India's demonetization could be a warning as we use less cash around the world : The Indicator from Planet Money India's recent announcement that it'll get rid of its highest denomination bill brings back memories of a disastrous experiment to invalidate most of its currency in 2016. Today, a critical look at the challenges of going cashless around the world.

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A cashless cautionary tale

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The world is going cashless. From Sweden to China to the U.S., fewer and fewer people are using coins and notes. In fact, by now, you could reasonably imagine a world where cash might be abolished. The question is, though, is that going to be a better world?


To get a glance at how that transition might play out, we can look to India. Now, to be clear, India is not going cashless. But back in 2016, it did a massive experiment to invalidate 86% of the country's paper currency. It was an effort to raise more tax revenue. And that big announcement forced people to either spend their cash, exchange it for other bills or put it into a bank account, and it was a catastrophe.



WOODS: And I'm Darian Woods.

The kingdom of cash is growing smaller by the day, and that has real consequences. Today on the show, we will learn about a disastrous cash swap in India, and we'll piece together what all this means for the challenges of going cashless around the world.


WONG: To learn why meddling with a cash system is so dangerous, you just have to go to India in 2016. Back then, Prime Minister Narendra Modi's concern was that about 90% of the country's transactions happened in cash and that - to use his words - this was black money and outside of the taxation system. The thinking was, a cash reset might mean a one-time windfall in revenue for the government, while also hurting illegal businesses whose owners didn't want to put their cash in the bank.

WOODS: So Modi made an announcement that the two highest-denomination bills would be invalidated in 50 days. And this came to the surprise of everybody.

SHRUTI RAJAGOPALAN: I've heard it on reasonably good authority that even the then-finance minister was not kept in the loop. It was just announced, and then they had to go with the plan.

WOODS: Shruti Rajagopalan is a senior research fellow at the Mercatus Center at George Mason University. She also hosts the podcast "Ideas Of India." Shruti says that the scramble to exchange notes was even deadly.

RAJAGOPALAN: Over 105 people died just waiting in line, trying to exchange their notes or waiting outside a hospital. Bank tellers - you know, some of them collapsed from exhaustion.

WONG: Part of the problem was there was such short notice given to everyone - even to India's central bank, which manages the currency. That meant there were currency shortages that led to all kinds of economic problems. Because so many businesses or farms paid in cash, when they couldn't access the cash they needed, some had to stop paying their workers, who then had to quit.

RAJAGOPALAN: If you look at the data from the Centre for Monitoring the Indian Economy, they found a sharp decline in labor force participation, and about 15 million workers dropped out of the labor force. The households that didn't have bank accounts experienced somewhere between 2- to 7% lower consumption than the group of households that did have bank accounts.

WOODS: And the original hope that this would boost the government's coffers? - well, that didn't really work out. Tax collection did not increase substantially that year.

WONG: Despite the chaos of 2016, the Indian Central Bank has announced it's doing a version of this again. It's getting rid of the 2,000-rupee note. That's the country's highest denomination, and it's valued at around 24 U.S. dollars.

WOODS: And that kind of raises the question - why? And Shruti gives two answers. And one answer is, if you ignored politics and just kind of focused on the economics, her guess would be that the government just doesn't understand the Indian economy and the reasons why there are so many informal markets that use cash.

WONG: But if you look at the question of why through a political lens, another explanation comes into focus. Shruti says she's hearing that a motivation was for political purposes. Indian elections are coming up next year, and it's believed that political parties are holding onto a lot of cash to escape rules and regulations around donations.

RAJAGOPALAN: If it's a cash transaction, it can't be tracked. So this is basically a way of hobbling the opposition parties from raising money - is what is being talked about in India.

WOODS: And so the situation now, with this new announcement, is that, yeah, there have been some disruptions, as businesses like gas stations are flooded with 2,000-rupee notes and are clambering for change. But Shruti thinks that this latest announcement is not likely to be a repeat of 2016. People have longer to swap their cash, and the share of transactions used with 2,000-rupee notes is much lower than the notes voided back then.

RAJAGOPALAN: This is not the same thing as the demonetization that happened in 2016. That time, 86% of the currency was - you know, lost its legal tender status in about four hours.

WONG: Some commentators have said that if the note withdrawal convinces more Indians to get bank accounts and make payments digitally, this will be a win for the economy. The argument is that it'll be harder for ill-gotten money to hide, meaning less corruption and more tax revenues.

WOODS: But in any case, it's clear that the last transition really hurt a lot of Indians. One survey of low-income, rural villages found that more than a third of households had less work afterwards.

So what can other countries learn from that as people and governments and businesses toy with going cashless? Jay Zagorsky is an associate professor at Boston University's Questrom School of Business.

JAY ZAGORSKY: If we eliminate cash, poor people are going to be hurt.

WONG: Jay says another problem with removing cash is you're getting rid of an important psychological tool.

ZAGORSKY: There's something called the pain of paying. When you pull out your credit card and tap it, there's no pain. You pay cash, there's a little bit of instantaneous regret. And if you're trying to control your spending by spending in cash, you get that regret. You tend to spend less.

WONG: And this little bit of psychological friction can be helpful for people who are trying to stay on a limited budget.

WOODS: And add to that 4.5% of American households don't have a bank account. They tend to be on lower incomes. And if you ask them why, like the government did in a survey, they have all sorts of reasons.

ZAGORSKY: Some of them said, I just don't trust banks. By avoiding banks, they get more privacy. Some of the others said, I don't have enough personal ID required to open an account. I don't have all the driver's licenses, passports and other things. And then some of them actually gave the reason that they can't open an account because I've had past banking problems - you know? - the bank just won't open it for me.

WONG: Yeah, many businesses all around the country are actually saying, no cash allowed. Of course, often, some small businesses prefer cash, so you never really know these days.

WOODS: Yeah, it's always hard to tell.

WONG: But Van Leeuwen, the ice cream company, was hit by repeated fines by the city of New York over the last couple of years. It refused to accept customers' cash despite the city's law mandating that shops accept cash. It eventually relented last year, started to accept cash and settled for $33,000.

ZAGORSKY: This is a modern way of telling people - particularly poor people, particularly people who are unbanked - don't enter. You're not welcome. Signs that say no cash accepted is a new kind of discrimination. It basically means, if you're poor, stay out of my business.

And I've talked to many business owners, where I'm like, can I pay in cash? And they're like, absolutely not. Why not? They're like, well, we're worried about theft. OK, that's fine. You know, we worry about speed. You know, your cash will slow us down a little bit. Well, I was like, OK. And there's lots of reasons they give me. None of them have ever said, oh, we're trying to discriminate against poor people. But that's the effect of their signs, no matter what their intention is.

WONG: Jay isn't saying we should all cut up our credit cards. He's an advocate for a mix of cards and cash. He says, yeah, avoiding taxes or doing illegal activities is easier with cash, but...

ZAGORSKY: Drug cartels - you know, people who are doing large-scale corruption - they're going to continue. They're just not necessarily going to continue using paper money. They're going to find other ways - jewelry, gold. When people want to act illegally, they're going to continue to act illegally.

WOODS: The story of India's demonetization backs up Jay's argument. While some people might have been nudged towards digital payments, the government never got its windfall. There was no clear effect on black-market dealings or corruption, and a lot of people on the economic margins were hurt in the process.


WOODS: If you want to learn more about India's demonetization, Planet Money put out two excellent episodes on this in 2017.

This show was produced by Corey Bridges, with engineering by Katherine Silva. It was fact-checked by Sierra Juarez. Viet Le is our senior producer, and Kate Concannon edits the show. THE INDICATOR is a production of NPR.


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