Peter E. Kunkel is the Acting Assistant Secretary of the Army (Financial Management and Comptroller). From 2003 to 2007, Mr. Kunkel served in multiple positions in the Office of the Secretary of Defense, including the Office of the Under Secretary of Defense (Comptroller) and Office of the Assistant Secretary of Defense (Legislative Affairs). From 1992 to 1996, Mr. Kunkel served as an infantry officer in the United States Marine Corps. He holds a B.A. from Northwestern University and a J.D. from the University of San Francisco School of Law.
In the early phases of operations in Iraq and Afghanistan it made sense for maneuver units to bring large amounts of American cash onto the battlefield. Army units used it to make various battlefield purchases, including construction materials for foxholes and flooring for tents and even bottled water for Soldiers. These Army units also used cash to reward tipsters or even to pay for battle damaged private property. Cash, particularly a hard currency like American cash, was the best tool for the job at hand, and local residents preferred to accept it.
Even so, the volume of these transactions was colossal. For the last several years, the Army has spent approximately $1.5 billion per year in American cash in theater.1 Relying on cash, year-after-year, at such a scale to handle such purchases in these economies meant missing, year-after-year, an opportunity to advance economic and security objectives there. Instead, transitioning today away from cash could make valuable improvements to these unstable economies.
Excessive reliance on cash for such purchases stunts entrepreneurial activity and job creation. But using commercially available, non-traditional banking methods for these purchases could arrest the trend. Further, transitioning away from cash would eliminate handling large sums on the battlefield, eliminating the need to put every person involved in distribution and usage at risk of personal violence.
Life in the Wild West of Reconstruction-era western Missouri offers some salient lessons to understand the insidious military consequences of this large-scale reliance on cash in Iraq and Afghanistan today. During those times, insurgents enjoyed strong popular support and operated with impunity. During those times, cash (actually state-chartered bank notes) was the dominant medium of value.2 During those times, changes in banking and wire transfer absorbed cash, helping to settle the Wild West. Today, the same principles can be applied in Iraq and Afghanistan to advance economic and security objectives there as well.
Of course, the most famous figure from Reconstruction-era western Missouri is the folk legend, Jesse James. James was nearly 14 at the beginning of the Civil War, too young to fight for the Confederate side. However, just as massed warfare gave way to insurgency, James came of age, and he rose to notoriety for banditry during and after Reconstruction. Against great odds, he managed to elude capture by law enforcement officials for 17 years until his murder by a bounty hunter in 1882. 3
Surely, his success was due in part to widespread support from local residents. One source of his appeal may have been the sheer audacity of his successive bank and train robberies, but that alone probably would not explain why he eluded capture for so long. Rather, a more plausible source of his popular support was likely his reputation as a Confederate champion.4
So, for some, James was merely a violent outlaw bent on robbing trains full of cash, using violent insurgent tactics. However, for others, he wasn’t merely employing insurgent tactics, he was, in fact, an insurgent. Indeed, local citizens dissatisfied with current political arrangements in Missouri aided him. The distinction between outlaw and insurgent was probably just as unclear to the people on the ground in Missouri as it is today in Iraq and Afghanistan. Because James directed his energies specifically at cash, he himself contributed to the confusion.
Those trains were loaded with cash in the first place because gold, the official specie, was virtually unavailable, and even state-chartered bank notes and the new federal “greenbacks” were in rare supply. Cash was extremely precious as the only alternative to the widespread practice of bartering.5,6 Cash had to be physically transported into the frontier region in trains, placed in bank vaults, and then distributed by bank cashiers to individuals for their own safekeeping and use. In such an environment, it would be likely that people would not use cash for frivolous purchases, or even some consequential ones, and banks and trains would be very lucrative targets for bandits like Jesse James.
