India is abolishing its largest paper currency notes, the 500 and 1,000 rupee bills, in an effort to combat corruption in its economy. About 80% of its paper money will become worthless come January 1. People have been exchanging the bills for new 2,000 rupee notes. And criminals who make money in the black markets, or show low income, are handcuffed into giving up their ill-gotten gains. While this sounds like a great idea, they are dealing with major implementation issues. I think the US would be far more capable of implementing something like this. Imagine how Tony Soprano would react if all of the cash he has hidden or buried becomes worthless. Could it work here? If so, what would happen?
The anticipation that money is losing its value is what drives inflation. The would be a run on consumer goods like never before seen, with prices spiraling.
This isn’t quite the same thing, as the old notes can easily be replaced with new notes for equal value. The problem for mobsters and other criminals is that they couldn’t walk into a bank to exchange the notes without essentially admitting to criminal activity, tax fraud at the very least.
I think for the US it would just as easy to not replace the bills and go completely cashless – i.e. all payments by debit or credit card. That would make tracking a lot easier.
I was waiting for a thread like this!
First, India’s fintech is backward compared to the US. Many Indians don’t have access to telecommunications equipment or even ID cards. Businesses don’t have card readers. Bank accounts are therefore rare.
Most Indians do most transactions in cash, and something like 1% of the population do taxes. (I think their basic personal exemptions are higher than most incomes, and farmers don’t have to pay taxes anyway. Also, lots of tax evasion.) Many Indian women store money in their homes, hiding them from their husbands.
In 2014 Prime Minister Modi started a basic bank account initiative. So many Indians opened new accounts that slightly more than 50% of the population had one… but most of the accounts had been unused for over a year (probably never used at all) so it seemed like a failure.
In 2016 Modi stopped the most common bank notes. The stated reason was that tax evaders were stocking up a lot of illegal cash, which is probably true, but the more sophisticated crooks had already bought a lot of gold, real estate, etc (supposedly only 6% of India’s huge black market gains are held in cash form).
Many poor Indians have had a hard time, either not having cash at all, or having bills too large to cash. Women are having to reveal their hidden money and people spend a lot of time in lines at ATMs and banks that have run out of money. The new bills are of a different size, so all the country’s ATMs needed to be reconfigured, plus new bills are being printed too slowly.
The government said that if you brought in more than a certain amount of money, you would have to prove you paid tax on it or you would have to pay double the normal amount of taxes. Many people suddenly put those new bank accounts to use. They would deposit old bills at a standard 30% cut into new accounts. Rich crooks would have to rent multiple accounts to avoid the limits (and did just that). Many companies have been paying their employees to hide corporate money in these accounts. The majority of “missing money” has ended up back in circulation (exchanged or in rented bank accounts) untaxed. Yes crooks got “taxed” 30%, but it didn’t go to the government, and only crooks who didn’t think beyond tax got caught up in this. I guess a wealth transfer from unsophisticated crooks to poor people with previously unused bank accounts isn’t entirely negative.
Demonetizing would work better in America, provided people are willing to use prepaid debit cards (those who can’t have bank accounts for various reasons). People who have been storing cash would have to bring that in, which would really hurt unsophisticated criminals. I suspect that crooks who like to be paid in cash would eventually get card readers and accept prepaid cards. I think you can get prepaid cards that have no identifying information at all on them. Of course, buying such a card might be advertising that you buy drugs, etc.
A lot of small businesses would suffer, at least in the short term, as they get card readers they didn’t have before. I think companies that already had card readers but were also accepting cash (practically all of them) wouldn’t be hurt too much. Laundry machines would require you to preload cards rather than use quarters or tokens.
ATM servicing companies would lose a lot of business, fast. So would strip joints and possibly casinos, or any other “embarrassing” purchases. Businesses that serve underbanked communities (such as many Walmart stores) would find themselves convincing customers to pick up new prepaid cards, which would basically be mandatory for living. Prepaid card companies would make a ton of money, as people would be researching them and buying them… even if they already had a bank account! I would expect a ton of regulation on prepaid cards to follow.
I don’t know what vending machine companies would do. I live in Canada and the only times I need to use cash are when I get my hair cut (no card reader there) and when I want to use a vending machine. I actually have a hard time using vending machines. I end up with a $5 bill after getting my hair cut, and since I almost never use cash I can’t break the $5 into change. And then half the quarters get rejected.
Possibly the people who would be second-most affected are tourists, especially if they come from a cash-loving country. When going to a foreign country I tend to take some cash in their currency with me, with any leftover exchanged when I come back, as I don’t trust the fintech in a lot of countries. However some countries have enough of a crime problem that this is a bad idea. (I haven’t visited any such countries.)
