Toward a cashless society: hundreds of lives and more than a trillion dollars can be saved each...

As far back as 1888, novelist Edward Bellamy envisioned a cashless society by 2000, but it still hasn't come. A major step toward cashlessness came with the advent of electronic funds transfer (EFT) technology, which ushered in the era of credit-card transactions in the mid-twentieth century.

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But the march toward cashlessness stalled due to wariness about invasions of privacy. Scholars and public leaders alike are reluctant to consider the idea of replacing cash with an electronic currency system, particularly one operated by government, lest they be seen as willing to compromise privacy. These concerns have also hindered discussion of significant social and economic benefits that could result from ending the use of cash, including major reductions in taxes, vastly improved public services, and the total eradication of many of the most serious and violent crimes.

True cashlessness will come about only if a government undertakes the project since only government can put an end to the production and circulation of cash, and only government can realistically administer an electronic replacement for cash. The payment industry (including VISA, MasterCard, and Citibank) cannot replace cash completely, despite smart cards, cybercash, and other innovations.

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Though the public enjoys the conveniences of "plastic," it still loves money. Virtually everyone carries some currency and coin, and the amount of cash in circulation continues to rise. The very idea of abolishing cash in favor of a government-operated electronic currency strikes many citizens as peculiar and questionable. A typical reaction is, "I use very little cash nowadays anyway, because I use a credit (or debit) card for most of my purchases. Cash will probably fade away of its own accord someday." And, "We're getting along fine, so why put everyone to the bother of learning and adopting some new money system?"

The world is hardly "getting along fine" with cash. Most crimes are either committed to steal cash or use cash as a method of payment. Drug trafficking is conducted exclusively in cash. The bulk of tax evasion is hidden in cash transactions. Cash carried in purses and wallets continues to make everyone a potential robbery victim. Throughout history, cash, in coin or paper notes, was a problematic necessity for which there was no practical alternative. With the advent of EFT, however, the relative detriments of cash can be targeted, if not eliminated.

Ending the use of tangible cash would greatly boost the quality of life by reducing crime. The most direct and noticeable effect of ending tangible cash would be the disappearance of bank robberies, cash-register robberies, and muggings. Other illicit activities reliant on cash, such as receiving stolen property and bribery, would nosedive as well, because with anonymous cash gone, any alternative payment medium would leave a trail that would serve to detect and prove, and hence deter, those criminal acts.

Crippling underground illicit activities would also generate billions of dollars in previously unreported tax revenues. Ending cash would also save industry the billions of dollars required to handle currency and coin. Overall, the social and economic potential in converting tangible cash to an electronic system is staggering.

Reducing Cash-Related Crime

I have proposed that government replace currency and coin with an electronic equivalent that I label FEDEC, or federal electronic currency, which would emulate tangible cash as closely as possible except for its physical form as paper or coinage. The national government would operate the system and guarantee the new electronic money. FEDEC would not replace credit card and other private-sector EFT systems and networks, nor would it replace bank-checking systems. It would operate as a separate system in which every person and legal entity would have an account. Funds would transfer within the system only from one account to another, and there would be no direct interchange with private-sector payment systems.

Under my proposed system, funds would be completely traceable. It would be foolish for culprits to somehow electronically "steal" FEDEC funds by moving someone else's funds to their own account. All transactions through FEDEC could be tracked, making it simple for authorities to identify and prosecute thieves. Furthermore, if any hacker-type thefts are perpetrated through this system, they would occur without the violence and terror that marks much of today's cash crime. This would be indeed a monumental gain, reducing the number of serious injuries in hospital rooms and on the street and providing a measure of security for users everywhere. The federal government would supply further security by insuring against losses from any theft that happened to slip through the system or any other threat to a FEDEC user's funds.

This type of security would be impossible if the new cash could be used anonymously. A key difference between tangible cash and almost any other form of money lies in traceability. Cash itself bears no indicia of ownership, and transactions in cash are not recorded. Whoever possesses it, owns it--no questions asked. Clearly, it is the ideal payment medium for theft and secret dealings. On the other hand, electronic transactions, at least in a nonanonymous system, are recorded. In such a system, transaction dates, sums transferred, and account numbers--as well as the identities of the transacting parties--would leave a paper or electronic trail, and would be technically available to legal authorities. Even today, authorities in legally prescribed circumstances often access credit- and debit-card records in criminal investigations, since non-cash payments are recorded and may serve as evidence. FEDEC would operate similarly: In drug investigations or other criminal proceedings, all transaction data and facts could be retrieved and the gathered evidence could be used against criminals in court. Abolishing cash in favor of a recorded medium of exchange has the potential to deter, if not render impossible, the bulk of crimes.

