What’s a cashless society worth if all the servers are down?
A. The macroeconomic view of cash
The first time you heard the argument against cash could be from Matt Yglesias. Or it was Miles Kimball and Greg Mankiw. From their perches the arguments trickle down until they saturate silicon airwaves — but only ones from a narrow viewpoint.
Cash, by definition, is physical money. By the constraints of bureaucracy and physical material, it is traded in notes, discrete quantities, and can be a bother to use. By the fact that cash is a denominated unit of account, we usually compare the rate of return on financial products to the rate of return on cash. This is what “the nominal interest rate of cash is zero” really means.
The problem is that, in a recession, an economy cannot adjust its prices quickly enough to restore balance in the exchange of goods, so public policy should encourage people to spend or invest in projects that will not produce immediate positive returns, net of inflation.
Instead, people might just hoard money — a product that has approximately zero return but will be kept because god knows what the banks will do to it. If a bank have to invest only in projects with negative return right now, it will fund itself by setting a negative rate on deposits and your accounts decrease in value.
From this perspective, cash sucks. It’s a way for someone to say: “I don’t want you people to circulate any of my wealth, no matter how bad things are for you, but I’ll spend, invest and reenter the economy whenever I want to.”
The tragedy of the commons kicks in and the whole thing spirals down. Now electronic money looks a lot better: if you don’t spend the wealth stored in your bank, you will have to watch the bank take a slice off your account.
But remember what was mentioned earlier on here: “cash can be a bother to use.” It’s trivially impossible to use if every store accepts only cards, but cash today is already subject to theft, takes more time to exchange than electronic sources, etc.
Even a recession with negative rates involves a tradeoff with cash: stop withdrawing cash when the marginal utility of the money you expect the banks will ding from the account remainder is equal to the marginal cost of cash inconveniences.
B: The microeconomic view of cash
Money is a “medium of exchange,” but I get confused about what “medium” means. It’s clearer to say: money is trade contracts between two parties where the other party already signed.
The problem is that someone has to foot the bill for recording that money, as one would for writing a contract. A bank then foots the bill for money deposits, an online company foots the bill for money transactions on their website, and the U.S. government foots the bill for currency (Article I of the Constitution, Section 8, Clause 5).
This line of thinking about money seems more intuitive to people, because when someone lays out the macroeconomic case against cash the responses seldom do not take the form “I don’t trust the institutions managing electronic money.” Often there is appended verbiage about “big government,” “fraudster banks” and “Venmo glitched on me,” but the logic is identical between them.
Cash is still somewhat to blame for this rut we’re in, because a strategy banks and virtual stores could always do is to charge a fee on its customers, enough to pay for the fixed costs of money accounting. But then we’re back again in the negative rates/cash hoarding scenario.
Instead, purveyors of electronic money have to find revenue in sneakier places: surcharges on stores accepting electronic currency, the sale of information, and so forth. Once customers realize this they open Pandora’s Box.
I almost forgot about the demand side of these unsavoury trades by today’s electronic money companies. In the U.S. people are not too trustworthy. They will give and donate, but they feel entitled to give to groups toward whom they feel least threatened. Their companies do business with customers, but are quite paranoid about their customers shopping elsewhere.
Pair that up with a government who is pressured to scrutinize every tax it takes and every transfer it hands out, and the market for customer information is deeper than ever.
C. Idiosyncratic theories of cash
We can see, for a social planner maximizing welfare gains with new cash regulations, there are a lot of variables to juggle. At the same time, there is just one problem underlying all this discussion: the problem of transaction costs. Because there are costs involved in the production and accounting of money alone, intermediaries spring up and faciliate these transactions.
The study of such an economic system is called market microstructure. Intermediaries in the money market, from banks to Venmo, in one sense intermediates the exchange of money between money holder and service requester. In another sense, they monitor consumption behaviour of customers on behalf of corporations.
What does this have to do with cash? Cash is a form of money distributed by the U.S. government, who then is a major market player among these intermediaries. But this market player does not charge heavily for its service intermediation and refuses to willfully monitor for any corporation; instead, it plays by its own rules drawn up in its own regulatory bodies (i.e. legislatures). It also has the power to punish any other market player by outlawing its activities.
It seems better for all of us that intermediation of the exchange of money is made as smooth as possible, while the monitoring of consumption is as minimized as possible. In that case it’ll be hard to set up a competitive market encourage improved intermediation, since each firm in that market would also need to monitor consumption to break even.
Hence this “money market” could be a market with a natural monopoly — the cash distributor, the U.S. government. (But not that U.S. government.)
That’s the first idiosyncratic theory. The second one can be seen comparing Sweden and the U.S. The Swedes — with a currency far less liquid than the dollar, subject to speculation attacks in the past and is now the testing ground for unconventional monetary policy — are quite okay with electronic money. The Americans — the one country that can build “deficits without tears” and so on — make up conspiracy theories.
The theory is that it takes a lot of social cohesion to ready a society to electronic money, but a little bit of social diversity to unravel that preparation.
The argument goes like this: social diversity both increases demand for monitoring of consumption behaviour (because we may classify activities foreign to us as criminal) and creates pockets of the economy selling niche products that prefers cash, the benign intermediary. The first force makes money market firms unattractive. The second decreases the marginal cost of cash inconveniences, since if you want something you can only buy with cash you may as well take the risk.
The content of this theory comes from claiming these two effects are asymmetric: the reason the Scandinavians can go cashless is because they took a century to build a very tight society, and countries that are unable to put in that effort should give up pushing for massive reductions in cash transactions.
One last corollary is that the second theory would be an argument of why a transition away from the gold standard is not like a transition away from paper. The difference is in time: today’s paper cash society is much more diverse, while the gold standard society of the thirties was relatively undiversified outside of a glittering urban elite.