In my city tourists have to use cash to use public transit… Canadian cash, of course, because they wouldn’t have bought a transit pass. (Unless they buy a transit pass, but they’d have to estimate how much money they need to put on the pass card.)
The most-affected would be the homeless, or illegal immigrants with little knowledge of America. Either group might be literally unable to get their hands on prepaid cards, and you would need a card reader to panhandle. (I heard of a homeless guy with a Square reader… somehow I don’t think that would be too common, at least not at first.)
The experiment has already been largely successful in Scandinavia, so I have a hard time picturing this failing in the US.
There would also be a surge in the use of bitcoins for the purpose of anonymity.
Can you spend bitcoins easily? (Probably the wrong question. Companies would make spending bitcoins easy.)
The highest-value U.S. bill now in regular circulation is the $100 bill, so you’d either have to print lots of new (and distinctively different-looking) $100 bills, or come up with some new denomination. The U.S. has never, I think, declared any U.S. currency to be valueless, so that would be a big departure from past practice, and might shake confidence in the dollar. Most U.S. currency (two-thirds, according to one study I read some years ago) is also held overseas, so that, too, is a complication.
I still can’t understand how a currency designed around the premise of everyone having access to the whole system’s entire transaction history got a reputation for anonymity. My best hypothesis is that bitcoin was invented by the FBI or some other government body for purposes of making it easier to catch criminals.
There would be global financial chaos because the USD is the international settlement currency. What would happen to the price of oil if all $100 bills were invalidated?
How would you bribe people without cash?
Apparently the CIA likes to bribe warlords and other potential opponents. “Give us intel and attack our targets and you get money. Oppose us and we give your address to the Air Force.”
“Do you take Amex?”
Bribes would have to be paid in gold.
$10000 in gold is about 267 grams. $10000 in $100 bills is about 100 grams.
Bills are lighter, but not by that much. And gold is more dense, so way less volume.
But then gold is harder to split up if you want to have exact amounts. If you have 10 ounce brickettes of gold, it is hard to split off a $1000 worth.
Bribing in gold would be more awkward. But not awkward enough to cause real problems.
Because people don’t understand what Bitcoin is.
You can certainly use it anonymously, if you go to the trouble of ensuring that your real identity can never be connected to your Bitcoin identity, but that’s actually very difficult, and easy to screw up.
I still don’t understand the underlying logic to any of this. After working with Indians on a daily basis for 15 years, I am convinced that they could screw up a wet dream remotely. I am not against Indians in general. Some of the ones in the U.S. are some of my most competent coworkers but they are the harshest critics of all and the country has some severe problems.
What problems are they trying to solve specifically and why will getting rid of lower denomination notes helps with that?
Yes and no. Bitcoins are harder to trace than bank and credit card transactions. But with enough subpoenas of ISP logs you could probably trace a transaction back.
Unless some smartass spoofed their MAC address and sat in McDonald’s parking lot using their free wi-fi.
There are also better ways to anonymize your bitcoin transactions.
Heh.
International currency settlements are made via electronic funds transfer and letters of credit not cash.
Unless the drug cartels were also part of the oil cartels there’s be no effect on oil or any other commodity for that matter.
Which is one of the consequences of the change in India: the government hasn’t printed anywhere near enough low denomination bills to replace the large ones, and pay-by-phone apps are having explosive growth.
As for how to bribe people without bills, well, traditional methods include food, work done in their house, houses in expensive places (in property or the use thereof)… the hookers and blow aren’t even considered a bribe.
Several decades ago, a drug dealer told me that $1000 bills (U.S.) were often used in drug transactions. Is this still the case? (Of course such notes are taken out of circulation whenever they arrive at a bank.)
The government believes that lots of people have been paid under the table (true) in cash (true) and wanted to force people to bring this cash in, either to put into a bank account or trade for new bills. When doing so, if they could not prove this money had been taxed, they would face double the usual taxes.
People found ways around it (the “ask limit” is too high, for instance, and banks are letting multiple people share an account without really keeping track of this), of course, while many ordinary people are suffering.
Because this wasn’t working, the government then started changing the “reasons” for doing so. They started saying they wanted India to become cashless, which is impossible due to the lack of telecom infrastructure (and numerous other factors). They said it would combat terrorism (probably true, but hard to prove). They said the new bills are harder to counterfeit, etc.
Yes, but you pay a premium, an “activation fee” in the range of 4 to 10%.
I don’t. Scandinavia does not have the deeply ingrained distrust of big government prevalent in much of the American interior. The notion that the government would be able to review all of your transactions, because they’d all be tied to electronic cards, would be deeply, deeply unpopular in places like Idaho and Kansas. Such an experiment would require substantial government resources to implement, and any politician who advocated for same would shortly become a former politician.