Gertrude Stein once claimed “The difference between animals and man is money.” Such a statement, although ever more questionable when plumbing the depths of the internet, is based from the assumption of why humanity uses money is the first place: as a tool to place value onto goods or services, and therein facilitate equitable exchange. Money was enormously useful when carrying around the entirety of your net worth was a cumbersome and ill advised endeavour. The evolution of the modern financial system, expansion of global trade and advent of modern technologies have made having and storing money easier than ever before. Now, with the tap of a card or the touch of a button of a smartphone, we can freely exchange goods and services in markets that are not limited by distance or accessibility.

So the question bears asking: if we can buy virtually anything at any point using technology, why do we still have paper currency? With consumers now capable of using credit and debit cards, as well as mobile payment applications, for micro-transactions, and large denominations of paper currency allowing for anonymity and being linked to criminal activity, the case exists to question whether physical currency has outlived it’s usefulness. Even with modern cryptocurrencies still being incapable of filling the void, the technology does exist to begin to phase out gold coins.

Physical currency still holds value, both literally and figuratively – having physical currency provides a mechanism to theoretically prevent central banks from lowering interest rates beneath zero. Cash itself gains greater value than electronic deposits if interest rates float in the negative range, an issue currently faced across the globe. A potential solution is that such measures can be offset by raising inflation targets and leveraging scope to make deep cuts to real inflation rates in periods of economic “bust”.

Secondly, paper cash is anonymous – a boon for many, but the greatest advantage is held to individuals or groups undertaking illegal activity or attempting to evade taxes. Standard monetary theory does outline that part of the value of currency is it’s untraceable nature – having neither buyer or seller know the origin of money ensures transactions are generally more equitable, as value is agreed upon. There is no caveat within the theory that states currency exchanged should be untraceable by tax and law enforcement officials.

Currency use globally is also a curious thing – a paper written in 1998 outlined that only 25-35% of Euros in circulation were actually being used by members of the public. The majority of currency was traded in domestic and international markets, though 7-10% was found to be unaccounted for, with the assumption that it was being used primarily in the “underground” economy. The volume of Euros, American dollars and Canadian dollars in circulation was found to far exceed the value exchanged legally within the domestic economy. The difficulty with cash, however, is that tracing where it is used and exchanged is often an impossible task.

Eliminating paper currency does pose three immediate issues however: the first is seigniorage (profits made by government bodies by issuing currency). If the demand for electronic reserves rose at the same rate as paper currency were taken from the economy, this would pose no issue. However, for the very reasons of anonymity and security stated above, this is seen as unlikely. Asking Treasuries to swallow the loss makes the move unpalatable. Additionally, moving to paperless transactions may very well affect transaction costs. If a market requires a certain degree of infrastructure to participate, the costs of that investment will be transferred onto the goods themselves, thereby raising the price of everyday items.

A less pressing, but equally urgent, concern is that of national identity. The centuries old social convention is one that ties together national unity and is a symbol of alliance. The European Union’s use of a single currency, the Euro, has aided the sense of togetherness felt by all Europeans in member nations. The introduction of fiat currency (a currency not backed by physical commodities) would throw into question the value of such inclusive economic unions, or at minimum reduce the physical symbols of unity seen in everyday life.

Not disturbing the status quo is an argument with powerful financial repercussions. But in a world where technology has facilitated mobile payments to such an extent and grown markets beyond traditional borders, the question may be when, not if, the twilight period of paper currency begins.

References

Rogoff, K. 2014. Costs and benefits of phasing out paper currency. NBER Macroeconomics Annual Conference. Harvard University.

 

 

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