Early on in my days as an economics teacher, I was teaching about money – what money actually is. I corrected the misconception that our money was based on gold, and explained that our money was based entirely on faith. One of my students, who hadn’t shown a lot of interest in economics til then, popped his head up and said, “You mean money is imaginary?” At various times I find myself explaining that most money doesn’t exist in tangible form – it’s all electronic in computers somewhere. And we talk about the ways money may change in the future.
It seems I’m not the only one thinking these things. In an article called “The End of Cash” in the Wall Street Journal, a lot of these same ideas are discussed.
There are no atheists in the modern economy. You may not have God or Buddha in your life, but you very much have faith—in money. I don’t mean that you worship money in the greed-is-good sense. No, you have faith in its value. Your trust in it depends on everyone else’s, which means that our faith in money’s value is really about trust in each other—a belief in shared purpose, or at least a shared hallucination.
Cash, as in banknotes and coins, helps us to maintain that magical thinking. It’s real in the way that you can hold it, smell it, and want to wash your hands after handling it. Paper notes and metal coins are the treasures of our childhoods, tucked under pillows by tooth fairies, delivered in secret by doting grannies. Despite the dull textbook definition of money—a medium of exchange, unit of account, store of value—it is by way of using it in the form of cash that we first come to understand the civilization-powering technology that is money.
But do we still need cash? In an era when books, movies and music are transmuting from atoms to bits, the greenback and those increasingly costly metal rounds are looking more analog by the minute. Lately it seems like the only people who carry cash are aspiring terrorists, corrupt government officials, drug traffickers, bank robbers, tax evaders, counterfeiters and rich college kids buying little bags of marijuana.
Although predictions about the end of cash are as old as credit cards, a number of developments are ganging up on physical money like never before: mistrust of national currencies, novel payment tools, anxiety about government debt, the triumph of mobile phones, innovative alternative currencies, environmental concerns and growing evidence that cash is most harmful to the billions of people who have so little of it.
The poorer you are, the higher the costs and risks of cash become. Anyone you know can beg you for a few bucks or steal the hard-earned money that you’re trying to save to pay your children’s school fees. A fire or natural disaster can obliterate your meager savings. And you may have to spend days riding buses and walking to the countryside to deliver cash to, or retrieve it from, a relative. Even if a wire service is accessible, that means paying steep service fees.
In wealthy countries, money, for the most part, is already borne in the form of 1s and 0s on some distant computer. If you happen to want or need cash, you stroll to a nearby ATM. Otherwise, you use your credit or debit card, or perhaps a newer technology like Google Wallet or PayPal Mobile.
Having money in electronic form is our ticket to both streamlined commerce and services that help us to achieve stability beyond the next meal or visit to the doctor: mortgages, small-business loans, interest-bearing accounts, health insurance, home insurance, college savings, e-commerce and more. Yet while we can essentially toggle between paper and electronic money as we see fit, the poor are stuck using cash. A primary barrier is the conventional model for banking based on bricks-and-mortar branches. It has never been profitable to put bank branches in the slums and rural villages where poor people live, while balance minimums and the time required to get to and from a branch make old-school banking unrealistic and unattractive.
But phones are everywhere. Mobile technology is now being touted as a solution for getting financial services to the roughly one billion people who already have a phone but who don’t have a bank account. The models vary, but the gist of mobile money is electronically storing or transferring value by way of the phone. For mobile banking, the idea is to make it possible for almost anyone to open and use a no-frills savings account and, through a network of associated merchants, make transactions. Major players like the World Bank and the Gates Foundation are already investing heavily in these new technologies for providing the poor with financial services.
Another innovation that promises to push cash further to the periphery is near field communication, or NFC. A tiny antenna inside a digital device, like a cellphone, can wirelessly transmit payment information with a quick wave toward a reader device or another person’s cellphone. NFC could be a killer for those low-value cash transactions—a pack of chewing gum, a lamp at a garage sale—that constitute the vast majority of today’s cash purchases. (Payment industry geeks call this the “final mile” on the road to cashlessness.) By 2014, transactions conducted via wireless connections from phones world-wide are expected to total $1.13 trillion. Initially, most of these new technologies will only provide alternative ways to make a credit card charge, but that too is changing, as users turn to person-to-person methods that cut out the middlemen, eliminating both fees and friction in our economic lives.
The final blow to old-school scrip may come from currency innovators. Alternative currencies are surprisingly common, and they go well beyond classic examples like Disney Dollars and airline miles. Today there are local versions like Ithaca HOUR (Ithaca, N.Y.) and BerkShare (western Massachusetts), and online ones like Facebook Credits and, most recently, the encrypted digital currency Bitcoin.
It may be tempting to belittle alternative currencies as limited, unrealistic, or maybe a little kooky, but they do work, so long as they don’t run into counterfeiting problems and supply is intelligently controlled to avoid inflation. Nothing but perception—call it religion, even—makes the issuing authority of the U.S. government more legitimate than, say, the Ithaca HOURs Circulation Committee. Both try to supply users with real money, and both do their best to wisely steer monetary policy in a way that promotes growth.
But the hazards are just as real, too. For alternative currencies, the risk of a mismanaged money supply is alive and well, and a misstep, or a crisis in confidence after an outbreak of war in upstate New York, could cause the HOUR’s value to plummet. National currencies run this risk as well, but those who handle the state money supply have more tools at their disposal to maintain stability.
As skepticism, or at least anxiety, about the managers of national or super-national currencies increases (hello, euro zone), supporters of alternative currency schemes will find a wider audience. New ideas about money are uniting people on the right, who worry about deficit spending and the heavy hand of government; libertarians, who see sovereign currencies as interference with market forces; and über-progressives, who seek a monetary system that relies less on frenzied speculation and plundering natural resources. A phantasmagoria of new value possibilities awaits.
Could we completely trash cash tomorrow, or even in five years? No. Too much economic activity and too many livelihoods still depend on it. Cash is useful if your baby sitter doesn’t accept PayPal or if you want to eat at a cash-only Chinese restaurant. And as long as we still use cash and not Facebook Credits to tip waiters and bellhops, we can’t get rid of paper money.
The idea isn’t to make life harder for those whose lives depend on modest transactions; it is to scrutinize cash because it has skated by for ages with barely a whisper of criticism. A closer look at the long history of cash, its present-day costs and the flood of emerging technologies suggests that we may very well be on the brink of a monetary revolution.