The Contemporary Currency
Bitcoin | Kai Sedgwick
It’s rare today to see someone searching in their coin purse for exact change. People tend to dislike metal currency; coins are bulky, heavy, and overall inefficient at a time when the price of most purchases exceeds the trouble of dealing with them. But current trends indicate that the same attitude is slowly developing towards cash. Is this a favorable trend or something to be wary of?
Paper currency originated in China during the seventh century as a promissory note payable upon demand; after currency issued by national banks became legal tender, paper money was backed by gold. The convertibility of currency to gold ended in 1971 with the Nixon shock and the Smithsonian Agreement; eventually most industrialized nations switched to the regime of a floating exchange rate and fiat currency.
Credit cards, on the other hand, first emerged as customer loyalty cards that could only be used at a single location; they were followed by charge cards, which had to be paid in full by the end of every month, and then by the first rendition of the modern credit card. Technological advances began with the magnetic stripe, followed by EMV payment technology (chip cards) to stymie counterfeiting efforts, and have recently continued with radio frequency identification (RFID) technology that allows customers to make purchases with just a tap.
Mobile payment systems have advanced beyond PayPal and Venmo—Apple Pay, Android Pay, Google Wallet, and even payments through Facebook Messenger are becoming more common, even replacing credit cards for some consumers. In Sweden, the bank-launched payment app Swish was used by over sixty percent of the population in 2017. The Indian app Paytm has recently expanded to both Canada and Japan and handles over twenty million transactions per day; Chinese apps Alipay and WeChat are accepted in seventy and fifteen countries, respectively, as of 2017. The accessibility of some of these apps has surpassed smartphones; smartwatches can also be used to make purchases.
Not to mention the fact that the slowly increasing prevalence of decentralized cryptocurrencies like Bitcoin has upended traditional ideas about purchasing power and the validity of money (though it’s possible these will not be as revolutionary as some imagine).
Alternative payment systems are making cashless monetary transactions easier and more efficient than ever. As these technology and internet-reliant methods have become more popular and accessible, there have been calls to scale back or even eliminate the role of cash in everyday transactions. Leading economists like Larry Summers and Kenneth Rogoff have advocated for large denomination notes being withdrawn from circulation. This has been done with extremely high-value bills before—some may recall that Canada only stopped printing the one-thousand dollar bill in 2000. In more recent news, in late 2016 the Indian prime minister cancelled all five-hundred and one-thousand rupee notes and replaced them with newly issued bills, invalidating eighty-six percent of physical currency in a country where ninety-five percent of consumer transactions occurred in cash. Though no denomination of currency was permanently eliminated, the move did accelerate the shift away from cash by cultivating the perfect environment for mobile payment apps. Furthermore, in 2018 the European Central Bank announced its decision to stop printing five-hundred euro banknotes (though existing bills continue to be valid).
Supporters of a cash-lite economy give a myriad of reasons for such a transition.
The most prevalent argument is that sophisticated banking systems and electronic recordkeeping have made large-scale transactions involving high denomination currency unnecessary—so rendering these bills obsolete would thwart criminals while not inconveniencing most ordinary citizens. The aforementioned Indian cash crisis began as an attempt to crack down on “black money” obtained through money laundering, corruption, and counterfeiting. The same is true for the five-hundred euro note, which is colloquially known as the “Bin Laden” for its rarity in everyday purchases and ubiquity as a denomination used for illegal activity.
Another benefit of a cashless society is that it prevents liquidity traps. The introduction of negative interest rates has been hindered by a problem known as zero nominal lower bound. This concept describes the situation in which low, zero, or negative interest rates cause a liquidity trap; people withdraw their money in cash and decrease the amount of money banks have to stimulate the economy. If a society were to become nearly or completely cashless, this liquidity trap could not occur and the policy’s true effects could be studied.
Those who favor continuing to use cash have their reasons as well. Germany, the largest economy in Europe, is famous for resisting the shift away from cash. Many cafés and corner stores are furnished with signs that read “cash only,” reflecting not only the preference of store-owners, but consumers as well. For Germans, the convenience and efficiency of electronic payment are outweighed by concerns about privacy and the role of the government. Physical currency provides autonomy and anonymity of transactions, as well as security (Holger Sachse of the Boston Consulting Group explained that “only a quarter of [German] consumers believe that cashless payments are safe.”). Experiencing dictatorships and periods of high surveillance has given the German people a desire to protect their privacy, including data on their spending habits.
However, it is also true that German advocacy for cash is not entirely virtuous. Because cash purchases have no electronic record, it’s easier for businesses to cook the books and report lower earnings than they actually received, thus evading taxes. Harvard economist Kenneth Rogoff said about under-the-table transactions, “People all over the world buy apartments in cash, and it’s not because they don’t know how to use a bank, believe me.”
Sweden is the opposite in regard to cash use; the value of cash in circulation was one-hundred twelve billion Swedish kronor in 2007 and just fifty billion ten years later. Jonas Hedman of the Copenhagen Business School, along with two colleagues, identified early 2023 as the year Sweden would become wholly cashless (that is to say, cash would not be generally accepted as a form of payment). Most banks no longer handle cash; citizens have to go to an ATM for it. Ninety-seven percent of traders still accept cash but only eighteen percent of consumers still want to use it. Sweden has the advantages of a bank-operated payment app, a historically good relationship with the government, and one-hundred percent mobile coverage in the nation.
Speaking of which: one of the premier arguments against going completely cashless is that card and mobile payments rely on the continuity and reliability of electricity, communication networks, and computer security; should one or more of these elements fail, even for a short period of time, commercial transactions would be entirely inhibited and citizens may not be able to access valuable resources and necessities in the case of an emergency. Similarly, should a bank fail, people’s savings could be decimated. And if governments and private institutions have control over citizens’ money, they could curtail access to it during times of war or rebellion; theoretically, they could prevent people who publicly dissent against them from being able to spend their own money.
The arguments vary by country and culture and are virtually limitless; money as a means of spending is necessary, and in its physical form, it’s almost sacred. Cultural factors abound: in North America, tipping is generally expected, and often it’s with cash. Questions about security are met with more questions: as robberies decrease in Sweden, credit card fraud is increasing. Governments are, of course, getting involved, with thirty countries (and multiple well-known companies and organizations) joining the United-Nations-based Better Than Cash Alliance.
Getting rid of large-denomination notes is a seemingly harmless move that may achieve the goals of maximizing efficiency and limiting illegal activity with minimal side effects. But going completely cashless is not something to be taken lightly. The companies incentivizing consumers to adapt to a world devoid of physical currency wouldn’t be doing so if they didn’t have something to gain; as for-profit institutions, it is not their job to consider potential ramifications that don’t affect their bottom line. Citizens are responsible for such considerations, and before being swept away by the wonders of technological advancement, it is worth assessing whether there isn’t some value in the conventional way of doing things.