Fortunately, during James’s lifetime, an alternative to moving cash across great distances by train was developed. In 1871, Western Union introduced money transfer by telegraph, allowing “money” to be moved freely and without risk of violent theft. Actually, money was not literally being moved at all. Instead, bankers were simply communicating by telegraph and making mutual bookkeeping entries in their respective ledgers. However, in western Missouri, James’s violent train robberies continued because the trains still had cash in them. And, clearly, so did the banks.
It was not until the passage of the Federal Reserve Act of 1913, creating “an elastic currency” and the Federal Reserve System, that the nation even had centralized large-scale substitutes for cash in the form of demand deposits and time deposits regulated at the national level. Banks could offer demand deposits and time deposits, i.e., checking accounts and savings accounts, without having to stockpile and physically transport large quantities of cash. Accounts were simply bookkeeping entries in a ledger.
Bandits like Jesse James could not steal an accounting ledger and expect to use it for much. No bandit could use an accounting ledger to make a purchase. And if the banks had fewer requirements to store cash in their vaults, then they would no longer need to transport so much cash in trains. And if the banks would no longer need to transport cash in trains, then thieves would generally no longer have reason to rob trains because there would have been scant cash in the train to steal.
So, telegraphs and cash substitutes offered by banks presented a compelling countermeasure to violence brought on by the prevalence of cash. Bankers had largely removed the temptation for thieves to commit physical violence, regardless of whether the thieves were bandits or insurgents.
These innovations solved problems not only for banks but also for everyday citizens. People no longer needed to store cash in their homes or fear for their own or their family’s security simply because they had cash or because insurgents sought to make a political statement by stealing from moneyed interests. In James’s day, when barter was prevalent, these lessons would have been particularly well understood.
The lesson the Jesse James experience offers is how to discourage thieves from resorting to physical violence. Wire transfer and cash substitutes, the tools of modern banking, remove temptations for physical violence.
The Army generally understands that security in Iraq or Afghanistan or, indeed, in any counterinsurgency environment, would improve if a local banking sector existed. Certainly, Army disbursing agents on the ground in Iraq and Afghanistan today understand well that enticing local Iraqis and Afghans to get bank accounts would greatly simplify disbursements. However, most assume that implementing a banking system in a counterinsurgency is a strategic challenge that traditional Army operations, logistics, and disbursing procedures cannot squarely address. Therefore, with the exigencies of ongoing battle—ameliorated by resorting to cash in the short term—and with incessant delay in passing legislation to protect depositors and creditors, creating a viable Iraqi private banking system from whole cloth seems out of reach.
Nevertheless, there is a way to convert this challenge into an opportunity. If the Army sees itself as a market participant with enough purchasing power to change the behavior of other market participants, a path out of this confusion appears.
Between 2003 and 2008, Army finance units in Iraq purchased from or made payments to Iraqis for goods and services worth nearly $7 billion. They paid this staggering sum in cash. Including the nearly $12 billion of seized cash from the previous regime tendered to the Iraqi government, the total reaches $19 billion in cash introduced by the Army into the Iraqi economy.7 Factoring in the second- and third-order effects of spending all of this cash in the Iraqi economy, this sum represents approximately 20 percent of official Iraqi gross domestic product from 2003 to 2007.8
It is important to make two distinctions. First, although Iraq surely has a vigorous unofficial economy (i.e, a black market), Iraq is still an oilexporting nation. As such, its economy is already robust compared to many war zones, so at 20 percent of GDP, the Army’s impact on the economy is even more impressive. Second, this spending is separate from the large-scale reconstruction projects administered through the Coalition Provisional Authority, the State Department, or other relief agencies. There, the payees are U.S. or international engineering contractors that hire American, thirdparty national, or Iraqi employees—the spending really made its way into the Iraqi economy only to the extent that Iraqis were hired as employees. Here, payments were due simply to the sheer gravitational pull attributable to sustaining such a large-scale Army presence.
