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Thoughts from the Frontline

The Cashless Society

April 27, 2013

But Mousie, thou art [not alone],
In proving foresight may be vain:
The best-laid schemes o' mice an' men
Gang aft agley,
An' lea'e us nought but grief an' pain,
For promis'd joy!

Robert Burns, To a Mouse, on Turning Her Up in Her Nest with the Plough

It is a common trope in science fiction novels. Economic transactions are handled seamlessly with a wave of a card or a physically imbedded chip, and whatever the author imagines money to be is transferred, far removed from the archaic confines of ancient physical monies. If you Google "cashless society" you get about 600,000 references in under a second, and 20 pages into the references there are still articles on a future world where physical cash is no longer needed. Some see it as a sign of the "end times," some as a capitalist plot, some as a frightening vision of socialists and ever-bigger governments, and some as a logical step in the evolution of a technologically driven international commerce.

And some of the "cashless society" references are showcase articles for the latest innovation that turns your phone or smart card into a functional wallet. I can attest it is quite possible to go for days without needing actual cash (as long as there are no kids around). The Bitcoin phenomenon (28 million sources on Google!) is a libertarian enthusiast's dream of not just a cashless society but a society with no need for fiat money and central banks.

Today we'll look at research suggesting that cashless future might be farther off than we either fear or hope. Not only is a cashless society farther away than some think, we are actually seeing an increase in the use of cash all over the world (and this is not just a US phenomenon). We will look at some interesting factoids that in themselves make for thought-provoking discussions, but when we couple them with research on the rise of the unreported economy (aka the underground economy) and the number of people who get some form of government assistance, we may find problematic consequences resulting from hidden incentives that work in unintended ways.

The Underground Recovery

In a recent New Yorker article entitled, “The Underground Economy,” writer James Surowiecki explores the import of a study by University of Wisconsin economist and professor emeritus Edgar Feige, who for many years has done research on the amount of actual cash in the US. Feige has recently updated his work.

What prompted me to follow up and then finally to discuss his work personally with…

Discuss This


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Carl Bechgaard

April 30, 2013, 1:27 p.m.

Perhaps the surprisingly large average amount of cash held per capita can be explained mostly by one commercial activity which operates strictly on a cash basis: the narco trade.

April 30, 2013, 2:25 a.m.

Welfare is far more poorly constructed than what is represented by the graph from the Urban Institute shown above. In Pennsylvania there are step function declines in benefits at specific income levels that make it better on a net basis to earn 29,000 with assistance than it is to earn 69,000 without benefits. This creates massive incentive to operate on a cash basis to avoid loss of assistance.

See page 8

Jerry Lobdill

April 28, 2013, 12:15 p.m.

During the Iraq war it was disclosed that periodically bales of paper US FR bills were shipped from the NY Fed to Russia, and also Iraq. No FR accounts were drawn down to pay for these FR notes.

This would not have been possible under the rules stated in Modern Money Mechanics. Neither would it be possible for moral hazard to cause the financial collapse we have seen in the banking system.

The changes in the rules were engineered by people who knew exactly what they were doing and what the result would be. 

The effect of the international sloshing of cash FR Notes not purchased by the original recipients has the same identical effect on the system as an equal infusion of counterfeit bills.

Our monetary system has been hijacked. No longer is it true that M1 is directly linked to GDP.

I think this is more important than the issue of cash vs cashless commerce.

Tom Warner

April 27, 2013, 2:27 p.m.

This is very interesting, especially the revelation that the New York Fed has been concealing such important data for so long, apparently even from the Fed’s own Board of Governors. Welcome to Byzantion.

I’ve spent a lot of my life in countries that use dollars as second currencies, and my intuition tells me that there is more 230 billion dollars abroad. But the paper you cited has me questioning my intuition. How many dollars do they really need to have to make it seem as plentiful as it did? I don’t know.

