A world without notes & coins

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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. 

Related Articles

• The History of Money (mint.com)