India joins in global cashless policies, but it took a chaotic turn.
December 12, 2016
By: Bobby Casey, Managing Director GWP
India’s approach to going cashless was quite extreme and a little different from those of Australia, Scandinavia, and the EU. For one thing, the latter countries are far more developed. With that development comes two major things: more people connected to a banking system and the poor not relying on larger bank notes.
India has NEITHER of those factors going for it. It wants to purge the system of corruption and criminality, as many well intended advocates of cashless policies do. But to eliminate the 500 and 1000 rupee notes would be like eliminating the $10 and $20 bills from the United States. Everyone, of every socio-economic tier, relies on those notes still being in circulation. When the EU decided to eliminate 500 Euro notes, as the US contemplates the elimination of the $100 bill, it’s because those denominations aren’t in popular use to begin with.
The 500 and 1000 rupee notes were the highest denominations in circulation, however, once the ban took place, India was given about a month and a half to get to a bank and turn in their high notes for other smaller denominations. This ban amounts to what some estimate to be 80% of the currency that was in circulation in India.
Demand for cash withdrawal was already up by 15% before this ban was implemented. There are lines around the block for ATMs that are emptying before everyone can get their money. Business has come to a screech because they can’t accept the 1000 and 500 rupee notes, nor can they make change for the new 2000 rupee notes because they can’t get the smaller denominations.
“Part of the problem is the poor penetration of banks in India’s villages — there are only 18 ATMs per 100,000 citizens in India, according to the World Bank, compared to 129 in Brazil. Additionally, just 22 percent of Indians use the Internet “at least occasionally” and only 17 percent have a smartphone, according to a Pew Research Center report.” (Source: Bloomberg)
Why not just use your card?
“Just over half of the nation’s adults have bank accounts, a precursor to using digital payments. Roughly 98 percent of all transactions are in cash, with 11 percent of consumers using a debit card in 2015, while most retailers don’t accept cards.”
“The government has made patchy progress on financial inclusion since 2014, helping the poor open 256 million bank accounts. However, 23 percent of these remain empty, according to the government, revealing an overwhelming preference for cash.” (Source: Bloomberg)
Banks don’t have the bandwidth or the means to meet the demands ordered by this government ban. They are telling people to try and open new accounts after December. They can’t service the lines of people being told to turn in their older and high denomination notes.
The problem with fiat currency is exactly this: one day 100 rupees notes are worth about $7-$8; the next day, no one will accept them as legal tender because by the same fiat power the government will declare it worthless. They can’t do that with crypto-currency or other physical stores of wealth like gold or real estate.
There are those who advocate using the power of fiat to disincentivize the use of cash. One such person is Kenneth Rogoff. He’s a Professor of Public Policy at Harvard University and former Chief Economist at the IMF. He suggests a slow and gradual move away from cash that initially offers a convenient means of turning in large notes, but then:
“[O]ver time make it more inconvenient by accepting the big notes at ever fewer locations and with ever stronger reporting requirements.”
Technology has certainly reduced the need to carry cash around everywhere, but we are heading toward a shadowy place when we eliminate the physical backing to that money.
Carrying gold around was replaced by paper notes, and then the gold standard was abandoned. Now paper notes are being replaced by 1’s and 0’s and physical cash is being abandoned.
Before people claim that this is no different than bitcoin or other cryptocurrency, I want to point out some very clear and important differences:
- Cryptocurrency is self-regulating. It doesn’t just get mined to infinity and beyond. It is finite. There aren’t any central planners with political agendas controlling its production. It has lately become a hedge against fiat currencies around the world, and for obvious reasons. Much like gold is a hedge against the dollar.
- You keep it with you. You have a block chain wallet and take your crypto currency with you. It might be 1’s and 0’s, but they are YOUR 1’s and 0’s and your anonymity is preserved.
It might seem like a distinction without a difference, but crypto currency abates the three major concerns I have about the war on cash or cashless societies: anonymity, the ability to take it with you, and lack of government control (at least for now).
As I’ve said before, I’m not opposed to the 1’s and 0’s, I’m opposed to the abolition of choice in how I store my wealth. I’m likewise VERY disturbed and frightened by the caps banks can and are placing on physical withdrawal of cash as well as the other regulations on banking people are being subjected to.
From the looks of it, the demonetization policies taking place are really preemptive strikes against free people. Preventing counterfeiting, money laundering, and tax evasion apparently entails controlling and tracking withdrawals, deposits, and spending.
If governments the world over are willing to take such measures to control you economically, it doesn’t seem so crazy to believe the lengths they will go to control any other aspect of your life.
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