Each year, nearly 3 million Americans are victims of crimes in which criminals target cash, according to extrapolated statistics from the U.S. Bureau of Justice Statistics. All over the world, cab drivers, convenience-store clerks, bank tellers, and others who deal almost exclusively in cash are accosted daily and often murdered, simply because they possess currency, and the impact of these crimes resonates throughout society. A quarter of a million people sustain injuries as a result of crimes perpetrated to obtain cash each year. The 3 million annual burglaries in the United States clearly diminish the security of homes, neighborhoods, and businesses. The use of tangible currency restrains retail business, controls where people shop and travel, and influences the use of guns and other measures citizens take to prevent themselves from becoming crime victims.

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Making cash electronic has the potential of making workplaces and crime-ridden neighborhoods safer, reducing prison populations, and freeing up emergency rooms. It could bring down insurance rates, cut public outlays for law enforcement and courts, and much more. If drug crimes and tax evasion, both of which are conducted almost exclusively in cash, are included in the calculations, the fiscal relief could run as high as a trillion or more dollars each year.

For point-of-sale usage at retail establishments, the new electronic cash would likely employ equipment and procedures similar to that of credit- and debit-card systems. Current products for mobile payments are somewhat bulky and specialized, though wireless terminals exist for use in taxis and delivery vehicles and at temporary sales booths. Non-retail, person-to-person electronic payments, though they would account for less than 1% of "cash" payments, do not have a counterpart currently. That need could be met by the use of personal terminals: Each account holder would own and carry a terminal device, perhaps the size of a wallet or a cell phone (and perhaps a combination thereof). If Bob wants to borrow $5 from Alice, all he would have to do is swipe a card in her terminal. She would indicate the amount, and the data would transmit to a processing center. An instant later, Bob would be able to use $5, and the system would know that he owes Alice.

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No matter the exact format that a new electronic currency might take, it is difficult to imagine any other single innovation that has the potential of generating such profound social and economic benefits. Hundreds of lives could be saved each year, tens of thousands of debilitating injuries prevented, billions of dollars could be saved in public services, and hundreds of billions of dollars in wrongfully withheld taxes could be raised--enough to finance universal health coverage for the entire United States, for example, or to subsidize other worthy purposes. Why then, one wonders, would anyone resist the idea?

Privacy Issues

The greatest obstacle to a federally operated electronic money system lies in people's suspicion that conversion from anonymous cash transactions might expose private monetary data to official scrutiny, which many regard as a threat to privacy or even as a step toward oppressive governance.

The welcome efficiencies of computers, electronic data transmission, and the Internet have, unfortunately, also ushered in abuses, ranging from misuse of medical data to identity theft, spam, and a variety of unwelcome and irritating marketing schemes. The creeping invasion of privacy has engendered widespread wariness, if not a negative bias, against any suggestion to create new electronic databanks and to collect personal data. Privacy, which until recent years had been a nebulous term, has risen from relative obscurity to a position of equality with other major rights. But the pendulum can swing too far.

Those who focus their efforts exclusively against invasions of privacy too often are oblivious to greater and more harmful social enemies. In the matter of electronic currency, they stand fixed to defend privacy while ignoring the robbers, murderers, thieves, kidnappers, drug dealers, and tax evaders who attack individuals, wreak widespread misery, and, collectively, compromise the pursuit of happiness.

It is inconceivable that an electronic currency system would be enacted without the inclusion of privacy-securing safeguards. As I envision an electronic currency system, no one would be authorized to access private data without legal grounds and a court order or warrant.

In actual operation, tens of millions of daily transactions would be processed automatically, efficiently, safely, and virtually anonymously to all but the transacting parties. Only a minuscule number of transactions would ever come under the eyes of administrators or officials, and then only after due process of law. Cashlessness and privacy are not incompatible concepts.

Who's Afraid of Big Brother?

A number of individuals fiercely oppose the idea of federal electronic cash. Some equate the anonymity of cash with liberty. Such critics are motivated by many factors, perhaps the greatest being the threat of "Big Brother" and all that implies.

Mere mention of the concept to some triggers a reaction that assumes that any government-operated electronic money system could be used by dissolute law-enforcement officials and bureaucrats to carry out authoritarian schemes. They envision such data being collected in government-held dossiers and worry that recording cash-transaction data would afford government a means of absolute control over citizens. One privacy advocate refers to "some [unspecified] people who are just drooling" to acquire the means to invade privacy. Another critic of the proposal for federal electronic currency says it should "terrify anyone with the slightest concern for liberty and freedom."

