Estonian Economist Suggests Abandoning Cash

J-Georg writes "Raul Eamets, professor of macroeconomics at the University of Tartu, proposed today during his TEDx talk that Estonia should stop using cash at all when adopting the Euro as the national currency (Estonian original). He also pointed out that abandoning cash would not be only important for the Estonian economy as a whole but also is a real challenge for both IT and banking sectors and would also improve Estonia's image as an IT-tiger."

Comments

Abandon all your cash

[Anonymous Coward]

I'll take it

Re:Abandon all your cash

[naz404]

While we're at it, I propose the removal of the artificial rounding off of citizens' bank accounts to 2 digits after the decimal point.

It is an outdated model stuck on physical money and a scam run by institutions pocketing the fractions (think salami slicing).

The rise of "paperless" money, rapid currency exchange fluctuations + digital microtransactions at consumer level have made this very feasible.

I want my bank account to be able to say ".0238538327" after the whole numbers' place. If I make games, I want to be able to sell virtual goods at $0.00056 per transaction if I want to. When your audience is the entire internet, small amounts like that can rack up to substantial numbers. I want institutions to be able to do that for me affordably, and I want to see that number reflect in my account instead of being thrown away.

I mean in this age of digital, how much does it cost to actually make/record/monitor a transaction when everything's already digital?

Any takers? Maybe this is an opportunity to create a new startup. Maybe this is a niche that can challenge Paypal. Take it. Run away with the idea. I don't care who implements it, as long as it gets implemented.

Re:Abandon all your cash

[Gerzel]

Oh sure. Like most any man on the street he happens to have the time, income to support himself, money to start the project, PHDs in encryption, economics, programming and good expieriance at international diplomacy to implement this himself and not be a lazy ass.

Re:Abandon all your cash

[Ethanol-fueled]

While we're at it, I propose the removal of the artificial limitations of citizens' double precision data to 16 digits with a floating decimal point.

It is an outdated model stuck on cheap hardware and a scam run by institutions paid by institutions pocketing the fractions (think salami slicing).

I want my bank account to be able to say ".0287863987569328746598137649582736985555726938475629835576459837" after the whole numbers' place. If I make games, I want to be able to sell virtual goods at $0.000000000000000000000000056 per transaction if I want to. When your audience is the entire internet and even very poor bushmen from Africa are on it, small amounts like that can rack up to pay for my six-pack. I want computer manufacturers to be able to do that for me affordably, and I want to see that number reflect in my account instead of being thrown away.

Re:Abandon all your cash

[blackest_k]

Your getting close to the real problem of abandoning cash, I live in Ireland and many smaller businesses will not accept a bank card for transactions of less than 10 euro's due to the transaction fee's charged by the banks.

Trouble is a lot of the time you will make small transactions from your morning cup of coffee, buying a paper , a carton of milk and you can't always make the value of the transaction raise above 10. Then there are some transactions which cannot really be done other than in cash, such as taxi rides.

There has to be some sort of symbolic token which can be exchanged for goods and services, like um cash maybe.
Of course you could have some sort of credit account or prepay system but then you can have your micro payment but either your customers have to prepay a minimum amount or your customers all owe you a small amount.

Google is one example if you run Google ads on a small website you need a good number of clicks on the ads before you can even go to Google to get your payment. So essentially you can end up hosting ads for free and Google gets its revenue from the advertisers as they are actually billed per click.

Even the phone company which bills by the second tends to have a minimum of a minute or a 5 cent charge which is largely covering transaction costs.

Money is here to stay even if most of us don't need to carry more than a few dollars/euro's/ ...

Re:Abandon all your cash

[badboy_tw2002]

Yeah, it should be pretty quick and easy to get a decent bank replacement system up and running. A few hours may be a bit short, but lets give the coder 2 days assuming he's using rails and a transactionless NoSQL solution to get the job done in time. We may need to test it a bit, so leave time for unit testing. After all, this is people's money, so you can't be too careful.

Re:Abandon all your cash

[icebraining]

You assume he's talking about credit cards. I don't know about GP's country, but here we mostly use debit cards.
Most people already use it, but they also keep cash because most shops don't accept it for payments under 5E (they have to pay a fee for each transaction), and because they're still slower than cash.

Re:Abandon all your cash

[bondsbw]

Your getting close to the real problem of abandoning cash...due to the transaction fee's charged by the banks.

But this is a logical fallacy, right? Your assumption is that electronic transactions cost a minimum amount of money, but cash transactions are free.

