollar bills like the $50 and $100 would significantly reduce organized crime. This would significantly increase the cost of transportation and would be riskier to move a larger amount of dollars since the most valueable dollar bill would be $20. Furthermore, it would be easier for the government to collect taxes if we got rid of cash becasue the would be able to monitor every transaction, so companies wouldnt be able to hide as easily the amount of revenue they obtained.
    Today, payments done in cash account for only 14% of the value of total transactions, meaning that only 14% of the total dollar value of transfers performed were attributed to cash versus 27% on electronic venues. Cash is used overwhelmingly to pay for small transactions, but if consumers were forced too abandon cash, I believe that they would simply pay these smallers fees with debit cards as well. Finally, there wouldnt be that much risk of leaving cash because, as it is, the dollar is a fiat currency. In theory, money in your bank account is backed up by acutal dollar bills, which in turn is backed up by the belief that society has in its value. So what’s the difference between electronic currency and actual dollar bills if they’re value isn’t backed up by anything real or tangeable?

    http://www.frbsf.org/cash/publications/fed-notes/2014/april/cash-consumer-spending-payment-diary
    http://time.com/money/4307717/getting-rid-of-cash/
    http://www.nytimes.com/2015/12/27/business/international/in-sweden-a-cash-free-future-nears.html?_r=1

Leave a Reply

Your email address will not be published.