by David Wolman
Birch is right that to transport, store, secure, examine, reissue, shred, and print all the money in the world costs a fortune. Precise numbers are hard to come by, perhaps not surprisingly considering the franchises at stake, but one estimate from 1994 is that the United States spent $60 billion on cash management. By 2005 that figure was estimated at $110 billion.26 Processing paper checks adds another $50 billion on to that bill.27 In 2007, Europe’s €360 billion in cash transactions cost around €50 billion ($70 billion). That expense is primarily borne by merchants, although it doesn’t take an economist to know that merchants pass those costs on to you and me in the form of higher prices.
By some estimates, countries could save 1 percent of their annual GDP if they were to shift from a paper to a fully digital monetary system.28 For the United States, that would put the annual costs of cash in the ballpark of $150 billion, or about three times the annual budget of the U.S. Department of Education. True, these savings would be reduced by the cost of implementing and maintaining a digital money paradise, but the logistics would be so dramatically reduced that the savings would still be enormous.
Cash is a financial burden for just about everyone in its life cycle who has to handle it, aside from employees of the U.S. Mint, the printing bureaus and their contractors, and multi-billion-dollar logistics firms like Brinks and Loomis. Banks in particular don’t like having to babysit physical money. In 2009 and 2010 there were more than 10,000 bank robberies in the United States alone. “Banks don’t like cash and don’t want to invest in it,” says Michael T. Dan, chairman, president, and CEO of Texas-based Brinks. Might the bankers’ judgment on this be a hint to the rest of us?29
Birch steps back into the foyer for a moment to make a call. He looks a little distressed. He’s been to this museum a number of times before—know thine enemy, I suppose—but I get the sense that this place makes him physically uncomfortable. Far from signifying stately grandeur and a rock-solid economy, the stone walls and stodgy traditions symbolize the kind of fuddy-duddy refusal to move forward that is anathema to someone who accepts the premise that technological innovation drives positive change.
Maybe he’s overreacting, though. Now that ATMs are pretty much everywhere, cash isn’t exactly hard to come by. Doesn’t that nullify, or at least weaken, the argument that cash is really so inconvenient and expensive? When I ask about this, Birch looks at me like I’m nuts.
ATMs may have lessened the costs of using cash for people in wealthy countries, because restocking our wallets is fairly easy, but in other ways they’ve only served to conceal costs—and add new ones. Securing them is the most obvious one. In one London neighborhood, ATM users have been mugged so many times that there’s now a police hotline that people can call to request an escort to the ATM. “Who pays for that? We do!” Birch says.
This kind of inanity is Birch’s specialty: the Shanghai man who saved 37,000 coins over the period of a decade, only to learn that exchanging them for banknotes requires a fee, one yuan for every fifty coins, which would total more than the overall value of his two sacks full of coins.30 “Or did you see the story about the £60,000 in cash found rotting in a basement?” Birch asks. I had not. “We all pay for that. There is even the cost of the reissued £20,” he says, gesturing back toward the poster about the doomed Elgar £20 series. In Japan, tens of thousands of police are deployed to banks and ATMs around the country on pension day, when elderly citizens withdrawing cash are at risk of being robbed or conned into some on-the-spot scam. Like it or not, citizens foot the bill for this police presence, just as they do for all of the investigations and prosecutions of cash crimes throughout the world.31 In (literally) cash-strapped Argentina, inflation and a scarcity of bills have recently forced some residents to line up at the bank the night before it opens, to be able to withdraw money the next morning.32 In Ireland in 2010, a government minister floated the idea of taxing people for ATM withdrawals. If people use them less, maybe the incentive for robbery would also decrease. He got the idea after a gang kidnapped a bank manager’s wife and ransomed her for €300,000.33 The tax proposal was quickly shot down.