But cash transactions do involve work! The bank teller takes money and gives money, all day long. That person gets paid, and all they might do during the day is handle cash. If a teller makes $100/day, and processes 200 transactions a day, each transaction cost the bank $.50.

That entire time, the teller is using computers that interface with backend servers. Each of those machines, and the network routers/switches in between are sucking down electricity. And there are people behind the scenes, making loan deals with the Federal Reserve (in the US). And people who do various paperwork, and people who run collections, people who do technical/customer support, etc., who all work for real money, and whose job is to directly or indirectly support such cash transactions.

In the cash world, the bank "eats" these costs. Obviously, they don't really eat them, they just put them into interest rates. The electronic transaction world really doesn't seem to have any more costs, but banks are requiring transactions fees. In other words, they are trying to recoup their costs up front, something that is impossible to do in the cash world due to tradition.

Moral of the story: There is no such thing as a free lunch. Cash is no better answer than electronic transactions.

Might I suggest an alternative currency

[Anonymous Coward]

Leaves might be a better choice. Given the country's forests every citizen would become quite wealthy overnight and it wouldn't require any additional infrastructure. I believe the next US Congress will be considering adopting leaves in the next session as the new US currency since leaves are worth more than the dollar.

Re:Might I suggest an alternative currency

[guyminuslife]

You clearly have not read The Hitchhiker's Guide to the Galaxy series. (I believe it was Restaurant.) If you had, you would know that the early Earth colonists' solution to this particular inflationary dilemma was to burn down all the trees. Problem solved.

I suggest you bow your head and accept that you have been judged on your geekdom, and found lacking. You may recover some lost face by immediately purchasing or borrowing a copy of The Ultimate Hitchhiker's Guide.

Re:Might I suggest an alternative currency

[ChatHuant]

In fact the value of currency is psychological.

In fact it's not. Or more precisely, not only.

If one dollar buys one candy bar, why should that change if there are more dollars? Nothing has really changed in terms of the candy bar's production costs.

The price of an item is a function of its scarcity and of the effort required to create it. If everybody had lots of money, nobody would be willing to work to create more candy (why bother making candy for a buck a piece, when you can just shake the money tree in the backyard, and get more bucks with less effort?). So candy becomes a scarce resource, and everybody competes for the same limited amount of candy. The only way to get the sweet luxury is to pay more. The price of candy goes up, and will continue growing until either people give up on candy, or the price becomes high enough that making candy becomes profitable again.

Re:Might I suggest an alternative currency

[FiloEleven]

Furthermore, those who are first in possession of the new money have a huge advantage: the market has yet to be affected by it, so they can use it to purchase lots of goods at uninflated prices. By the time the new money gets to Joe Sixpack in the form of a necessary wage increase to keep up with inflation, the new equilibrium is all but settled and he ends up about where he was before.

Fiat money is a tool for the rich to get richer.

Re:Might I suggest an alternative currency

[JesseMcDonald]

The important point that you're missing is that currency behaves just like any other good. The shopkeeper's revenues must compete with all the other dollars in existence for the goods and services the shopkeeper requires (personal and business), just as those goods and services must in turn compete with all other goods and services for the higher-order goods (like raw resources and labor) required to produce them.

If the shopkeeper were to decide not to raise his prices despite the existence of more dollars in circulation, then he would receive the same revenues per candy bar sold and thus be limited to bidding for new ones at the same prices as he used to pay. However, other shopkeepers who did raise their prices can now outbid him, which means he won't be able to get enough new candy bars to replace his old stock; the same amount of dollars won't buy as many as it used to. If all the candy-bar retailers banded together and chose not to raise any of their prices then the same problem would still exist regarding the higher-order goods required to produce the candy bars in the first place. Some of these goods, such as labor, are common to all production, which means that all products compete with one another to some extent—and that injecting money anywhere will affect all prices eventually.

Essentially, in order to prevent a general rise in prices you would have to convince every single holder of dollars, including those who hold the newly-created ones, to act as though the supply hadn't changed. Good luck with that. :)

On the subject of economics and money...

[complete loony]

... I highly recommend people read up on the work of Steve Keen.

a professional economist and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous debts accumulated in Australia, and our very low rate of inflation

Re:On the subject of economics and money...

[Orgasmatron]

Steve Keen knows his stuff. I highly recommend his blog to anyone interested in economics, even though I disagree with several of his conclusions and proposals.

