The Death of Crash

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Cash money is one of mankind’s greatest inventions. He who possesses it can trade it for just about anything. Once price is agreed upon, he simply hands it to the seller, takes possession of the good being purchased, and walks away. The whole interaction is over.

Until less than a half-century ago, this was the way most personal transactions occurred. Oh, beginning in the early part of the last century, certain cash substitutes came into occasional use, mostly to effect transactions when face-to-face contact was inconvenient. A person might pay his rent, say, by sending his landlord a check. The landlord would deposit the check with his bank, which would, directly or indirectly, return the check to the remitter’s bank, which would redeem the check with cash or, in some cases, a cash substitute such as a bank deposit. The check would then be returned to its writer, and that would be the end of it.

Early in the century, income taxes were introduced. Then, as now, citizens were pretty much on their own when it came to reporting their income and calculating their taxes. It didn’t take long for government officials to figure out that cancelled checks revealed a good deal about a person’s affairs and could be very useful in finding out whether he was reporting all his income. About 50 years ago, government required that banks make copies of all checks that pass through their hands and make those checks available to law enforcement authorities.

About 35 years ago, a new, convenient method of handling small transactions emerged: credit cards. At first they were used as an ancillary to travelers checks, a cash substitute that enabled merchants to make purchases from individuals unknown to them without using cash or checks, which might, after all, have nothing to back them up. The first credit cards were used mostly by the well-to-do as a convenience while traveling or entertaining. The issuer of the card guaranteed to pay the merchant the amount charged, less a modest commission, provided the merchant agreed to take certain relatively simple precautions. The card-holder was relieved of the need to carry cash and obtained what amounted to a free, short-term loan. He also obtained a record of expenditures in his credit card bill. This last feature made credit cards fairly popular with business people, whose travel and entertainment expenditures are often tax-deductible, provided that they can document them.

Re-enter the government, which also obtained something from credit card transactions – a detailed look at the economic affairs of its citizens. Legislation was enacted that required credit card records be maintained by banks and made available upon request to law enforcement authorities.

During this entire period, cash money existed side-by-side with checks and credit cards. It was somewhat less convenient in certain ways, notably that its risk of theft was slightly higher than that of other sorts of property, because its value was much higher compared to its mass and volume and because it could be exchanged so easily for just about anything that anyone wanted to acquire. But it had advantages. For the buyer, it did away with the risk that his check or credit card might be refused because the seller did not want to take the risk of loss if the buyer’s bank account was insufficient to pay the check or his credit card company refused to honor the charge, because, perhaps, the card had been stolen. For the seller, it saved the fees charged by the credit card company and the bank and provided him instant liquidity. But in the mid-1970s, the U.S. government began to put restrictions on the use of cash, in an attempt to minimize the amount of economic activity its citizens might engage in privately. At first, it merely required that banks report to the government whenever anyone withdrew or deposited cash in excess of $10,000, and required that anyone entering or leaving the country carrying $10,000 or more in cash report his doing so to government officials. The rationale was that drug dealers were using cash, and that these restrictions would help control the flow of illegal drugs.

Of course, the restrictions had very little effect on the drug trade. Anyone who could bring a ton of marijuana into

The IRS wants to have a detailed report of every dollar that every American earns and how he earns it, and an equally detailed report on every dollar he spends and how he spends it.


the country without being detected could pretty well manage to take cash out of the country, too. After all, a ton of marijuana is large enough to fill a good-sized truck and gives off an obvious odor, while the cash for which it could be sold, generally $10,000 to $20,000 in those days, weighs only a few ounces, can fit inside a ladies handbag and carries no odor whatsoever.

What the regulation really accomplished was to give the government a closer look into the affairs of its citizens. My father was an Internal Revenue agent at the time, and he told me that occasionally a Cash Transaction Report (CTR) would be· forwarded to the office where he worked, passed among the agents, and discussed during coffee breaks. “Oh, I wouldn’t think that Joe Doakes had any good·reason to handle that kind of money,” an agent would say. “Maybe we should take a closer look into his affairs,” another might respond.