Under these circumstances, it seems reasonable that the Army, with such immense purchasing power in addition to its manifest kinetic power, would have the necessary tools at its disposal to dry up the cash by mandating and creating incentives for its vendors and others to accept wire transfers, also known as electronic funds transfers (EFTs).
Of course, for this to work, these counterparties would require access to bank accounts so they could accept payment by EFT. Since Iraqi state-run banks with brick-and-mortar branches have generally proven themselves unfit for the task (essentially, they are just cashiers), the Army must help these counterparties find an alternative. Commanders will need to take two steps.
The commanders’ first step must be to mandate EFT for all payments in their sectors. Counterparties, be they concerned local citizens or vendors, sheiks or contractors, will not set up bank accounts and accept EFT without commanders mandating it. In many cases, commanders may need to create incentives for counterparties to take this step (e.g., monetary inducements).
However, after these sheiks and contractors have received the first few EFT payments, commanders will have to solve an even harder problem. These sheiks and contractors will not have cash to pay employees’ salaries or their own subcontractors. The employees and subcontractors, in turn, will
need to get bank accounts to accept EFT so they can get paid. The problem is that, although brick and mortar bank branches with EFT capability are opening in Iraq, in a nation with a population of 26 million people, commanders might have to wait a long time before such banks will open in their sectors.9 Further, once the Army stops delivering cash to the battlefield, this problem will intensify. Something better is required.
The commanders’ second step will be to help the sheiks and contractors find a banking solution— other than traditional brick-and-mortar bank branches—that can link outdated or non-existent banking sectors to modern, private banking institutions and regulatory regimes. Such commercial banking products and providers exist today, and they use mobile technologies.
For example, on 10 February 2008, the global mobile telecommunications company, Vodafone, partnered with the leading telecommunications operator in Afghanistan, Roshan, to launch “M-Paisa,” the first ever mobile money transfer service in Afghanistan.10
As commanders insist their vendors use mobile banking technologies, the aggregate effect will be to accelerate the penetration of retail banking into the population. Army EFT payments, diffusing throughout the Iraqi or Afghan economies or, for that matter, any economy in which the Army operates, can help wean the population from cash, thereby priming the pump in converting an unbanked population to a banked population.
So the importance of the commander’s role cannot be overstated. Although the contracting and resource management communities in the Army have had some success getting EFT implemented under certain circumstances, given the operational importance but cultural resistance to mandating EFT and mobile banking, this task must fall to operational commanders and not be relegated to a support function.11
Mobile banking is a technology unknown to most Americans. It allows the unbanked to conduct a variety of financial transactions by using existing cell phone networks. A solution that is both portable and virtual, mobile banking is versatile in the types of payments that it supports: payroll, retail, business-to-business, money transfer, and micro-lending. It allows the unbanked to move funds and credit quickly and easily, eliminating the requirement to carry around substantial amounts of cash. However, if cash is needed and no cashier or automated teller is available, all a mobile-banked consumer needs to do is get cash from a mobilebanked vendor after a purchase. This is similar to the point of sale “cash back” option available at supermarkets and pharmacies in the U.S. today.
Cell phones allow users to communicate both voice and data without the major investment of time and money to build a land-line infrastructure.12 Innovations in banking technologies and models that use these same wireless communication networks to provide banking services to the world’s poor are promising.
As these mobile banking networks are spreading rapidly and extending to ever more remote regions to overcome the lack of bank branches and wireline banking infrastructure, when the Army is called upon to enter a part of the world that has no banking sector, it should leverage these same banking technologies and models.13
In such cases, the Army likely would not be able to rely on local legislation protecting depositors, creditors, and borrowers, so it would have to build a system that can reach back to foreign legal protections and financial indemnities and infrastructure. Further, the Army would possibly even have to underwrite such financial indemnities by using appropriated funds.
However, even though mobile banking uses existing cell phone networks and reaches back to existing banking infrastructure, the challenge confronting commanders is to get that first sheik or contractor to embrace it. The challenge is to harness the power of the network effect.
