Governments may now be taking steps to outlaw cash transactions as demonstrated by Greece's announcement on February 9, 2010 to make all monetary transactions above 1,500 euros illegal if done in cash, as opposed to debit or credit cards. According to Reuters, Greek Finance Minister George Papaconstantinou said during a press conference, "From 1. Jan. 2011, every transaction above 1,500 euros between natural persons and businesses, or between businesses, will not be considered legal if it is done in cash. Transactions will have to be done through debit or credit cards."

What would be the immediate results if a country outlaws its own currency? What are the reasons for doing so? What are the further-reaching implications?

Benefits to Government

The primary goal of such a system is to maximize tax revenue. With a typical cash-based society, many transactions go un-reported or under-reported. Thus, the government, which could be considered the "super-employer", loses some amount of tax revenues that it would otherwise be entitled to. No one who overpays in taxes ever says to their government, "Ah, just keep it".

So, just as any business tries to get a better hold of its receivables, governments would, and should, naturally try to do the same. And who could blame them? Anyone who pays their share of taxes, whether you agree with your country's taxation system or not, doesn't want non-payers getting off the hook.

There are some who don't pay any taxes at all and are in "businesses" that are primarily cash-based. This includes organized crime, drug dealers, and arms smugglers to name a few. These entities typically have a stockpile of cash that has to be spent or otherwise laundered in some way. Laundering money by executing transactions with willing participants would be much harder to complete under a system such as Greece is pursuing. In the U.S., money laundering occurs when one conducts or attempts to conduct a financial transaction using cash from unlawful activities with the intent to promote the carrying on of unlawful activities. Under the Greek system, the financial transaction itself would be made illegal. The stockpiles of ill-gotten gain would now need to be deposited and accounted for if criminals wish to actively reap the benefits of their crimes. They would no longer be able to pay cash for high priced items to support their lifestyles. Further criminal transactions would most likely need to be carried out using credit/debit cards, and thus result in direct revenues for the banking industry and government tax departments.

There is another benefit in reducing the reliance on a cash-based system – fighting counterfeiting. While currency designs get more intricate, complicated and difficult to reproduce, the skills of counterfeiters only get better. By making large cash transactions illegal, there is less of a demand for large denomination notes. Less demand for large bills also means a more difficult market for the professional counterfeiter to do business in. With fewer real notes in circulation and in use, a counterfeiter will see more risk and expense in getting their notes out in the public.

Technology

Limiting cash transactions forces people and businesses to comply with the law by increasing their use of technology. By using credit/debit card systems, many more transactions are now recorded, tracked, authorized, processed, and archived. In other words, they are made official and subject to fees, auditing and taxes.

Often, each transaction made using a credit/debit card results in a small fee that goes to the merchant bank used by the vendor to process the transaction. This fee is deducted from the total of the sale and is incurred by the vendor as an expense for the convenience of accepting credit/debit cards. With more transactions made using credit/debit cards, banks revenue increases. As bank revenue increases, so does a government's tax revenue.

Therefore, since more and more transactions would be completed using technology, the result is increased control over the monetary system through these automatic electronic transactions, and increased fees that directly result in higher tax revenues.

On the other hand, who loses out in this type of exchange? The users of the credit/debit cards will certainly pay more for the convenience to comply with the new legal requirement. Specifically, they will see new interest charges and bank fees for their purchases where there used to be fewer or none at all.

Also, every person and business that previously used cash for their transactions may now be required to set up merchant accounts and get card readers to be in compliance with the law. Any costs associated with setting up these accounts and the fees paid to the banks per transaction increase a business's operating expenses, and result in lower profits.

So, banks and governments win while customers and merchants lose. But, it could get worse.

Questions About the Future

In the system that Greece is set to implement next year, they have set a limit on legal cash transactions at 1,500 euros (about $2,047 US). But what is a limit? When a government sets a limit into law is it not just an arbitrary number? And, can't arbitrary numbers written into law be changed? So, once limits are set and the system is in place, how long will it be before all cash transactions are made illegal? If a government sees any benefit to a system that puts a maximum limit on legal cash transactions, why wouldn't it see even more benefits (tax revenues) in a system that makes all cash transactions illegal?

Also, will less reliance on cash increase the potential for identity theft and fraud? We all hear about the horrors of identity theft, and millions of people have fallen victim to it. How many have had to deal with bogus purchases found on their credit card statements? Compliance with these types of laws will increase the number of merchant accounts, cardholders and transactions by the millions. Wouldn't these increases also lead to more instances of identity theft and fraud?

Just as opponents of U.S. healthcare reform worry about the U.S. government having access to one's complete health records, would a completely digital monetary system give worry to the idea that one's lifelong purchasing history could be accessed in a likewise manner? Although most banks are currently private businesses or corporations, would the demise of a cash-based currency system require more intimate ties between private sector banks and government entities? As some worry that an employer could gain access to one's complete medical history via a central repository of such information, wouldn't the same concerns apply to a central repository of financial transactions?

Finally, once the monetary system of a country is made entirely digital, does that not open the door to the implementation of the concept of a "one-world currency"? With all transactions processed by computer, will the global currency notes be just one's and zero's?

Conclusion

Cash-based transactions, whether using gold, silver, gems, goods or their modern representation of bank notes, have been in successful use for thousands of years. Digital technology has provided a convenience to society like never before. Now, at least one government, Greece's, is venturing into uncharted territory by beginning to eliminate their centuries-old cash system. Banks and the government will win, while customers and vendors will surely lose out. Will other countries follow Greece's lead? How will these new laws change society? And, what will that cost?

All trademarks and copyrights on this page are owned by their respective owners. Comments are owned by the person who posts them.
The rest is copyright © 2004-2010 PlanetData, LLC. All rights reserved.