I do know that the dollars reached the countries I was in through official channels, shipped to the local banks and then sold out of networks of exchange booths around the country. Which should all be counted by that NY Fed data. I have no reason to believe any significant amount of dollars was getting there by any other means. I can see substantial amounts of dollars getting smuggled into Mexico and central America through criminal networks, but I doubt many dollars are smuggled to south America, eastern Europe, Africa or Asia. So I really don’t know.

Look at it this way, $230 billion abroad is around 35 bucks per man, woman and child outside the US. That seems small to me, but I have to admit I don’t really know.

What I do know is that the mast majority of growth in notes in circulation is in $100 notes. So I don’t think it could have much to with the US “grey” economy - doing legal work on an illegal basis, such as working as a driver while on disability or while in the country illegally. Thanks to Bradley for making the point that employers of people who are working while collecting disability et al pay with checks, not stacks of $100 notes. I think though a fair number of people on welfare do find some kind of work especially as nannies. All the recipient has to do to avoid detection is take the check to a “checks cashed” shop. Drive through any low-income neighborhood and count how many “checks cashed” shops you see per mile. They’re all over the place. These places take a hefty cut, and personal bank accounts are almost free, so ask yourself, why so many “checks cashed” shops? But this “grey” economy has always been there. Disability is becoming more widespread, but otherwise not much really has changed in 20 years. I don’t think that grey employment is a reason for notes in circulation to grow faster than GDP. Plus, I doubt many people cashing checks at “checks cashed” are taking $100 notes. $100 notes are pain these days, lots of shops won’t take them. For the same reason $100 notes can’t be very big in “grey” transactions.

So that really leaves two places for all those $100 notes to be: abroad, or in the US black economy. The criminal gangs definitely use $100 notes. And not only for circulation: they stash substantial sums. Are they holding hundreds of billions? All of the gangsters put together, maybe.

jack goldman

April 27, 2013, 8:09 a.m.

America is becoming a less free, more Communist, more central controlled society each day. All forms of money should circulate freely but who in their right mind would pass off an ounce of gold, an American Eagle, when it says is is $50 face value? Our money is intentionally counterfeited, debased, and destroyed by the “powers that be”.

A gallon of gasoline was three silver dimes in the 1960’s and is still three legal US Treasury silver dimes in 2013. Trouble is the massive expansion of government and banks required unlimited counterfeiting of paper money. The dollar has lost 90% of it’s value driving most things like cars, houses, and movie tickets up 1,000%.

Bankers, brokers, asset owners, and government employees are the winners. Children sold into debt slavery, families where men no longer marry, renters, and employees who pay 51% income and other taxes, are the losers. In other words the middle class has been wiped out by counterfeiting the money supply. Winners love this war, the billionaires.

Average people played this debasement with real estate debt but the bubble popped in 2008. Few middle class own stocks or bonds. Rich people own stocks or bonds. The public savers are being raped with zero interest rates to heal the over extended banks. This is a tragic transfer of wealth to heal banks that should have been allowed to go bankrupt. Capitalism is dead. Socialism is dead. We are now in Communism 2.0 where we get two false choices about things that don’t matter. This massive counterfeiting and Communism 2.0 traditionally ends in tears.

A cashless, centrally controlled, bank controlled government is the Communist dream and the death of freedom. What did you earn? Send it in. Oh, we already have it.

Good luck to us all in this global experiment with counterfeiting to subsidize a failed society.  By the way Communism is Facebook, where a central planner controls all people. I don’t use Facebook and never will.

Bradley Dressler

April 27, 2013, 4:56 a.m.


A few corrections to your piece if I may.

I owned a construction company for 25 years and for at least the last 10 we had no direct employees.  However, that was not a case of cheating workers comp etc, it was a business model of farming out everything to sub contractors, or if we wanted to run a crew, using a payroll company to be the “employer”. Many contractors conduct business this way. To skimp on workers comp is a quick route to jail and financial ruin if someone gets hurt, so most rational people do not go down that path.

As to the shadow economy, are you serious, welfare people working off the books? I know businesses that hire people all the time off the books. Why, because they are most likely on disability and in some cases on social security. These are people who are hard working skilled workers who do not want to risk their disability status or interfere with the amount they collect from social security. Welfare people are generally unskilled welfare people. Disability people and active retirees are anything from electricians to accountants.