IN THE FALL OF 2010, the U.S. Treasury announced that the new $100 bill’s official release date would be postponed. The new C-note was originally slated to enter circulation in 2008, but it was bumped once to 2011, and now it was being bumped again. Some of the paper fed into the presses had a slight fold, so the ink wasn’t perfectly applied over the notes, and the bills came off the presses with a tiny blank spot.34
Because cash provides numerous benefits to society, I had hoped, perhaps naively, Treasury or Bureau of Engraving and Printing officials might talk openly about the mistake. Without sharing how-to secrets with counterfeiters, they could use the episode as an opportunity to remind the public of the benefits of cash, and that providing an ample and secure supply of hard currency is no simple feat.
For the time being, however, no one is talking, and it’s doubtful the costs of this snafu will ever be made public. It would be interesting math. The plagued bills, we’ve been told, cost $120 million to make, but at press time $1 billion worth of the notes were still quarantined and awaiting inspection by BEP and Treasury officials. The investigation and cleanup will prove costly: retrieving, examining, and destroying the old notes; repairing or replacing equipment; the expense borne by banks that need to resupply their cash supplies; and all those indirect costs, like fuel and CO2 emissions from all those armored trucks that have had to fetch the bunk bills and then redeliver the good ones sometime in the near future.35
By and large, though, most people are disinclined to contemplate the costs of their cash. In the United States, it’s as if we are so consumed with anger toward credit card companies and overpaid investment bankers that we just don’t have energy left to fret, complain about, or even notice the liabilities of cash. If anything, the opposite is true: according to a recent Fed survey, almost 67 percent of people said cash is a “very low cost” form of payment—the least costly, by far, compared to credit and debit cards, checks, prepaid cards, and bank transfers.36 How could we be so far off the mark?
Another recent Fed study took a closer look at rewards cards—the ones that provide airline miles, hotel points, shopping or restaurant discounts, and other “cashback” incentives. Not surprisingly, customers who use this type of credit card are generally more affluent. Low-income people, if they can afford credit cards at all, aren’t going to sign up for ones requiring an annual fee.
Someone has to pay for those supposed freebies. The banks cough up part of the dough, but the Fed economists found that the rest of it comes from cash users, which is to say poorer households. To cover the fees levied by the card companies for the “privilege” of electronic payment, merchants charge higher prices across the board. The result is “an implicit monetary transfer to credit card users from no-card (or ‘cash’) users,” wrote the Fed economists. While the average cardholder enrolled in a perks program receives about $750 worth of rewards every year, the average cash user pays about $20 a year so that someone he or she doesn’t know can score a free night at the Marriott.
The report opened peoples’ eyes, if only a little, to the fact that these rewards aren’t gifts—someone always has to pay. I’m all for information that gets people thinking more critically about the workings and hidden costs of different forms of money, but when Birch read this study he saw something else: a continuation, really, of material money’s Houdini-like ability to escape criticism. No one ever looks at, or even mentions, the negative impacts of cash on society as a whole. It’s as if we just can’t come to terms with the notion that cash has costs.
When viewed through this lens, says Birch, “credit card and non-cash users are subsidizing cash users,” to the detriment of all. In other words, the steep costs of cash are absorbed by everyone, including people who choose to bypass using it.37 And should you be tempted to think that the poor might be disenfranchised by all this pro-digital money talk, or
that the needs of lower-income people aren’t being addressed by the likes of Birch and his banking industry pals, don’t. We’ll get to how cash is hardest on the poor soon enough.
Retailers on the other end of your transactions have mixed feelings about cash. Some hate credit and debit cards because of the fees, so they take the cash-only route, thinking these are their only realistic options, which is often the case—for now. One study suggests that a sale by way of a credit card can cost a merchant as much as six times what the same sale might cost if the costumer paid in cash.38 And cash is obviously effective for merchants who are of a mind to dodge the taxman.
Other merchants, however, are waking up to the high price of using cash in their operations. The risk of robbery has always been a big one for mom-and-pop shops, and accepting and dispensing cash costs businesses millions of dollars’ worth of labor hours due to the time and manpower required for cashiers to hand out correct change down to the last penny.39 That price only increases for businesses that maintain cash’s availability for fewer and fewer customers who use it.40 Kill cash, and you can have fewer cashiers, fewer security issues, no employees skimming off the top, and fewer germs to boot.
