Paper and Plastic: Two Sides of the Cashless Debate

  • Cash has relatively high maintenance costs.
  • Consumers would likely also spend more readily, as digital payments can be more convenient and less noticeable.
  • A cashless economy will hurt the poor.

Recently, a number of states in the US brought in legislation to prevent the rise of so-called ‘cash-free stores’ which only accept digital payments. Some see that denying payments in cash is a form of discrimination against people with lower incomes. This is but one more episode in an ongoing debate over the possible future of our economy. Under consideration is the discontinuation of cash as a means of exchange. Should we double down on our race towards digital dependency?

A cashless society describes an economic state whereby financial transactions are not conducted with money in the form of physical banknotes or coins, but rather through the transfer of digital information (usually an electronic representation of money) between the transacting parties.

There are various axes upon which pro-digital economists assert that cash should go, despite significant drawbacks and risks associated with its removal as a payment option. Let’s take a look at some of the ideas that the debate is circling to assess their merits.

Economics

The main argument on the pro-digital side of the debate is that there will be a more frictionless, efficient economy. Cash has relatively high maintenance costs. Producing, transporting, and protecting cash can be expensive for financial institutions, and there is a constant need for technological innovation in the prevention of counterfeits.

Consumers would likely also spend more readily, as digital payments can be more convenient and less noticeable.

Economists also suggest that it would allow greater control over monetary policy – making negative interest rates more achievable. Such policies are believed to encourage spending and stimulate the economy, making it easier to ensure economic stability and prevent damaging recessions.

The first thing to understand is that economics is largely theoretical. The outcomes of massive overhauls in global norms are difficult to predict, even for experts. While negative interest rates have been used in recent years, notably in Japan, the limited application has made it less than clear whether they could be replicated for protracted periods of time.

“The consequences of a deliberate policy of negative interest rates are very uncertain. Negative rates don’t seem to work at low doses, as we see in Europe and Japan. Many observers are worried that the current low interest rates are already fuelling an asset bubble” argues Pierre Lemieux, a Canadian economist.

Secondly, as for the costs of maintaining cash, there are equivalent expenses when safeguarding and innovating in the realm of digital financial assets. Not only are these comparable to those needed for the protection against forgery seen in fiduciary printing, more crucially, they will only rise.

Lastly, while businesses benefit from consumers who spend more freely as a result of digital payments option, this does not necessarily have the consumers’ personal finances at heart. The tangibility of cash, in the everyday sense, helps people to visualise how much they are paying. There are many people in Europe and the US struggling under the weight of debt and poor financial habits and upping the fluency with which they spend their flattening salaries might not be the best idea for their own particular finances.

Security

Proponents of digital currency assert that in a cashless world all wealth could be tracked, and this could result in a reduction in financial crimes, robberies, and pick pocketing.

Sadly, there are more digital financial crimes every day, and the rate at which they occur increases with each new technology that is added to the vortex making up the mutating payments industry. Current estimates of financial cybercrime sit at a direct cost of $1 trillion globally. Whether it be digital ransom attacks over data, remote blackmail attempts, or full-scale digital bank robbery — criminals, as always, move with the times.

The idea that we can simply outpace them with gadgetry and software is at best naïve, given the burgeoning avenues available to them for infiltration into our lives. More likely, it is everyday people who will become increasingly vulnerable as emerging technologies expose them in unfamiliar ways.

Financial Inclusion

As the market penetration of debit and credit cards has climbed, banking experts have suggested that the trend is granting greater financial inclusion. Many more people are able to build credit and take advantage of banking services, such as loans and overdrafts. Furthermore, they have new, innovative ways in which to pay, and they can shop from the comfort of their own homes. Removing cash would only accentuate this trend, proponents argue.

Cashless societies have existed from the time when human society came into existence, based on barter and other methods of exchange, and cashless transactions have also become possible in modern times using digital currencies such as bitcoin. However this article discusses and focuses on the term “cashless society” in the sense of a move towards, and implications of, a society where cash is replaced by its digital equivalent – in other words, legal tender (money) exists, is recorded, and is exchanged only in electronic digital form.

What is regularly overlooked is the number of people who cannot participate in digital payments. Previously, the problem was expected to harm the elderly the most, but recent studies have found that it is actually going to be the poor who will suffer, in particular, homeless people.

Firstly, there are a number of individuals who do not have the necessary bank accounts to go digital – in the UK, this figure sits at 1.2 million. How these people can pay for daily necessities when cash is taken away from them is unclear. Then there are the 25 million Britons who see cash as a necessity, forcing them to keep up with financial shifts that do not support their lifestyles hardly seems inclusive.

Personal Freedoms

This brings us to one final point on choice. Players in the digital payments space argue that with many more ways to pay, consumers now have ever greater means to exercise their freedom. What they overlook is that in removing cash they would be removing a significant amount of choice.

The freedom and independence not to have to pay a company in order to spend your own money is only provided by the cash option. Cash also allows people to choose to decouple themselves from institutions if they wish to do so. Without this option, they are trapped in the digital financial system unable to withdraw funds when it seems in their interest to do so.

Wherever you sit on the cashless debate, it is apparent that far more thought is needed before anything drastic takes place. With recent banking scandals and the recession of 2008 still fresh on the global consciousness, people want decisions for once made in their best interests, rather than the best interest of bankers and executives.

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Joseph Gamble

I am a retired economics professor. I like to write about topics that interest me such as international relations, globalization, technology etc.

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