Closing the Loops

During the past quarter-century, the requirements have been extended and tightened. Many merchants must also file CTRs with the IRS, banks are required to report any “suspicious” transaction to the IRS (which in effect generally requires them to report cash transactions of $3,000 or more), and various cash substitutes (money orders, cashiers checks, travelers checks) must be treated as if they were cash. The la~ allows the government to treat the mere possession of more than a nominal amount of cash as evidence of wrongdoing and confiscate it from whoever has it, leaving him to prove beyond a reasonable doubt that it is not, in fact, the proceeds of a criminal activity. This is an expensive process, and very often the people whose cash is confiscated simply give up or negotiate a compromise whereby the government keeps a substantial portion of the cash.

As recently as a few decades ago, large transactions in certain industries were customarily effected in· cash, and it bore a substantial role in everyone’s day-to-day life. In Britain, for example, in the 1970s, bundles of 10,000 pounds sterling, packaged in plastic bags, were routinely used in commerce. Certain industries in the U.s. continued to make most transactions in cash into the 1970s.

But the role of cash has become smaller and smaller. Not only has government systematically harassed its users and subsidized the use of checks, but merchants have discovered that there is so much consumer demand for payment by plastic that it would be foolish not to sign· contracts with credit card compa~iesthat both require them to pay substantial fees for clearing credit cards and prohibit the mer~hant from offering cash discounts or passing on the extra cost of credit card processing to their customers.

In 1983, I wrote an article on the decline of cash. “I believe the day will come,” I said, “when you will be called in for an audit with the IRS and the auditor will have on his desk a detailed list of every cent you spent and every item you bought. ‘Where did you get the money to buy this car,’ he will ask. ‘How can you afford to buy your wife this fur coat?'”

“Of course,” I concluded, “our privacy will be shot: the government will be able to conveniently and easily look up and see how much liquor we buy, how much pornography we read, how much’subversive’ political literature we read – how much we spend on everything.”

At the time, I believed that the fulfillment of this Orwellian vision was far, far in the future, and I doubted that any of the advocates of anti-privacy measures had tried to trace their implications as far into the future as had I. I also suspected that my prediction was, well, a bit paranoid.

Two years later, Roscoe Eggar, head of the IRS under President Reagan, stated that the ultimate goal of the changes in tax law and IRS regulations was to do away with tax returns entirely: the IRS would have a detailed report of every dolla.r that every American earned and how he .. had earned it, and an equally detailed report on every dollar he spent and how he had spent it. Knowing what income was taxable and what expenditures were deductible, the IRS would calculate the victim’s income tax liability and send him a bill. Commission Eggar did not comment on what privacy Americans would retain once this policy had been achieved.

So the nightmare that I envisioned turned out. to be. the explicit policy goal of the Reagan administration. I haven’t heard any politician state the goal quite so plainly since then, but law and regulations have continued to encroach on· the privacy of Americans.

In the late. 1980s, the Department of the Treasury announced that it was in the process of making some minor changes in U.S. paper money for the purpose ·of rendering counterfeiting more difficult. It would enlarge the portraits on the bills, for example, and move them slightly off-center. And. it would embed in each piece of paper money a small plastic strip printed with microlettering.

A well-known investment writer saw in this an opportunity to increase the sales of his newsletter by reporting on the secret and sinister purposes of the “new money.” Once it was released, he said, the government would on very short notice require that all existing paper money be turned in. If anyone had more than a small amount of it, it would have to be explained to law enforcement authorities; any currency not turned in by the deadline would cease to be legal tender. Further, the investment writer claimed, the microprinting was done in magnetic ink, making it detectable by the government if anyone tried to hide it in a safe-deposit box or to take it from the country.

If he really believed this, however, he was genuinely paranoid.