As a business owner, there’s nothing stopping you from forsaking cash except convention. In the United States, no federal statute requires merchants to accept legal tender. You get to set the terms of payment—the money’s form, price, pay schedule, currency—that you’re to receive in exchange for your proffered goods and services. Legal tender only means that if I already have a debt, in dollars, owed to you or your bank, you can’t suddenly refuse me when I try to pay up with greenbacks. Otherwise, as a business owner, you are well within your rights to stipulate that you only accept payment in the form of Japanese yen, tango lessons, uncut rubies, electronic transfer of airline miles, or gold coins in an online videogame.
The cashless cabin policy of many major airlines is case in point. Another example is an uppity Manhattan restaurant called Commerce. Explaining his decision to quit accepting cash payments, co-owner Tony Zazula told the Wall Street Journal: “If you don’t have a credit card, you can use a debit card. If you don’t have a debit card, you probably don’t have a checking account. And if you don’t have a checking account, you probably shouldn’t be eating at Commerce to begin with.” Think of it as the Zazula plan to reduce America’s addiction to debt, one overpriced, classist meal at a time. Customers can, however, leave cash tips.41
BIRCH IS PLEASED to report new allies lining up in support of the war on cash, even if their stance is less “militant” than his own. Recognizing the inefficiencies of checks, the government of the UK has set a target to abolish them by the fall of 2018.42 True, checks aren’t banknotes, but they’re similarly inefficient and expensive. Paying for something with a check is like opening your wallet to a bunch of strangers on the street, and each of them—the check-printing firm, financial institution, transit company, clearing house, banks, and, if you get your voided checks back in the mail, the postal service—all get a cut or need some form of external compensation.43
Meanwhile, university and corporate campuses, hospitals, and military bases are already cashless mini-societies, where residents use payment systems like barcode badges linked to personal accounts, or stored-value cards. (This is basically the same technology that makes your payment as you glide through an EZ-pass toll booth.) And a quiet uprising against cash is underway in other settings, too. In the Netherlands, supermarkets are aiming to be cashless by 2014, and a Dutch consortium of retailers has established a commission (code name: Taskforce Cashless) to educate the public that electronic money equals saving money.44
The countries of Scandinavia, especially Sweden, are taking an even harder line. Swedes have a cultural tradition of using cash, and, as a result, they also have a lot of robberies. One of them took place in the fall of 2009. With a stolen helicopter, thieves landed on the roof of a cash depot outside of Stockholm, rappelled through a blown-out hole in a skylight, and within minutes had filled duffle bags with seven million Swedish krona (about $5 million) before climbing back into the helicopter and taking off to the north.e Yet even before this Hollywood-style heist, crusaders like Birch had already been eyeing Sweden, where the governor of the central bank, Stefan Ingves, was earning a reputation for speaking up about the costs of physical money.45
“People don’t think they should pay for getting cash,” Ingves told me. “They think money is a free good, and that they should have access to cash and correct change anywhere and always. They take for granted that there are enough notes and coins available wherever they go to buy things, without thinking about how that works.” The distribution and safeguarding of cash is a centuries-old challenge that many governments and banks have risen to quite impressively. Yet we forget that this isn’t just a service of the commercial bank or the company that owns the ATM. It’s also a service paid for by the government supplying the notes in the first place. Every day throughout the world, some 500 million new banknotes move between printers, central banks, and their customers.46 And that’s just the new stuff.