He was recently able to give the full (long) version of his standard presentation in Michigan. Go watch it. http://www.debtdeflation.com/blogs/2010/11/15/why-credit-money-fails/

no thanks

[Trepidity]

So I won't be able to give $20 to a friend without: 1) being tracked; and 2) giving a cut to some payment processor like PayPal? I'd rather use cash.

Re:no thanks

[0123456]

So I won't be able to give $20 to a friend without: 1) being tracked; and 2) giving a cut to some payment processor like PayPal? I'd rather use cash.

But that's the whole reason for governments wanting to eliminate cash: it means every transaction will be taxed and no transaction will be possible without their permission.

Well, except that everyone will start using US dollars or whatever for their free market transactions.

Re:no thanks

[iluvcapra]

Use virtual cash to buy ounce of silver, hand silver to friend. Another serous problem is that, if this were done in the US for example, you'd probably have people starving to death because they have bad credit, or at lest you'd be giving banks a huge potential to become rentiers. A solution would be to create a banker or last resort, like a postal banking/remittance system that will do business with anyone.

Re:no thanks

[jc42]

So I won't be able to give $20 to a friend without: 1) being tracked; ...

Yup; and this is exactly why it won't be implemented, not in Estonia, not in the US, not in any other country.

A more illustrative example would be: You want to give $20,000 to your favorite local politician, in exchange for "consideration" during part of the law-making process. This only works well if your "gift" can't be tracked and be made known to the voters (and to legal authorities).

The recent election in the US is a good example. Political gift-giving used to be mostly public information. But recently, our Supreme Court changed the rules, making it legal for anyone to give money to politicians and keep the source of the money a secret. So before this election, political contributions went up roughly an order of magnitude over what they had been in previous elections. Mostly to the Republicans, but the Democrats got a large increase, too.

This would be very difficult with an all-electronic money system. The political system relies on the non-tracability of most of the "gifts". So we can trust that the politicians who got elected won't pass laws that eliminate the money that put them in power.

All the recent news of financial systems being "hacked" and their information made available to the wrong people is all the proof our politicians need that electronic money can't be trusted to keep a secret. So they won't allow it to happen while they're in office.

Re:no thanks

[guyminuslife]

Or Euros because the currency in question is the Euro, and it's already printed and minted in Europe where this is taking place.

Re:no thanks

[Kjella]

if this were done in the US for example, you'd probably have people starving to death because they have bad credit

Heard of debit cards? They're very common over here in Europe and go directly against your bank account. As long as you are using an online terminal, like pretty much every grocery store has, then the card will only work if you have money. The only people taking something on credit would be private transactions or backup solutions if the terminals are offline, everyone who regularly handles money today would get one if they don't already. What I don't like around here is that they're using the "by volume" argument to say removing cash is not a problem, which is ridiculous. It's no secret that I do groceries and pay for utilities and insurance and so on, but maybe I don't want that medical specialist or strip club or whatever on there even if they make up 1% of the volume. Same with my location, I'm often at home or at work so by duration I mostly don't care if everyone knows where I am. Again, it's the exceptions that matter.

Re:no thanks

[khchung]

Please don't use the broken banking system in the US as your reference.

I have no problem doing instant electronic bank transfer of 20 bucks into my friend's bank account at no extra cost to either of us. In fact, we often settle the our lunch bills this way.

Only in America's broken system would you run the risk of losing money by just giving people your account number.

Yes, it made it possible for the govt to find out these records. But you have to fear being taxed only because of America's broken income tax system. Other people in sane countries don't have that problem at all.

Re:no thanks

[rockout]

I believe his point was that if Estonia eliminates the physical Euro so that all tranactions will be taxed/tracked, citizens will start using another currency (like the dollar) for their free market transactions that they don't wish to be tracked.

History teaches us this is likely if only because the US dollar was the black market currency of choice in Eastern Europe during pretty much the entire Cold War. You could exchange your dollars with the Communist government at a rate tilted ridiculously in their favor, or you could ask your taxi driver if he wanted to buy dollars, which he did, and you'd get around 3-5 times the "official" government exchange rate. Dollars were always in demand because they were so much more stable than the constantly inflating local currency.

Re:no thanks

[pjt33]

Only in America's broken system would you run the risk of losing money by just giving people your account number.

Or the UK.

Re:no thanks

[guyminuslife]

They might use a physical currency. They would not use dollars. The dollar was used historically because is stable, it has a wide international reach, and there wasn't any European currency that could compete with it on scale. Sure, you had British pounds and French francs and German marks, but the dollar was the big boy in town.