The network effect is well understood in the Army. A network with only one node is worthless. With a second node, it becomes more valuable. With a third node, it becomes more valuable still, and so on. When it has millions of nodes, the network has tremendous value. Cell phones are already being used all over the world, including 10.9 million cell phones in Iraq in 2007, so it makes sense to use these preexisting networks. However, this is only half the problem.14
As commanders ask local contractors or others to accept payment by electronic funds transfer, these local first-adopters will not be able to turn the funds around and spend them again unless their own contractors or payees also have bank accounts. For vendors, the risk is high, as they have to make payroll on time. For individuals, it is cold comfort indeed to accept on faith that precious funds will be available on demand. It is risky for the Army’s small unit commander to experiment with mobile banking on strategic programs, such as the Commander’s Emergency Response Program (CERP), currently heavily conducted in cash.
CERP is an invaluable tool for field commanders to influence their environment without resorting to force. It enables them to provide urgent humanitarian relief and reconstruction assistance. Commanders use cash to make payments pursuant to various agreements for many different kinds of projects. Examples of these kinds of payments include payments for road and school projects, battle damage repair, civic cleanup activities, condolence payments, detainee payments, and even “concerned local citizen” payments.
Therefore, conversion of CERP payments from cash to EFT, essentially a simple contract amendment, has both the highest risk and highest reward. On one hand, the commander does not want to endanger the influence CERP affords, but on the other, the best way to overcome the network effect is to carefully pick counterparties who have the ability, through their own purchasing power, to affect the largest population and then have them follow suit. The numerous, diverse CERP payees might become appropriate conduits for the growth of the network.
Local contractors working with the Army also wield important purchasing power over their subcontractors and employees, but Army relationships with contractors typically involve sophisticated transactions that recur repeatedly and so may lend themselves to EFT at banks. In any case, mobile banking would not be optimal for the large payments that tend to occur in a contracting environment.
By adopting a combination of EFT for large funds transfers and mobile banking for non-repetitive or small funds transfers, the Army can begin the process of mopping up the $1.5 billion of cash the Army brings into the battlefield. This combination of mobile banking and EFT, or expeditionary banking, can perform the same function for modern battlefields as traditional banking and wire transfer did in Missouri and elsewhere in the Wild West.
There are additional benefits as well. A functioning banking sector not only reduces the risk of physical violence (for market participants who substitute cash with bank accounts) but also provides powerful tangential advantages for the host nation and the Army.
In Iraq or in any counterinsurgency, the challenge for the Army is to win the trust of local residents to gain their support to deny insurgents sanctuary. To do so, a genuine improvement in the quality of local residents’ lives must occur. Job creation is imperative. Provision of basic city services must occur (e.g., septic removal, well digging, trash collection), but during counterinsurgency, the regime is likely to be unstable, rendering job creation and the provision of city services by government agencies very difficult.
Since government agencies are likely to be hamstrung, private contractors could fill the gap to provide basic city services on behalf of the new regime. This model could provide jobs as well as the services themselves, and it could make an immediate, perceivable improvement for local residents. It could also support the Army’s objective of winning their trust.
But such contractors would need access to investment capital to get started. To be sure, cash could provide that seed capital, but modern, foreign public and private lending institutions that can bring in robust seed capital will not lend in cash. The risk of loss is too high. These institutions require a means to lend electronically into a functioning host-nation banking sector.
If a functioning banking sector were in place, local entrepreneurs could tap into rich sources of capital to compete for contracts to provide basic city services. Thus, by injecting a combination of mobile banking and EFT payments into the economy, the Army can help create a functioning banking sector and facilitate the extension of credit to ready, willing, and able entrepreneurs. Then, jobs could be created and city services could be more effectively performed. More important, an ever-greater proportion of the population would be literally invested in the new regime and less dependent on prewar, pre-regime, and perhaps state-managed institutions.
