Payments in chaos

Payment History

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Do we need disaster money?

There are a lot of people who think there should be some sort of universal service around cash, forcing banks to provide it and forcing retailers to accept it. Age UK, for example. A lobby group for the elderly, he calls on the British government to designate access to money as a universal service obligation, just like the supply of electricity and drinking water to consumers’ homes. I disagree, but I understand why some people think that imposing the additional costs of cash on financial institutions and merchants sounds appealing.

One of the arguments often put forward to justify the costs of cash management, transport, succession of ATMs, flights, etc. managerial incompetence in key industries and hence companies should be forced to maintain the ability to distribute and collect banknotes and coins. But is it true?

In a debate on these issues in which I participated some time ago, one commentator referred to the consequences of the Japanese cataclysm of ten years ago, where following a magnitude nine earthquake and a tsunami, the nuclear reactors did not melt but the payment system did. The disaster, as you will recall, was the consequence of a massive earthquake off the northeast coast of the island of Honshu in Japan in 2011. This triggered a huge tsunami rising to 30 meters. above the ground that swept far inland. The wall of water crashed into towns, cities and villages devastating more than 200 square miles.

What is the right lesson to be learned from this horrific event, however? Yes, there have been a few temporary issues with the card networks due to the disruption, but it’s important to note that this hasn’t impacted all cards: Japan has a retail payment landscape. quite rich, so immediately after the disaster offline e-money systems (such as like Edy and nanoco) continued to work as long as there was electricity and backup battery systems or generators were running , and the unfortunate citizens could still go to 7-Eleven and buy their basic goods.

In this particular disaster, in fact, it was the people who kept their money in cash who suffered the most. Japan remains a cash-based society and through a generation of low inflation and low interest rates, large numbers of people keep their cash savings in their homes. Now, keeping piles of money at home may seem like a suboptimal wealth management strategy in some countries (for example, United States and Great Britain), but this is usually not a problem in Japan, unless (for example) a wall of water takes your house overboard and takes your money with it.

This is what happened a decade later, on a large scale. This led to the (from a Western point of view) the unusual phenomenon of wreck full of safes and money the dishes on the beaches. I can’t, at this point, help but quote a Yasuo Kimura, a then 67-year-old former bank clerk, who said he had a lot of friends who have lost everything. “I have spent my career trying to convince them to deposit their money in a bank,” he said. “They always thought it was safer to keep him at home.”

(Japan is a very honest society, however. In the months following the disaster, citizens handed over thousands of wallets found in the debris, containing $ 48 million in cash, and most of the safes found in the rubble were ultimately returned to their owners.)

Many Japanese safes contain much more than money, sure. They also hold the identity documents that people need to rebuild their lives: bank books, share certificates, land titles as well as gold bars and other precious metals. People need a safeguard for all kinds of physical wealth, not just banknotes, but that will be discussed at another time.

Backup

Is money a good backup then? This was not necessary in China this year, where catastrophic flooding devastated major cities, so mobile base stations in drones were dispatched to get things done. For example: a “Wing Loong” drone has been deployed in Henan, providing stable communication signals for an area of ​​more than 50 square kilometers without break for 24 hours. The rain couldn’t stop the money from flowing through mobiles, although I suspect a smart cyberwarfare could. There was certainly some global chaos when a bunch of 4G data networks (including O2 in UK) went down in 2018 for a few hours, although to be fair this was due to botched software updates rather than sabotage by cyber commandos.

The big question, then, is whether we should keep the money (whatever the cost) just in the event of a zombie apocalypse, an asteroid strike, or the cloud services first cyber war attack. Overall, I think not. I even checked a preparer website to see what they said about cash, and even they seem to think it might not be the ultimate safeguard, saying that “when cash and credit cards don’t make no sense, you can turn to your barter stock. (The suggested barter stock, by the way, included bullets, marijuana, and condoms.)

So when there is no money, life can go on. We know this to be true because there is a really good case study on what could happen when the money goes. I cover it in my book on the history and future of money, “Before Babylon, beyond Bitcoin“: Irish bank strikes from 1966 to 1976. At that time there were three major bank strikes in Ireland and these shut down retail banks for a year in total. The public ended up with the banknotes and coins in his pockets and nothing more. As people couldn’t get cash, they developed their own money substitutes: people started accepting checks and IOUs directly from each other. others, and these instruments began to circulate. Antoin Murphy points out that one of the main reasons why this “personalized credit system” could substitute for cash was the local nature of the circulation. written a few years ago, when the financial crash occurred in 2008, Irish bankers proved to be far more irresponsible than those who had written checks on coasters a generation earlier.

The point is, people exchanging checks and IOUs knew each other, and if they didn’t, they might soon find the information needed to assess each other’s creditworthiness (usually in the pub). In our post-industrial economy, local means something different and that would be LinkedIn more than the owner providing the connections, but you get the idea. The use of cash as an intermediary is not a prerequisite for the functioning of the economy.

In a more recent and similar example of a lack of liquidity under difficult circumstances, South Africa has experienced numerous riots and unrest. Looters targeted bank branches and ATMs precisely because they contained cash. Not only was this money stolen, but of course the banks were reluctant to repair and replenish as the mess persisted, so law-abiding citizens were quickly denied the money they needed to continue operating. live. It will take months for order to be fully restored to return to normalcy in the money distribution systems.

OFFLINE

So it seems to me that forcing companies to provide cash services as a disaster backup is the wrong approach. There are other reasons, of course, and these need to be addressed. One example is confidentiality. The Electronic Frontier Foundation rightly points out that a growing number of retail businesses are refusing to let their customers pay in cash and that it could be bad for privacy. They ask “how can you stop data thieves, data brokers and the police from spying on your purchase history?” And suggest that paying cash is the answer. Personally, I think the use of privacy enhancement technologies (PET) in the implementation of electronic payments is a better answer, but that’s a discussion for another day.

The main lesson to be learned from past, present and future disasters is not that we should keep cash, but that what we should have in place is a person-to-person (or indeed, d device to device) in the absence of mobile networks, electricity and compensation systems. I don’t want to dwell on the inadequacy of blockchain-based payments for replacing general-purpose cash, but it seems to me to reinforce a critical design feature for central bank digital currencies: they need to be able to work offline. .

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