In one speech, Ingves argued that the cost of robberies, from security personnel and insurance payouts to investigations and prosecutions, should be factored into the overall accounting when a country considers what it spends, and what it ought to spend, on cash.47 In the past few years, Swedish police, citizens, politicians, and bankers have intensified the anti-cash campaign. A union of thousands of bank employees is lobbying the government to eliminate material money, and their campaign has even received the odd but irresistibly noteworthy endorsement of former Abba band member Bjorn Ulvaeus.48
But if you hadn’t already guessed, most governments still don’t see cash in such a negative light. As with coins, orders for banknotes are up—way up—even though cash usage continues declining. For the U.S. dollar, the value of cash in circulation has gone from $51 billion in 1970 to $1 trillion in 2011.49
More physical money delivered into circulation yet declining reliance on it for doing business—how could that be? Where’s it going? A cash-friendly interpretation of this trend is that people are turning to it as a more reliable place to park wealth in times of economic turmoil. If interest rates and inflation are both low, why not just hold on to your cash? If your confidence in, or enthusiasm for, financial institutions has been shaken of late—and unless you live under a rock, it has—then even more reason to cling to your paper.50
People have indeed retreated from using credit cards in recent years. Many consumers even turned away from debit cards, in a kind of backlash against any bank product (except the central bank’s). In one study, 42 percent of people surveyed reported that they were using cash more in 2010 than they were in 2009.51 Unfortunately, this shift in behavior only accounts for a small fraction of the physical money in the system, and it fails to thoroughly explain why there is so much cash circulating, how people use it, and why it’s so coveted.
As if channeling the anti–Robin Hood, Birch lays it out plainly. “Cash is a black hole for tax revenue.” We’re lingering beside a museum display case crowded with centuries-old receipts, written in sweeping cursive, documenting loan amounts, payments made, and taxes collected. By supplying us with cash, he says, governments enable the very evasion they wish to curb. “Doesn’t anyone else find this at all odd?”
Birch elaborated in a blog post: “No one uses 500-euro notes for day-to-day transactions, and if they were withdrawn from circulation it wouldn’t make the slightest difference to the 99.97% of the European population that isn’t trying to avoid Spanish property taxes.”52 Similar critiques have been leveled against $100 bills. Although Benjamins are “small denomination currency,” according to the Bureau of Engraving and Printing’s website, they account for about 60 percent of notes in circulation. 53 In 2010 alone, $268 billion worth of $100 bills were printed, the majority of which were or will soon be whisked overseas because that’s where most of the banks and drug dealers demandin
g it are.54 The Fed itself estimates that 90 percent of all C-notes have been sent to foreign banks, and most of those notes have no interest in repatriating.55
Although governments profit by providing cash, they’re also swindled out of huge amounts because of it. It’s part of what the IRS calls the tax gap: the difference between what taxpayers should cough up and what they actually pay.56 In 2008, some 84 percent of Americans voluntarily reported and paid what they owed.57 But there’s still that gap: almost $350 billion a year.
On his blog, Birch recounts a conversation he had with a fellow consultant. The guy had just boasted that he was saving a lot of money by paying his contractors in cash—“£50 notes in bundles of £2,000.” Birch responded that he should be reported to the police and prosecuted for conspiring to evade taxes, because that was obviously why the contractors wanted cash. “My objection,” Birch continued, “is that by helping other people [and himself] to evade tax, the person in question was making me pay more tax: the use of cash facilitates the transfer of wealth from the law-abiding (e.g., me) to the law-breaking (e.g., his builders). This seems immoral to me.”58 It also helps illuminate why Birch defies the easy characterization often assigned to people who complain about fiat currencies. Part of the reason he favors electronic money is precisely because it would help government, insofar as making tax evasion harder.
In the United States overt evasion, or for that matter cash-enabled evasion, doesn’t account for all uncollected taxes. Intentional evasion is only one piece of the noncompliance equation. Noncompliance, or taxes not paid, can result from underreporting (accidental or intentional), underpayment (accidental or intentional), and nonfiling (accidental or intentional, but let’s not kid ourselves—this one is intentional, as jailed actor Wesley Snipes can attest). Every year the U.S. government loses nearly $260 billion due to individuals underreporting, underpaying, or not filing their taxes. The rest of the gap is from businesses.f