For one thing, it would be hugely expensive to recall the currency and do away with the legal tender status of existing currency. Any recall would cause a panic, and removing legal tender status would cause huge losses to those who held it. And it would be impractical for currency to be recalled quickly. Somewhere around 25% of all currency outstanding was in the hands of people overseas (where it was widely used in black markets). Recall would create a nice short-term profit for the Treasury, but it would forever destroy the use of the dollars overseas, since no one would want to take the risk of another such event. Printing money and exporting it saves the government billions of dollars per year and is tantamount to a huge profit source.

For another thing, although the magnetic ink on the plastic strip might be used by automated currency counting or sorting equipment, it certainly couldn’t be used to detect currency in safe-deposit boxes or in the possession of people leaving or entering the U.S. Safe-deposit boxes are con-

The federal government has installed a surveillance system in Washington, D.C. that when fully operational will include video feeds from inside shopping malls and apartment buildings.


structed of steel, and magnetism cannot penetrate steel and detect small amounts of magnetic material, certainly not the microscopic amounts contained in the microprint. Millions of automobiles, nearly all containing a ton or more of steel, cross U.S. borders with Mexico and Canada each year, and detecting a few micrograms of magnetic ink within the ton or so of automotive steel is physically impossible.

The government’s concern about the problem of counterfeiting was real. In the first century of American independence, when paper money was issued by private banks and printed by private companies, American security printers led the world in anti-counterfeiting technology. When the federal government began to issue paper money in 1862, it used the same private banknote printing firms that private issuers had used. But in 1873, the government established its Bureau of Engraving and Printing (BEP) to produce all U.S. paper money. Private firms continued to do business, printing securities and paper money for other countries, and they continued to make technological advances that kept them ahead of virtually all counterfeiters. But for more than a century, the BEP made no changes whatsoever in the way it printed paper money, aside from reducing the size of the bills in 1928, a change that actually made counterfeiting easier. By the late 20th century, color copying machines were widely available to make very good counterfeits of the BEP’s by now ridiculously low-tech product. Plainly changes were long overdue.

The investment advisor who opposed this revision apparently sold a lot of newsletter subscriptions, then dropped the story when the currency was introduced without any recall, demonetization of old currency, or magical searches of safe- deposit boxes or of people crossing borders.

Meanwhile, however, technology continued to progress.

Technological Menace

There is now on the horizon a device that could be incorporated into paper money that would indeed make it vaguely similar to the currency of 1988’s paranoid fantasy.

Electronic devices have been made smaller and smaller. Today, several companies manufacture very small devices

RFIDs have one major advantage over holograms/microprinting, watermarks, and other passive devices: They enable every cash transaction to be tracked.


that are intended to be an improvement on the ubiquitous bar code, that is familiar to anyone who buys anything in a supermarket. With bar codes, every product (including this magazine) has a unique number. The vender can simply program his computer with the price of each item, the checkout person scans the bar code, and the computer prints an item’s description and its price on the cash register receipt. Bar codes not only save time at the checkout counter and minimize the number of errors, they also enable merchants to keep track of which products are selling and which are not, thereby lowering the cost of maintaining inventory and reducing losses from marking down goods that fail to sell.

The problem with bar codes, as anyone who has ever bought anything in a store has noted, is that sometimes they are hard to find and sometimes they are marred, defaced, or otherwise unreadable. Isn’t there a way to make them more reliable and easier to use?

Yes, there is. Instead of “reading” them with a light-emitting device, why not implant a tiny transmitter that can send a radio wave? Radio waves can be read more easily and more reliably than bar-code surfaces.

Thus the birth of radio-frequency identification tags, or RFills, tiny bits of computer memory with radio transmitters and antennas attached. They can hold and transmit a substantial amount of data, which can be read, erased, and rewritten by special devices.

At first, RFIDs were fairly large and expensive and thus were used only in applications where the expense was justified – in identification cards, for instance, that allow access to high-value merchandise or confidential information.

