The end of cash?

The writer is a freelance contributor.

Cash (paper currency and coins) is the most sought after commodity in the world. It’s also the most liquid (in terms of acceptability). In the world of business, ‘cash is king’ is a known adage. It’s easy to imagine the evolution of this adage; The person with the most liquid wealth is the one who usually ends up calling the shots in any arrangement.  

A lot of people end up equating cash with wealth, which is wrong. Cash is a physical commodity, while wealth can include non-physical assets like shares, bank accounts, etc. It also helps to clarify that when financial institutions like banks talk about money, they don’t mean it to be only cash. A central bank uses various measures of money, with only one measure constituting physical money.

How much wealth and cash is there in the world? That is difficult to calculate because there is a world over tendency to hide the total wealth and cash figures. Plus, a lot depends upon how we define money and wealth. Whatever estimates exist, though, suggest that the amount is astronomical. One of the most credible of these estimates comes from Credit Suisse. According to its estimates, the total global wealth in 2015 amounted to a staggering $250 trillion. Of this, an estimated $5 trillion is in cash. About $ 2 trillion (or 40 percent) of this cash is in the coffers of billionaires around the world. Of course, people do not carry this $5 trillion around in their pockets. A lot of it is stashed in bank accounts. The remaining is characterised as ‘currency in circulation’ by central banks. 

There is now a steady movement around the world that is calling for an end to cash, and to moving fully to electronic payment mechanisms. The people behind this movement (mostly economists) see the advantages offered by cash being outdone by the costs associated with it. The latest person to raise this argument is Kenneth Rogoff, former chief economist at IMF and a professor of economics. In his book, ‘The Curse of Cash’, he advocates doing away with cash for good. He points out that one of the major problems with cash is large denomination bills, something I also had alluded to in a previous article. These large denomination bills are a favourite when it comes to crimes, tax dodging and financing terrorism.

There are other problems as well. Printing cash is not free (imagine how much it would have cost for printing, transporting, distributing and designing $5 trillion in cash) and its anonymity implies that it can easily find its way into the wrong hands without a trace. Extremist organisations around the world, including those in Pakistan, rely on cash to finance their activities. Cash, especially large denominations, also inflicts damage on government revenues since undocumented economic activity is largely dependent on cash.

Professor Rogoff and many others who argue in terms of the negatives of cash tend to underestimate the role of governments, whose monopoly on printing money has historically imposed the biggest cost upon countries and societies. That cost occurs due to hyperinflation, inflation that runs at hundreds of percent. From the Weimar Germany of the 1920s to the Venezuela of today, rulers have taken resort to printing vast amounts of cash to overcome the economic morass (which is largely the result of their own policies). But this ill-advised policy only leads to disaster in the form of hyperinflation.

Will we see a cashless world in the future? In countries like the US, Sweden and Netherlands, almost half of the transactions are now taking place electronically. Moreover, electronic currencies like Bitcoin (the most famous in this category) are gaining more traction around the globe. Some retailers in the US and other industrialised nations are now accepting Bitcoin, which is significant since Bitcoins are not legal tender (they are not sanctioned by the government). 

Optimism aside, I at least remain a bit apprehensive of the idea that it would be the easiest of transitions and that there are no risks or problems involved. I don’t think that those calling for abolition of cash have really considered all aspects to this equation.

The transition to a cashless society will ensure that the government’s monopoly over printing money is transferred to the financial sector. Of the many lessons in the aftermath of the 2008 recession, one was that there is no end to the greed of the financial sector. It remains to be explained how a society and consumers fare under the financial sector’s monopoly? In Sweden, the chairman of the small business association (TOMER) recently complained about the hefty fee that banks charge on electronic transactions, which is making doing business difficult.

The part about less risk is also questionable. Carrying and keeping cash indeed carries a risk, but a cashless economy may face risks that are even greater. These risks come in the form of hacking, cyber identity theft and computer virus attacks. Just a week or so back, Yahoo announced that millions of its online accounts had been hacked and secret data stolen. In essence, there is no guarantee that any future arrangements will provide foolproof safety against identity theft and hacking. What if one day a person in a cashless society wakes up to find that his wealth has dissipated into thin air after a hacking or virus attack?

The risk of physical money getting stolen also carries an equal risk for the thieves, who can be caught or shot. In a cashless society, the offender can do his work from anywhere around the globe with just a click of a button, without taking much risk. In this regard, I may also add that in a world of cashless currencies, only those adept in the cyber world will know how to gain advantage of this system. Those who have little knowledge of computers and internet would be at an extreme disadvantage. This is a sure-shot way of exacerbating income inequalities. 

Electronic currency is another alternative to physical currency. But their performance to date does not elicit much confidence. Consider Bitcoin. To get Bitcoins, a customer has to ‘extract’ or ‘mine’ them through the internet. Unless one is good at computers and working the internet, there is little chance of getting it. Also, the process of extracting Bitcoins can take a toll on the power grids as it requires tremendous computing power. California found this out a couple of years ago when it faced a serious possibility of blackouts due to extra power demand. To ensure such computing power, a lot more servers and physical space is required (plus all the cooling equipment for the servers). Adding up all these costs makes this currency costlier than physical currency. 

Bitcoin also suffers from another problem – the large variations in its value. One of the characteristics of sound money is that its value is relatively stable over time, and any appreciations or depreciations in value are minute. Bitcoin’s value either goes through the roof or crashes down instantly, which makes it an un-attractive alternative. Mt Gox, a Bitcoin exchange platform, filed for bankruptcy as Bitcoin’s value took a nose dive a couple of years ago. And the icing on the cake is that Bitcoin has become the most in-demand currency in the world of illegal activities and underground economies, an aspect that led to the replacement of physical currency in the first place. 

Last, but not the least, is the psychological phenomenon known as ‘pain of paying’. Physical money is something tangible (and valuable). Therefore, when we pay, we feel a sort of pain (the level of this pain varies with the level of total money or wealth one has). In other words, physical money is a powerful reminder of our limits. Plastic and electronic money are less tangible and come with the option of deferred payments, which usually lulls its user into a false sense of security. The user may feel that there are no limits with this kind of money. This is a proven fact, given the huge household debt around the globe. In a nutshell, a world with a cashless society may turn out to be the right incentive to accumulate even more debt. In a world awash with debt, this would be an unwelcome development.

A cashless economy and society may offer many advantages, but clamouring for its establishment deflects attention away from some pressing concerns which have to be addressed to make this kind of transition successful.

Email: shahid.mohmand@gmail.com

Twitter: @ShahidMohmand79