Nowadays, that's no longer true. The Euro is a completely viable alternative to the dollar on a broad international scale. It's even used as the official currency in countries outside of the EU: see, for instance, Kosovo. The physical Euro has some nice advantages for Estonians: you can drive to the country next door and actually spend themat any retailer, as opposed to trading them as a "black market" currency. And as the summary notes, it's already going to be the official currency of Estonia, even if not in physical form, which reduces barriers to depositing physical Euros into, say, a bank account. You don't even have to do a currency exchange!

Without cash...

[arunce]

No way. Economies can't work without thieves or corrupt politicians. Even if something emerge to fill the gap, like gold, drugs, diamonds, name it, the neighbor country with real cash would get the benefits. At the bottom, cash on your pocket grants some privacy... and security.

Sounds great...

[Beelzebud]

...Until the power goes out.

I've got to agree with the Fundies on this....

[Alan R Light]

There's much to be said for streamlining financial transactions, but there are limits to what we should allow, for reasons others have stated. There is simply too much opportunity for mischief in an economy where there can be this sort of control.

I'm surprised no one mentioned it, perhaps the /. readership is too young and secular to remember the concerns of Fundies from the 60's, 70's, and 80's, but I will give the relevant quote from the Book of Revelations, chapter 13, verses 16 & 17:

"16 It also forced all people, great and small, rich and poor, free and slave, to receive a mark on their right hands or on their foreheads, 17 so that they could not buy or sell unless they had the mark, which is the name of the beast or the number of its name."

(The number is, of course, 666, or in a few ancient texts 660.)

Regardless of whether one believes ancient prophecies, I think those Fundies had one thing right: Don't trust ANYONE - not even the "Majority" - to have that sort of control over humanity.

Better yet: stop using debt as money

[Anonymous Coward]

Few people realize that we use debt as money in our monetary system. All those dollar bills and Euro notes? Those are actually IOUs that have to be repaid with interest to central banks. All those dollars in your bank account? They too are just debt markers that have to be repaid with interest. The problem is that in order to repay the interest, new money has to be created; but the only source of new money is new debt, with more interest, that requires more money with more interest ad infinitum.

The net result is that: 1) if all debts in society were repaid there would be no money and commerce would sieze up; 2) all debts can never be repaid because the principle + interest always exceeds the money supply; 3) the amount of debt is always increasing until there is a crash.

Everyone (except bankers) would be better off if we used debt-free money issued by your government, rather than debt issued from privately controlled central banks.
http://www.youtube.com/watch?v=vVkFb26u9g8

Re:Better yet: stop using debt as money

[complete loony]

You are confusing a stock (debt) with a flow (income). It is quite possible for money to circulate around the economy more than once in a year. Assuming bankers spend the money they make from interest, it is entirely possible for debt's and interest payments to reach an equilibrium in the economy without the continual creation of new debt. See the video from Why credit money fails linked earlier for more details and simulations of such a working economy. Of course it never works in practice because bankers are greedy.

Re:Better yet: stop using debt as money

[orlanz]

Wait, what? Why was this marked interesting? That's not how money actually works. Ideally, you borrow from the future (debt) so that your value growth is increased today. Eventually the additional growth increase produces enough value to offset the amount of value you took into the past. A very simple example: A farmer in a poor country spends a day walking to a market to sell his goods. The trip ruins 40% of his goods (say milk). Now he takes a small loan, buys a cart, reduces his trip, and thus only loses 10% of his goods to waste. Say he makes 20% more profit due to demand. That cart increased his effciency enough to pay for itself and then some.

Always increasing debt is when you borrow w/o enough of a increased value growth. You keep hoping that your continued borrowing will provide enough additional growth today to offset the already there debt and this one too. Crashes only happen when there is no one left to believe in your investment. Also, unlike European and American economies, some cultures such as middle eastern, Indian, and the Japanese do belive in over saving. The opposite problem... little investment is like lending to the future, but results in little growth that means more and more inefficiency... stagnation.

Re:What about tipping peopel like bellhops / skyca

[FatLittleMonkey]

In many countries, wait staff are paid a decent working wage so they don't need to rely on tips to survive. The listed price is the price you pay. (In fact, tipping is banned in some industries, such as casinos.)

Re:And just person to person transactions

[Cederic]

Indeed - I stuck £40 in crisp used notes through a neighbour's door yesterday. I could have done an electronic bank transfer but she'd have panicked if I'd knocked on the door and asked for her bank account details.

I like using cash anyway, it gives me a tangible way to observe my general expenditure. If I used a card for everything I'd have less of an emotional link between spending money and having a lower bank balance.