Keith Rankin's Thursday Column A Cashless or a Cashmore Society?
13 April 2000
This week, the ANZ bank announced that it would follow WestpacTrust in charging fees whenever its customers used other banks' automatic teller machines. This is a classic example of the "prisoners' dilemma" in which individualist behaviour leads to the worst possible collective outcome.
Under the former cooperative regime, in which all cashcard holders could use all automatic teller machines, both banks and consumers were collectively the winners. Now, however, the banks are behaving like prisoners who nark on each other.
WestpacTrust saw on opportunity to gain at the other banks' expense by discouraging their customers from using other banks' machines, while still collecting the dues payable to WestpacTrust whenever other banks' customers used WestpacTrust's machines. This was a win-lose "negative-sum game": WestpacTrust gained, while its customers and the other banks become worse off than under the cooperative arrangement. The total losses exceeded the total gains; hence a negative-sum game.
So ANZ has responded. Unable to beat WestpacTrust, it has joined them. The pressure is raised to the point that the other 3 major banks must follow suit. The result will be a lose-lose negative-sum game. All of the banks will become worse off once they all have defected from the cooperative arrangement. Likewise their customers, who will either have to pay extra fees or each have to forego the use of 80% of the teller machines. At a place like Unitec with only two teller machines on campus, students who bank with other banks will be affected more than most.
The prisoners' dilemma is a process or 'game' in which 'players' who act both individualistically and opportunistically end up all being losers. The shame is that if they had acted cooperatively, they could have all been winners.
The ANZ also announced other new fees, including a set of dishonour fees which they say simply match those of other banks. The key message here is that the banks are saying that they do not want customers who use banks for transactions only; in particular the many customers who spend all that they earn and who often have difficulty making particular payments on the scheduled dates.
In the 1980s we were moving, it seemed, into a cashless society; a society in which virtually all our transactions would be conducted with electronic money in one form or another. In the 1990s the apparatus of the cashless society was realised; eftpos, credit cards, and systems for paying wages and benefits that required everyone to have a bank account.
Despite these technological realities, we are now moving in the opposite direction. With the announcement by the ANZ bank of its new fees schedule, we were told that we would have to change our behaviour in order to avoid crippling monthly bank fees. To avoid fees, we must withdraw our wages or benefits as cash, and make all our transactions with cash or credit cards.
As it is likely that transaction fees on credit cards will come next, we are moving into a situation that, for perhaps 70% of us, the costs of electronic transactions will exceed their convenience. Indeed, the coming divide between the wired information-rich and the unwired knowledge-poor will be exacerbated by the divide between those who transact electronically and those who conduct their pecuniary transactions in cash. Welcome to the new class system of the 21st century.
Money is a public commodity the prime purpose of which is to conduct transactions. We should not have to pay rents to the banking system for the use of a public commodity. Fortunately, we still have the opportunity to use cash, which today is explicitly public in nature. (This is a contrast from pre-Reserve Bank days, in which banknotes were the private property of the banks, and only coins were public money.)
It is not only banks' pricing policies that are bringing cash back into vogue. In the 1970s and 1980s, inflation obliged people to use financial institutions or otherwise see their cash reserves depreciate. $1,000 put under the mattress in 1970 is worth less than $100 today. But with low inflation today, banks are really only of use to most of us as places of safekeeping. But, with low interest and up to $50 per month of bank fees, money is hardly safe even in banks. In a deflationary environment, banks are even less safe than usual (as their business customers go broke, and the securities that secure secured loans fall in value), while cash under the mattress appreciates in value.
The main implication that follows from this trend towards cash and away from the use of banks, is that the "money multiplier" no longer works. Our monetary system is based on the supposition that money, as it is spent, remains within the commercial banking system; ie it only shifts from one account to another. New money, injected into the commercial banking system (eg by the Reserve Bank buying securities), is multiplied perhaps 20-fold through the creation of loans, as banks only need to keep about 5% of their assets as cash (or cash-equivalent) reserves.
When the public withdraws cash and places it is a jar in the top cupboard or in the underpants drawer, that represents a withdrawal of cash reserves from the banking system. Unless the central bank acts, every dollar withdrawn and hoarded represents a loss of around $20 to the money stocks of the nation. While it is true that most money is held by the top 30% of New Zealanders who will find that the convenience of electronic banking outweighs its cost, the some total of the transaction balances of the other 70% represents a tidy sum of money.
The social consequences of our voting with out feet and moving back into a society in which most people use banknotes for both immediate transactions and as a store of savings in their homes are immense. If the monetary authorities are not awake to these changes, the potential exists for a deflationary crisis. Strategies adopted by households in response to low inflation and modern bank charging practices are magnified by the workings of the banking system. Deflation feeds on itself.
The banks have become a part of the fabric of our society. A divorce between the banks and the people cannot take place without social consequences. In the Great Depression of the early 1930s, cash was a valuable commodity. 'Cashmore' strategies helped to create a very different kind of cashless society to the electronic cashless society that is now technically possible. That's another example of the prisoners' dilemma. Have we learned anything?
© 2000 Keith Rankin
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