But progress is inexorable, and various high-tech companies found ways to make RFIDs smaller and smaller and cheaper and cheaper. They did away with the need for a battery in the devices by powering them the radio waves sent

by the”interrogator,” as the device that reads them is called. Today, RFIDs are used in airline baggage tags and library books. They can be read by receivers as far as three feet away, but they can be made as tiny as .04 inches across and .02 inches thick. That’s nearly small enough to allow them to be embedded in paper. Current prices are as low as 20<t each. That’s pretty cheap, but it still amounts to a lot if they are to be imbedded in paper money. (The European Central Bank [ECB] printed 14.5 billion banknotes in preparation for release of the euro, the new European currency, on Jan 1; the total cost of embedding a 20 cent RFID in each would have been

How much privacy do people want? The answer, apparently, is very little, provided they are asked to surrender it in small enough increments.


almost $3 billion.) According to a story published in December in EE [“Electrical Engineering”] Times*, this technology has caught the interest of the ECB, which issues the euro, the “most common currency in the world,” in the EC’s opinion.

The ECB figures that if RFIDs can be made a bit smaller, a bit less fragile and a bit cheaper, they can be incorporated into paper money. This would not be a particularly attractive anti-counterfeit device, since it would remain no more effective than other technologies that banknote printers like Thomas de la Rue and American Bank Note Company are already using.

But RFIDs have one major advantage over holograms, microprinting, watermarks, and other passive anti-counterfeiting devices: They enable every cash transaction to be tracked. All that is required is to make banks and merchants install RFID readers in cash registers and transmit the data to central computers.

Once such a system was implemented, the bank would report identifying numbers of every piece of paper money it gave you. When you spent it, the transactions would be recorded by merchants and reported to the authorities. And so on. And so on.

Implementation of this plan has obvious advantages for law enforcement officials. There would no longer be any such thing as “unmarked” bills for ransom payoffs, or any need for police to mark bills when they pay for goods when entrapping a seller of illegal drugs. And the IRS could achieve its dream of knowing everything about your income and expenses, thus saving you the trouble of filing a tax return.

Of course, there are other ways of helping law enforcement officials. The technology needed to open every piece of mail in search of incriminating evidence has existed ever since the first postal system was established. The technology exists to record virtually every conversation in the country and to use computers to examine it for suspicious words, the way computers are already used to examine keywords in telephone conversations and email correspondence.. Television cameras could be put on every street to record everything that might be evidence of crime. Putting them inside every room in every private home would also provide useful information to police. In fact, Britain has installed more than 2 million surveillance cameras to enable the police to observe what its citizens are up to, and the federal government has installed a surveillance system in Washington, D.C. that when fully operational will include video feeds from inside shopping malls and apartment buildings.

The question remains: How much privacy do people want? The answer, apparently, is very little, provided they are asked to surrender it in small enough increments. For now, the government’s massive surveillance system in Washington doesn’t record video feeds “unless there’s a reason to do so,” according to a report in The Wall Street Journal, and law enforcement officials have not yet installed biometric software that enables computers to identify and track the movements of specific individuals. But this too will likely change. “People in England have easily adapted to it,” Stephen Gaffigan, the official in charge of the massive surveillance program in Washington. “There has not been an outcry about privacy.”

Public outcry against embedding RFIDs in paper money is even less likely, if only because it will be almost invisible to the public. There was virtually no public protest against the requirement that banks photocopy every check they clear for the convenience of law enforcement officials or about the implementation of cash reporting regulations or their consequent tightening.

Of course, it’s always possible that the technological bugs will not be worked out. Judging from past progress, however, this possibility seems remote. And some of the most innovative and successful high-tech companies, including Texas Instruments, Hitachi, Philips Semiconductors, and Infineon Technologies, are working on the project. They aren’t talking much about it, though;· spokesmen for Philips and Infineon told EE Times that they”are under strict non- disclosure agreements.” Perhaps this will help minimize the public “outcry about privacy” that seems to worry the head of the federal surveillance program.

Anyway, the ECB doesn’t anticipate incorporating RFIDs into the euro until 2005. Maybe it never will. And maybe the United States will refuse to follow suit. So why worry? Tomorrow is another day.

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