But concerns must yield to the real terror suffered by convenience-store clerks, cab drivers, and bank tellers. Each month, about 100 Americans are murdered and 3,500 more are seriously injured in crimes involving cash. It is patently wrongheaded to ignore these facts, particularly on the implausible expectation that electronically collected data might somehow facilitate creation of a totalitarian regime.

Despite more than 50 years of unfulfilled prophecy, George Orwell's novel Nineteen Eighty-Four, with its Big Brother, two-way television, and Newspeak, still exerts a powerful influence on many people. Orwell warned of how surveillance technology might enable governments to carry out authoritarian schemes to the extreme. As history has unfolded, however, the England and the United States alluded to in his book have hardly become totalitarian states. To the contrary, the technologies Orwell so feared would be used against citizens have been used to protect citizens, as with ubiquitous public cameras in Britain, for example, and screening devices increasingly used in airports worldwide.

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The most cynical of Orwell's disciples envision the government employing invasive surveillance and computerized intelligence to control its citizens. Electronic currency, they suspect, would grant cunning politicians a means for totalitarian rule.

But government officials do not need additional technology in order to acquire prohibited personal financial data; they already have ample means at their disposal. For example, they could easily tap into the voluminous checking-account data processed by banks in the U.S. Federal Reserve System and search through private financial data.

Only adherence to law, and not the lack of means, prevents government from intruding on privacy. In the United States, federal officials have an increasingly good record of respecting laws that protect individual privacy, and no valid reason exists to predict that they would flout laws after electronic cash came into being. Indeed, data in a federal electronic currency would serve to deter bribery and other covert and illegal activities that might otherwise be carried out by officials themselves.

Abolishing cash would necessarily entail some loss of privacy because one could no longer transact monetary business without the possibility of recording payment data and thus having it exposed. But this loss would be limited to data from illicit acts and would result only from the fact that cash transactions, as a matter of feasibility, are usually beyond the observance of authorities or others entitled to it. That should not be regarded as a legitimate loss of privacy.

America loses more valuable resources from the side effects of tangible currency than it does from wars, terrorism, and even natural disasters. That makes electronic currency, whether recorded or anonymous, simply too advantageous a step to pass up.

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RELATED ARTICLE: Scenario for Going Cashless

Federal electronic currency, or FEDEC, would have to be implemented in stages. I estimate that it would take about 10 years to be available everywhere. Physical cash would continue to be available for several years, coexisting with FEDEC. Following initial trials and a pilot program, the FEDEC system would first be offered to retailers. The cost of FEDEC terminals (or the cost of programming FEDEC into existing universal card terminals) would be borne by industry. I believe the overwhelming majority of retailers will gladly make the switch to the new system, because it will insure against lost sales and reduce the far greater cost, bother, and security risks associated with cash. As an inducement, I foresee the federal government providing transaction cards for free to individuals.

At some point, retailers would be legally allowed to refuse tender of tangible cash. This would further prompt individuals to apply for FEDEC accounts. At about the same time, individuals would be offered various models of federally approved personal terminals for purchase to facilitate interpersonal transactions that don't involve a business, like giving your kids an allowance.

At a later stage, before government withdraws currency from circulation altogether, it would have to address the needs of the poor. Conceivably, government might deploy terminals for everyone's interpersonal use in post offices and other public places or build the system into public telephones. Perhaps personal terminals might be provided to the poor for free. Any implementation plan has many possible variations.

Clearly, designing, building, and deploying FEDEC would require major governmental outlays and impose significant costs on industry. The mere processing of several hundred million FEDEC account applications alone, each of which would have to be verified, would run in the hundreds of millions of dollars, if not more. Yet, the tradeoff of cost against the benefits to be gained is an absolute lopsided bargain.

FEDEC Monetary Benefits

Handling and processing of tangible cash costs more than $60 billion a year, according to an in-depth study by the Food Marketing Institute. This amount includes the 550 billion annual cash transactions; costs incurred by the U.S. Treasury Department, the U.S. Federal Reserve System, and banks; and the estimated $10 billion stolen from individuals each year. These costs would disappear under FEDEC.

Furthermore, ending cash will likely generate over $30 billion in previously unrealized federal income taxes, $4 billion in unrealized state sales taxes, and $10 billion in state income taxes across the nation. Conversion to FEDEC would also produce savings of $25 billion in criminal justice outlays and $17 billion in reduced government fraud. The total savings to the nation as a result of converting from cash to FEDEC approaches $150 billion a year.

David R. Warwick

About the Author

David R. Warwick is a realestate developer, investor, and former attorney. He is author of Ending Cash: The Public Benefits of Federal Electronic Currency (Quorum Books, 1998) and many articles in various publications. His address is 5730 Bennett Valley Road, Santa Rosa, California 95404. Telephone 1-707-545-9898; e-mail warwick@sonic.net.

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