In addition, as access to capital for entrepreneurs creates economic activity, it reduces the number of unemployed men who might otherwise become desperate enough to take up arms against the Army simply for pay. However, there are other more direct counters to violence.
Although a functioning banking sector should eliminate some of the temptations for physical violence in society, if insurgent violence or simple criminal violence does occur, a functioning banking sector also creates tools to check it.
Insurgents use cash to acquire weapons and other resources that degrade security and stabilization efforts. So if a mobile banking network has been established, financial flows across the network would be transparent, limiting opportunities for corruption, and increasing law enforcement tools to battle more serious threats such as terrorism financing.
Further, with a functioning banking sector in place, the discovery of large quantities of cash would be a good general indicator of suspicious activity. Today, a Soldier on patrol who encounters a large sum of cash in a private home might conclude that the cash is evidence of suspicious activity, even though in a cash-and-carry economy like Iraq’s, the cash could simply be someone’s savings. However, with a functioning banking sector, Soldiers on patrol might be able to avoid apprehending law-abiding non-combatants or seizing their funds. Such incidents only degrade the trust and confidence the Army might enjoy with the local population.
Beyond the tactical and operational utility that expeditionary banking provides, there are other strategic objectives served as well.
On 15 April 2008, Secretary of Defense Robert Gates testified before the House Armed Services Committee that he believes “building partner capacity is a vital and enduring military requirement” beyond the current operations in Iraq and Afghanistan. Un-governed and under-governed regions around the world offer havens for non-state actors to gather strength and execute attacks against the United States and its allies. Rather than attempt to neutralize these threats with our own forces, which would require vastly more combat power than the Nation has on hand, Defense Department leaders instead seek to increase American support to friendly governments’ military and police forces so that they can influence these areas. The most recent Quadrennial Defense Review Report outlines the “critical importance of being organized to work with and through others, and of shifting emphasis from performing tasks ourselves to enabling others.”15
In shaping Army doctrine and capabilities for future contingencies, the Army should study the experience of current train-and-equip missions in Iraq and Afghanistan. The Army can learn from accounts of Iraqi units suffering high rates of absenteeism while indigenous soldiers and police travel great distances to deliver cash to their families and, while in transit, suffer attacks by insurgents seeking to weaken the nascent force and discourage potential recruits. A practical solution to this problem could be to conduct salary payments of indigenous soldiers and police by money transfer enabled by expeditionary banking. This would keep government employees off the road and within the relatively safer confines of their units. The contributions expeditionary banking could make to the strategy are manifest. However, there are still other reasons to study the impact of cash on Army operations.
The well-publicized irregularities identified in Kuwait contracting operations last year prompted Army leaders to conduct a comprehensive review and implement immediate and ongoing contracting reforms. Expeditionary banking would support many of these reforms as the automated recordskeeping capability inherent to EFT improves transparency and supports audit of contracts and disbursements. Indeed, EFT and mobile-bankingenabled money transfers deliver automated record keeping to the battlefield.
However, mandating EFT and bringing it to the battlefield would also improve force protection for Army finance Soldiers. The $1.5 billion of cash the Army transports annually in cargo aircraft on the battlefield has resulted in nearly one million cash payments since 2003.16 This heavy logistical burden endangers Soldiers, both in the air and on the ground, transporting required cash to commanders at forward operating bases and combat outposts.
There are some encouraging developments. The Department of Defense has undertaken several initiatives to revitalize the Iraqi economy, including efforts to develop Iraq’s financial infrastructure and private banking.17 The Army supports these initiatives, but it will be important that the Army learn the right lessons from them.
On one hand, it is encouraging that, after five years of operations in Iraq, commanders are beginning to de-emphasize cash in favor of EFT, particularly local-denominated EFT.18 On the other hand, there is a risk that in future contingencies the Army could repeat the process of handling bulky cash, ultimately becoming a victim of its own success, as the burden to distribute the cash increases. In that case, the Army would have drawn an incomplete lesson from today’s experience, and this would be a failure to recognize EFT and mobile banking for their own intrinsic tactical, operational, and strategic value.
