Virtual payments may overtake cash transactions in some levels of society, but cash still reigns in many places in the world
There is an inexpressible sense of comfort and security in the knowledge that there is some cash in your wallet. As Russian novelist Fyodor Dostoevsky expressed it, “Money is coined liberty, and so it is ten times dearer to a man who is deprived of freedom. If money is jingling in his pocket, he is half consoled, even though he cannot spend it.”
Before the concept of money spread, people used the barter system to exchange goods and services. There was a time when items of popular acceptance like salt and cowrie shells were used as a medium of exchange. .As English philosopher and statesman Francis Bacon once said, “Money is like manure, of very little use except it be spread.”
It was in 1862 that the US government began to issue banknotes, following the passage of the Legal Tender Act of February 25, 1862. Although the plan was to print a particular number of notes needed to pay the army and for the needs of the army during the Civil War, the notes ended up being known as “Greenbacks” and issued for several decades.
There was a time when cash reigned supreme in the world of finance. But now, with the popularity of online shopping, cash appears to be losing importance as a mode of payment. Sweden is trailblazing a cashless society, with cash being used for only 15% of transactions at point of sale. Sweden being sparsely populated, it is expensive to distribute cash, and more than half of Swedish banks have stopped handling cash. Deputy Governor of Sweden’s Riksbank, Cecilia Skingsley, said, “Access to the Internet is widespread, and computers, smartphones, and tablets are household items. Thus, the conditions are ripe for launching more electronic payment forms.”
Added to this, India recently removed 86% of its banknotes from circulation, while only some Nordic banks are using cash in their branches and South Korea hopes to stop minting coins by 2020. In the Netherlands, card transactions were higher than cash transactions for the first time ever, in 2015. In a millennial-dominated financial system, where speed and convenience are the keywords, virtual payments by card and mobile app, are preferred to cash payments. Professor of Psychology and Behavioral Economics at North Carolina’s prestigious Duke University, Dan Ariely, said, “The more cashless our society becomes, the more our moral compass slips.”
However, cash still reigns in developed economies like Austria, Germany, Japan, Singapore and Switzerland. Smaller markets with a high level of technology will embrace the cashless concept readily, but as Björn Segendorf, of the Riksbank’s Financial Stability Department, said, “If you look at some bigger countries, say Germany or the U.S., you have so many more important players that it’s simply more difficult to create this atmosphere of cooperation.”
A recent study of consumer transactions in the US called the Diary of Consumer Payment Choice, conducted by the Federal Reserve Banks of Boston, Richmond and San Francisco, showed that cash transactions made up 40% of the total number of transactions, followed by debit cards at 25% and credit cards at 17%. The study also uncovered a surprising fact – that 40% of young people between 18 and 24 years, prefer cash transactions – which is the highest percentage of any of the age groups in the survey. Young people seek speedy, convenient cash like title loans, possibly because they lack creditworthiness with the lower incomes they earn as young adults fresh in the job market. In fact, statistics show that small businesses alone account for up to $19 trillion in annual transactions in the US. Yves Mersch, an Executive Board Member of the European Central Bank, said, “The cashless society, as appealing as it may sound, is probably just as elusive as the much vaunted paperless office.”
According to a study by the San Francisco Federal Reserve, US Dollars circulating in global money markets has increased 87% over the past ten years. The study finds that $783 billion worth of US dollars circulated globally in 2006, and in 2016, it had increased to $1.46 trillion. 5% of this $1.46 trillion – that is about 70 billion dollars, is neatly stacked and accounted for in bank vaults by individuals. But the rest of the money eludes tracking. A regular American has about $30 in the wallet and on average, about $174 at home. One in 20 may have more than $1200 hidden in their home. Cash savings people put down on tax documents is a small fraction of circulating money. So, what happened to the rest of the money?
The number of 100-dollar bills has increased fourfold, with a lot of it finding its way overseas. Harvard Economist Ken Rogoff said, “We all use cash in our everyday life, but we don’t use hundred-dollar bills. We’re not using 500-euro notes. And yet these account for mountains of cash out there. I think they’re being used in tax evasion and by criminals of all types.”
India has taken large denomination notes out of circulation to reduce tax evasion, financial crimes and corruption. Several European countries have introduced limits to cash transactions, and the European Central Bank aims to stop printing its highest denomination note – €500 – in the current year.
As real life situations show with clarity, cash may be getting replaced to a significant degree as a medium of exchange. But it has not been displaced as a store of wealth, if at all, that function has enhanced globally. As Kenneth Rogoff observes, “I don’t think it’s time yet to eliminate cash, but I propose having a less-cash society, not a cashless one.”
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