And as to how people really get paid in “cash”, you don’t actually pay them in cash.  You give them a check which they take to the bank and turn into cash. If the check never hits their account the IRS doesn’t know the income existed. The person who wrote the check though deducts the check as an expense. So from an economic ledger standpoint you have an expense with no corresponding income.

Love your writing, and thank you for moving back to Saturday

April 27, 2013, 2:59 a.m.

Dear Mr. Mauldin,

I wish you were not so coy about this, with your conclusion about “what messages we are sending.” The message we are sending is that paying taxes is a fool’s errand, especially when we see a huge disconnect between public sentiment and the apportioning of the public purse. What were the poll numbers against the TARP bailout? North of 70 per cent. Didn’t make any difference. Today we read in the NYT (even there!) about how the administration is ready to surrender on a lawsuit alleging discrimination against black farmers. The payout: four billion. The reason for the surrender, addressed more or less explicitly: the money will go to Obama voters.

The middle class is sick and tired of both the Reps and the Dems using public money to pay off their voters (Dems) and donors (Republicans).

Another message that the middle class is getting is that the top and the bottom are allied against the middle, a common historical pattern. The cultural and social elites think nothing about importing tens of millions of poor Mexicans and others so that the Democratic machine becomes permanently entrenched. It blows my mind that any serious discussion of the underground economy does not talk about illegal immigrants. About how, almost by definition, they do not pay taxes. And about how the middle classes are feeling cheated by having to compete against this kind of workforce (even while some do benefit from it in some way, although the benefits go mostly to the upper class owners).

You read about Gates and Zuckerberg wanting to import as many IT workers as they want, so they can pay them less than American workers. (There is no end to the jobs that “Americans won’t do”. Or rather would prefer not to do when subjected to ruinous wage pressure.) Clearly, those guys have a greater loyalty to their own companies and their wealth than to their country. Why shouldn’t Joe Sixpack learn from their example?

Adam Smith was very clear about the fact that self-interest is not sufficient to hold together the kind of civil society that capitalism requires in order to function efficiently. Well, civil society has been under attack in America for decades. See the book Bowling Alone, or the very perceptive blog of Steve Sailer.

Popular democracy is broken in America. Instead, we have ethnic and class interest groups. Without the sense of belonging that a vote given you, wh put into the common kitty? No taxation without representation, right? Tell me again, what was the vox populi on the Iraq war? And how much did that misadventure cost every taxpayer, per capita?

Michel Bastien

April 27, 2013, 1:53 a.m.

The fact that corporations have cut defined-benefits pension plans and health care plans over the years (and other benefits as well) give an incentive to workers to fend for themselves. What is the point to stick with an official job that only gives you limited unemployment benefits (compared to other western countries). Better to be self-empoyed and declare as little revenu as possible.

Michael Crofts

April 27, 2013, 12:44 a.m.

We have the same problem in the UK - t’s the same everywhere there is a welfare state. Why not pay everyone a flat rate income? Everyone who is over High School age gets it, the amount is the same for everyone, no complicated rules. Make the payment subject to ordinary income tax so the well-off benefit less than the very poor. Fire the welfare workers - all of them. Cut out all the complicated administration of social security - just pay a flat rate to everyone, regardless of “need”, regardless of whether they work or not. If necessary, cut other government programs to pay for it. Instantly there is an enormous incentive to work. Tax evasion would still be a problem but there are ways to deal with that.

April 27, 2013, 12:05 a.m.

Superb article, John, really.

For years now I’ve been learning from your letters.  With the WSJ, they are my most valuable source of fact-based thoughtful research I have.

You are a blessing to the ones of us who, hammered by the financial disasters of the last few years, cannot afford multi-hundred dollar per year subscriptions to exclusive publications or high-fee prestigious investment options.

Thank you so much for what you are doing.  You are the most generous “social worker” I know.  You give for free the most valuable commodity there is: outstanding usable knowledge.  Please don’t stop.

Dino de Falco
Austin, Texas

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