Rather, recall that the Army was responsible for spending enough money in Iraq to account for 20 percent of official Iraqi GDP across 2003 to 2007. The challenge for the Army is to make the necessary alignments between finance doctrine and contracting doctrine to develop Army purchasing power as a non-kinetic weapon to deliver banking to the battlefield and then link this doctrine to its operational counterinsurgency doctrine.
Army Vice Chief of Staff General Peter W. Chiarelli has written of the capabilities gap between the capabilities the Nation needs and the combined resources the U.S. government can apply.19 The Army, with the direct support of the Department of Treasury and Department of Defense, and with minimal impact on its traditional roles and missions and culture, can create a banking system wherever it is asked to go, made possible not by infringing upon the traditional missions of other Federal agencies but rather by its local economic leverage as a market participant.
Expeditionary banking could do for modern battlefields like Iraq and Afghanistan what the telegraph and the Federal Reserve Act of 1913 did for the Wild West of the United States: remove incentives for violent theft and create opportunities for economic prosperity and job creation. Near total reliance on cash would be replaced by a more balanced approach between banking and cash as a convenient medium for very small scale economic activity far away from the battlefield, with commanders assessing just how far away from the battlefield those activities occur in time and space.
Only ground commanders know which neighborhood is a battlefield and which neighborhood is not. When commanders deem that expeditionary banking is appropriate for their areas of responsibility, they must have the tools to make the transition quickly. Preparations must begin now. The tools must be understood before they can be used. More study is necessary, but it seems clear that modern banking, particularly mobile banking, has a tangible security effect.
That is, it has military application.
1. U.S. Army Finance Command, Finance Activity in Operation Iraqi Freedom (4 June 2008).
2. T.J. Stiles, Jesse James: Last Rebel of the Civil War (New York: Alfred A. Knopf, 2002), 168-70.
3. Ibid., 3.
4. James was the subject of much reporting and editorializing by John Newman Edwards. Edwards was an editor on the staff of the Kansas City Times and a “voice of the Confederate wing of the Democratic Party . . . and a close friend of Jesse James . . . [who] largely shaped the outlaw’s public image and political strategy, spearheading the former Confederates’ rise to political and cultural preeminence in the 1870’s.” State Historical Society of Missouri, Columbia.
5. Stiles, 168-70.
6. The 5 June 2008 Federal Reserve Statistical Release, Monthly Historical Money Stock Tables, indicates that, today, the opposite is true. As of December 2007, currency comprises just 10 percent of the U.S. money supply, but this is not because the alternative is barter.
7. U.S. Army Finance Command, Finance Activity in Operation Iraqi Freedom (4 June 2008).
8. U.S. Army Cost and Economics, Spending Multiplier Effect (12 June 2008).
9. Paul A. Brinkley, Deputy Under Secretary of Defense for Business Transformation, “Restoring Hope: Economic Revitalization in Iraq Moves Forward,” Military Review (March-April 2008): 8.
10. Vodafone Group Plc press release, Vodafone and Roshan Launch First Mobile Money Transfer Service in Afghanistan (10 February 2008).
11. U.S. Army Finance Command, Finance Activity in Operation Iraqi Freedom (4 June 2008).
12. CGAP, Branchless Banking for Inclusive Finance: CGAP Technology Program (August 2007).
14. Central Intelligence Agency, World Fact Book (10 June 2008).
15. U.S. Department of Defense, Quadrennial Defense Review Report, 6 February 2008.
16. U.S. Army Finance Command (4 June 2008).
17. Brinkley, 8.
18. U.S. Army Finance Command (4 June 2008).
19. LTG Peter W. Chiarelli, with Major Stephen M. Smith, “Learning From Our Modern Wars,” Military Review, (September-October 2007): 2.
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