A world without notes & coins

Assorted international currency notes.

Image via Wikipedia

Niall Ferguson in “The Ascent of Money– A financial History of the World” says that money is a medium of exchange, which eliminated the inefficiencies of barter. It allows transactions to conducted over a long period or distance. To perform these transactions it should be available, affordable, durable, fungible, portable & reliable. Thus money has evolved from metals to notes & coins today. 

“Money’s the same, whoever gives it to you. That was the point of money, after all: crisp and clean or wrinkled or disintegrated into quarters – a dollar was always worth a hundred cents.” says Scott Westerfeld, The Last Days, 2006. How correctly said. One of the properties which money adopted was that it loses trace of what it was used for very easily. From where the money came does not matter. In a world where blood diamonds are abhorred, goods made using child or prison labour are despised, there is black money, there is drug money, but all of this can be & is laundered so that it loses its identity very soon. 

Scientific American reports that a study of US Dollar bills across 18 cities in 2009 showed that 90% of them has Cocaine traces. While this is alarming itself it is not possible to trace the people who did use it or sell it. Can we make it difficult for money to loose its identity. It was not easy earlier but now technology is available which can make this possible. When you give a currency note to someone the transaction itself is an anonymous one unless for some other reason it is recorded. But if we remove the notes & coins from circulation & allow only electronic (credit cards, mobile, online) & Bills of payment (cheques, promisary notes, etc.) to be allowed it can solve many problems at one go. 

How? Today electronic banking & more importantly mobile technology has provided a solution whereby monetary transactions can be done thru mobile. Infact, in 2009, 4.6 Billion people already have a mobile connection. Of the others who don’t have half a billion each stay either in India or China. Going by the growth rates in these countries it shouldn’t be long before almost everyone has a mobile phone. The technology of making payments thru mobile phones already exists. Zain with its service Zap already provides mobile banking to over 200 million in Africa. When Bharti acquired Zain it possibly acquired a bank of the future. 

Record of all the monetary transaction will achieve many objectives: 

1. Help in preventing tax evasion: If all the transactions are captured & linked to the person who did it, it would be very difficult to avoid paying taxes. This would go a long way in actually reducing tax rates) 

2. Trail for finding criminal activities: The way we need to interact & do transactions with many people to live our life so do criminals. They cannot solely operate outside the financial eco-system. This tracking will make life miserable for them, or so I hope. Thus it can go a long way in reducing funding for terrorism, drugs, illicit trafficking, etc. 

3. Financial inclusion of the poor: The banks like to deal with people who have very strong financial credentials. They like to lend to those who don’t need money. Electronic payments will leave a trace of financial activities for all the strata of the society, specially the poorest. This can be used very effectively by the Microfinance Institutions & later on by bigger banks as well. 

4. Enforce a better moral code: Compliance does play a good role in shaping what we stand for. People who have to follow rules later on quite emphatically state why those rules are good for them. This learning from behavioral economics can be put to good use. The fear of being found out can stop a lot of people from doing activities which they socially cannot own up. 

This is no panacea for all the evils: 

1. Tax havens need to co-operate else they will be the backdoor entry. Also all the major economies need to collaborate, else only the currency will change. 

2. The nefarious elements will just move to the other modes of transferring value like barter. But this is better as it will make their lives a bit difficult. The other modes have their own set of problems. They also can be tracked without creating problems for the law abiding citizens. 

3. As Robert Jackman says “Men are more often bribed by their loyalties and ambitions than by money”. Till people will want more than they are capable of getting they will try shortcuts which are not acceptable. 

What I suggest is simple. Make mobile banking universal & remove all coins & currencies out of circulations. 

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5 Responses to A world without notes & coins

  1. Suresh Mutyala says:

    Didn’t exactly get the point. Mobiles can at best be a medium for exchange, it can’t become the currency itself.

  2. Dear Suresh,

    Thnaks for posting the comment.Possibly I did not explain completely. I completely agree that mobile can become the medium for exchange & not the currency itself.

    But if everybody in the world uses mobile for doing monetary transactions all the time, then physical notes & coins are not required atall. This has many advantages as stated in the blog.

    Imagine a world where you shops for flowers, pick up your mobile, enter the amount in an application similar to SMS, enter the mobile number of the flower vendor, enter the password & send the money (as SMS). Wow, the trasaction has happened, trace established, the vendors gets the money in seconds in his mobile bank account. he can now use it to make payments to whoever he wants in the same way. The cost of this is practically Zero. Far lesser than printing notes & minting coins, counterfeit currency, tax avoidance, etc.
    Banks dont print money (Reserve banks do it) but they control the economy as they provide the conduit. Mobile companies if they get into this space they can become the next generation banks. Infact thye are more likely to do this than banks. Most industry chnaging innovation comes from players outside the industry who are on the fringe. The industry leaders are too comfortable in their current success.

  3. Vineet Bhardwaj says:

    Hi Uday,

    I think the idea is great and it will definitely help to curb another menace of our society i.e. Corruption.
    There is already a positive move with the news of ‘RBI allows Airtel to offer limited mobile banking’. News Article link – http://www.deccanchronicle.com/business/rbi-allows-airtel-offer-limited-mobile-banking-147
    The onus of making it big and successful lies largely in the hands of consumers like us and we need to encourage and educate people to make good use of it. I expect that there will be huge resistance from the public initially but this initiative is definitely going to be a success.

  4. Thanks Vineet, this is truely a move in the right direction. RBI has now allowed it as an option. At some stage RBI should start discouraging the use of paper & coins. Infact a step in this would be to have only small denomination notes.

    Excellently explained in the article here.

    When you dissuade people from using physical cash & move to online channels avoiding tax would become more difficult.

  5. Deepak Nagar says:

    Hi Uday

    I guess AADHAR or Unique Identity initiative could create a good platform for making all monetary transactions virtual without the necessity to hold the currency in physical form.

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