In Praise of Analog Money

ATrigueiro
Jun 13, 2019 · 6 min read
Photo by Vladimir Solomyani on Unsplash

Sending money via our smartphones is convenient, but is it in our best interest? Already some countries are nearly free of physical money with most transactions being done digitally. There is an extreme disconnect in some of these countries between the assets stored digitally as savings and checking accounts and the actual physical currency available. In New Zealand, there is only enough physical money to cover about 5% of the money in citizen accounts. If 6% of New Zealand citizens withdraw their money due to some panic, the system would be in crisis and perhaps even collapse.

New Zealand’s size may make this an acceptable and stable situation. The island nation can reach out to global resources if such a panic did occur. In my opinion, economies the size of the United States are a different story. Admittedly, I am old enough to have grandparents that lived through the Great Depression, which makes me a very 20th-century person. Their stories to me as a child were filled with images of extreme poverty. It made me very interested in the Depression and the events that led up to it so that I might hopefully avoid ever experiencing it in person.

My grandparents had lots of stories too. They intimated that once rumors began to circulate of bank insolvency, a run on the banks was a foregone conclusion. You better have some cash on hand at home or be able to barter for this or that when the run came. In those days, there was a much lesser disconnect between the amounts of the depositors, stored on paper in those days, and the physical supply of money. Nonetheless, a run on the banks threatened the global financial system due to the size of the American economy even in the 1930s.

The runs on the banks led FDR to close the banks for days. He recognized that he needed to stop the bleeding. It was a breather, so the system could get resources in place. Such are the limitations of an analog system that physical resources can take time to marshal. One could be forgiven for seeing today’s digital improvements as far superior since these resources can be brought to bear so much quicker and easier. In 2008, when the credit market froze causing a global crisis many resources pushed into the system quickly. Perhaps the Great Recession brought on by credit default swaps has faded from your memory already as it seems to have most Americans. It was a relatively short term event compared to the Great Depression.

Little regulation has been applied since the Great Recession to prevent similar risky behavior by financial institutions. The event was so short-lived compared to the Great Depression. The short-lived nature made the system seem more resilient. After all, banks did not have to close during the Great Recession. However, we learned later that things were right on the brink for a while there in 2008. We still do not fully understand how bad things were in 2008, I believe.

Ironically in the Information Age, information is more controlled than ever before. The digital revolution now allows for more control of the distribution of information rather than facilitating a wide distribution of useful knowledge. It is not widely known or discussed that the run on the banks during the Great Recession was significant. Wealth was fleeing the American financial institutions very quickly in the summer of 2008. The flight of “cash” nearly crashed the financial system. The reasons to move back to Glass-Steagall and other regulations born from the Great Depression seem quite justified. However, there is a widespread feeling that 2008 was not really that bad. Presuming the freezing up of global credit is not considered a crash, but just a fender bender, then perhaps the lack of improved controls on banks is justified.

The Great Recession was a Great Warning in my opinion. A warning that we do not seem to have heeded. The continuing movement to eliminate analog cash would not be as aggressive had we paid attention to this warning. There is no question that analog money can be a throttle on finance since physical transactions must take longer than digital ones. Analog cash can actually be a stabilizing factor because things just take longer to move through the systems. Analog cash also forces some transparency on the financial market and can slow the falling dominoes during a bad run.

Transparency is the great gift of analog cash and its slow elimination has made things predictably more opaque. We now know that there were huge outflows of digital cash from American financial instruments in the Great Recession. There was so much pressure on US financial institutions that money market funds in 2008 began to break below a dollar. This was significant because money markets were seen as savings accounts back then. However, money market funds are NOT digital cash, they are financial instruments with shares that can trade for any number. These mutual funds had been designed to be pegged to the dollar in such a way that each share was worth a dollar UNTIL the Great Recession pulled the rug out from under everyone.

We found this out after the fact though. There was not a lot of obvious and physical evidence of the financial crisis in the Fall of 2008. We heard a lot of breathless Congressional testimony that actually sounded almost hysterical to Main Street. Everything seemed fine, but we were being told that a trillion dollars were necessary to “save the system”. It was not until later mostly in 2009 that the average person started to see the effects of what had happened the previous summer.

In the late 20th century, when the savings and loan crisis roiled American financial systems, I learned of it because I saw a line outside of Tahoe Savings and Loan in Rancho Cordova, CA. There was a physical manifestation to the savings and loan crisis, even before it really started showing itself in the financial markets. In 2008, no such physical manifestation of a possible run on our banks presented itself. Obviously, if you knew where to look the signs were there or Congress would not have been able to basically giveaway one trillion dollars of taxpayer money to prevent a complete collapse of the global financial systems.

I think there is a lot more to be written about 2008. I wonder about the fact there were rumors the US had been involved in the dustup in South Ossetia. South Ossetia was part of Georgia on the southern Russian border. In 2008, the Russians were flush with cash. Could they have attacked the American financial markets in retaliation for our meddling? If one looks back at the events leading up to the crisis, there are definitely some heightened tensions growing between Russia and the United States.

Analog cash is not going to prevent wars or prevent Russians from shorting our markets. However, it does act as a throttle on how quickly things can get really bad. We on the street get to know a bit more about what is truly going on in the financial markets when there is more physical cash. I fear for a completely opaque system operated by greedy robber barons. Analog cash prevents COMPLETE opacity and we should preserve that and use that as much as we can.

Another reason for the average person to expand their use of physical cash is that it also slows the automation of retail. There will be claims the lines are shorter with self-checkout, but invariably the lines lengthen as everyone is forced to do their own checkout. Automation of buying is moved forward by the usage of plastic debit and credit cards, but when the cash transaction comes along automation stalls. Slowing the loss of some of these low skill jobs is in the best interest of society. Jobs do help prevent homelessness after all.

Let me be clear here. I have some cryptocurrencies. I definitely think there is a place for them in this world. Mostly, I think there is a class of people leveraging it to move money across national borders, especially in times of crisis, like the Cypriot bank collapse. It is the main reason why I decided to park some money in the crypto space to wait and see. Depending on how this epic battle between the super-rich libertarians and the all-powerful national governments works out perhaps there is some money to be made by an early adopter in this space. However, I do not consider the cryptocurrencies to be the digital money that is the threat, but rather the everyday plastic card is the enemy of transparency.

Finally, we all need anonymity sometimes. In fact, in this age of corruption, cash is necessary. It’s sometimes the only way to do business. Business that doesn’t NEED to be tracked is sometimes a necessity. And sometimes to get things done in an age of corruption; You bribe people. Lori Loughlin wishes she had used greenbacks right now.

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