10: Abolish Paper Money

O.K., O.K.--not all paper money, but certainly bills over $50. They'll be mourned only by tax cheats, drug dealers, and other criminals

Gresham's Law holds that bad money tends to drive out good. These days, though, cash itself--loot, moolah, clams, bread, the dear old greenback, in short--is getting whacked. Go to the movies, shop for groceries, and the cashier is delighted to run a debit card through a terminal that zaps payment straight to the vendor's account. On many highways, an electronic pass pays the toll. And when you write a check, the money is switched from your account to the recipient's electronically.

So, is the much-forecast day of the cashless society upon us? There's no question that consumers love the convenience of electronic money. Last year, they paid just 19% of their $5.4 trillion worth of transactions in cash, vs. 25% of payments totaling $2.3 trillion in 1990, according to The Nilson Report. By 2020, figures Nilson publisher David Robertson, little more than 10% of payments will be in cash. "The technology now exists for a paperless society," he says.

But cash isn't about to be consigned to the museum. Imagine having to pay for such items as a newspaper or a delivery tip without small bills or coins. Besides, the cost of converting billions of parking meters and vending machines to accept electronic payment would be astronomical.

Although consumers are using a lower proportion of cash in making payments, they still hold plenty. The Federal Reserve figures there's enough of the green stuff in circulation for every man, woman, and child in the U.S. to have $2,178 in bills stuffed under the mattress. But, says the Fed, the average adult carries around only about $100 in cash. So where's the rest? About half is circulating abroad; the other half is used in illicit activities, such as tax evasion and drug peddling.

Criminals prefer paper currency because it's largely invisible to the government. All-cash transactions drive a thriving underground economy of businesses, from corner stores to laundromats and restaurants, that don't declare or substantially underreport their income to the Internal Revenue Service. According to the last IRS estimate, some $278 billion in tax revenue was lost from such businesses in 1998--more than 15% of the $1.8 trillion taxes paid.

Police, tax collectors, and regulators would have a much simpler job stomping on tax evasion and crime if the use of electronic currency were mandatory. The electronic trail it leaves is easy to follow. Even checks and money orders leave electronic traces when they're cashed. Electronic money also would help protect the private sector against criminal activities. For example, First Data Corp., the largest U.S. processor of electronic transactions, has a system for wire transfers that raises a red flag and prevents the transaction when a known drug dealer tries to launder money.

Happily, compulsion may not be necessary. If present trends continue, criminals and tax bilkers will eventually be the only big users of cash. The mere possession of a big stash of the stuff will attract the attention of cops, just as the inability to produce a satisfactory ID does now. Rather than ban paper money altogether, let's get rid of the large bills, say $50 and up, that are most used by criminals. Life would go on as before. After all, in New York City, cab drivers can refuse anything bigger than a $20 bill, and the place still works.

By Lewis Braham

    Before it's here, it's on the Bloomberg Terminal.