Why software isn’t about to replace hard cash…yet

David Wolman

Physical money is one of humanity’s most brilliant inventions ever. But has its time finally come? Is the Cashless Society just around the corner? Not for a while, says the US author who tried to live without cash for a year

A few years ago, I read about a young man in the UK who bet a friend he could live without cash for a year. It sounded like an interesting experiment, although rather easy to execute in a technologically enlightened country like Britain.

Here in the tipping-obsessed United States, however, where many parking meters and even more buses can still be satiated only with little metal plugs; where countless restaurateurs frown at credit cards the way you might expect them to frown at cockroaches; and where someone once told me that doing away with physical money is tantamount to burning the Stars and Stripes on the steps of the US Capitol, foregoing cash for an entire year struck me as far more challenging.

Yet what better way to peer, or at least try to peer, into the cashless future? At a minimum, keeping my hands clear of coins and germ-saturated banknotes for a while would catalyse some contemplation about what a cashless future might look like, the role of different forms of money in our lives, and what some of the best arguments are for keeping cash around or accelerating its demise.

Let’s back up a moment. Money isn’t going anywhere, obviously. It’s undergoing a dramatic metamorphosis, though. A fusion of social and technological developments is bringing money’s various functions into the spotlight and, in the process, enhancing our understanding of what forms of money work best in different situations. Cash is still a pretty terrific medium of exchange in many settings, particularly small-value transactions in the offline world. When it comes to money’s function as a store of value, however, cash is precarious. Most people with access to financial services have said “yes” to the electronic money proposition and “no” to stashing wealth under the proverbial mattress, even if they’ve never paused to think about it in those terms.

Whatever the pros and cons of abolishing physical currency, its fate will not be – and should not be – decided by a government mandate. Rather, cash, if we let it, will go the way of the VHS tape: from ubiquitous to overshadowed, to laughed-at anachronism to museum artefact.

But, for now, let’s imagine we could euthanise cash by way of a sweeping policy decision, like retiring the penny or redesigning a banknote. The proposition is not as outlandish as you might think. Recent technological advances, especially in the payments space, are pushing tactile currency further to the margins of our financial lives. To be able to walk into a store and pay for something just by saying your name (Pay With Square), or to buy something on Twitter’s platform merely by replying to a tweet (Chirpify), or to transfer value to a merchant, bank or friend much as you would send a text message – these are just a few of the developments that have a profound impact on the finances of households and national economies alike.

The problem is that, so far, we still don’t have digital money solutions that are as good, if not better, than cash. None have all the attributes that have made cash such a staggeringly powerful technology for millennia: convenience, widespread acceptability, speed, anonymity and finality. New tools excel on one or a couple of fronts, but not all of them.

The truth is that, were we to get rid of cash tomorrow, the drawbacks would be worrying, if not downright dangerous. For the millions of service-sector workers in the US alone, who depend on gratuities for the lion’s share of their income, getting rid of cash would be disastrous. For the billions of people worldwide barely surviving on $2 a day, doing away with cash would only make their struggle to climb out of poverty that much more difficult. Without some alternative medium of exchange that is equally fast and freely exchangeable, the poor would be driven back into the age of barter.

There is also the disaster-scenario defence. What happens with a digital money economy when the power suddenly goes out, not just for a few days but weeks or months? Automatic clearing houses, credit cards, PayPal, your new favourite mobile-money app all need juice from the grid. Although tinged with a little more doomsday-scenario sensibility than I am accustomed to, this argument for keeping cash around is solid. At a minimum, it’s a fair defence for keeping at least some cash around, or engineering a Plan B currency system that we could turn to if we ever had to face a massive-scale power outage. Or worse.

An alternative scheme would not be impossible. A few years ago, the government of California was unable to pay state employees, so it issued them IOUs instead. Those IOUs started circulating as currency. After all, anything can be a currency, whether it’s red feathers, wampum shells, Facebook Credit, Brixton Pounds, airline miles, Disney Dollars, or promises issued by a state government or, ahem, central bank. Money is whatever we believe it to be, created not with clay but with mutual faith.

Shaken confidence in the euro and fascination with virtual currencies, especially Bitcoin, have forced people to think more about money, currency and value itself. Over time, this trend in how we think about what is, or could be, money may prove to be more of a cash-killer than new technologies.

Then of course, there is the expense. Cash’s costs are myriad, and the basics – like production, management, bank robberies, tax evasion and anti-counterfeiting efforts – only begin to hint at the overall cost. To the individual, these costs are less apparent, but for governments, societies and economies, physical money is proving more and more taxing. If you’re an aspiring terrorist, there is no more convenient, widely accepted and private medium of exchange to use for the purchase of illicit materials than cold, hard cash.

Yes, we – which is to say government treasuries – gain financially from the process of issuing the currency, profit that goes by that lovely-sounding word, seigniorage. But to date, there seems to be no comparison between that profit and the bill taxpayers must simultaneously pay as a result of cash’s role as coveted currency of the black market, bait for criminals who we must then chase, prosecute and incarcerate, lost tax revenue and the like.

On top of that, cash itself is a tax, in a way. It’s an interest-free loan from the people to the central bank, which then uses it to buy government securities. You know – the kind that bear interest. This is the abracadabra of money creation, and when you think about it, it makes the pixie-dust of Bitcoin’s value sound downright straightforward.

In the end, I didn’t have such a hard time avoiding cash for a year, minus a few minor hang-ups; paying the babysitter one night is the best example. There was also the week in Delhi where, although I was reporting on the mobile technology revolution and new digital money options made possible by mobile, it was also clear that I would need to use cash to make my way around the city, hire a taxi or simply just purchase bottled water. Money is metamorphosing, certainly, but it still has some way to go. Physical money, although currently only a small fraction of the total supply, nevertheless remains essential in certain corners of the global economy. We can’t do away with it yet, but I wouldn’t want to bet that that will necessarily be the case a generation or two from now.

About the author:

David Wolman is a contributing editor at Wired and the author of The End of Money, out later this year in paperback: www.davidwolman.com


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