Why according to some “experts”, is there an urgent need to eliminate cash from the economy?
- Cash is thought to support the “shadow economy” and enable tax evasion.
- Another justification for their abolition is that, in times of economic shocks, which push the economy into recession, the need for cash exacerbates the recession — becoming a contributing factor to economic instability.
- Furthermore, it is argued that, in the modern world, most transactions can be settled through electronic/digital funds transfer.
- Money in the modern world is supposed to be conventional value.
The emergence of money and its transformation into a commodity
Money appeared because exchanges of goods (countertrade) could not support the market economy.
A butcher who wanted to trade his meat for fruit might not be able to find a fruit grower who wanted his meat, while the fruit farmer who wanted to trade his fruit for shoes might not be able to find a cobbler who wanted its fruits.
The distinguishing feature of money is that it is the general medium of exchange. It has evolved as the most tradable commodity.
In this process, Mises wrote: “…there would be an inevitable tendency for the least tradable of the series of commodities used as mediums of exchange to be rejected one by one until only one commodity remained, which was universally used as a medium of exchange, in a word, money.”
Similarly, Rothbard argued: As in nature there is a wide variety of skills and resources, so there is a variety in the marketability of goods. Some goods are more in demand than others, some can be easily divided into smaller units without loss of value, some more durable over long periods of time, some easier to transport over long distances.
All these advantages contribute to greater marketability.
It is clear that in any society, the most marketable goods will gradually be selected as the medium of exchange. As they are increasingly chosen as media, the demand for them increases due to this use and thus they become even more marketable.
The result is a spiral that reinforces the phenomenon: greater marketability causes wider use as a medium which causes greater marketability, and so on. Finally, one or two commodities are used as general media – in almost all exchanges – and these are called money.
Since the general medium of exchange arose from a wide range of commodities, money is a commodity.
Again, according to Rothbard: Money is not an abstract unit of account, which can be separated from a specific good. it is not a useless coupon only good for exchange, it is not a “claim for society”, it is not a guarantee of a fixed price level. It’s just a commodity.
Moreover, in the words of Mises, “…an object cannot be used as money unless, at the moment its use as money begins, it already has an objective exchange value based on some other use.”
Why does this have to be the case?
Rothbard further explains: Unlike goods immediately used by consumers or producers, money must have pre-existing prices on which demand is based. But the only way this can happen is to start with a useful commodity under exchange and then add the demand for a medium to the previous demand for immediate use (eg for jewelry, in the case of gold).
Therefore, money is what all other goods and services are traded for. Through a continuous process of selection over thousands of years, people adopted gold as money.
In today’s monetary system, the money supply is no longer based on gold, but on coins and paper money issued by the government and the central bank.
This fiat money still has exchange value because of its previous connection to real money and the inertia caused by the fact that it is already accepted as a general medium of exchange. Consequently, coins and notes are still money, known as cash, which is used in transactions. Goods and services are exchanged for cash.
Individuals keep their money either in their wallets, under their mattresses, in safe deposit boxes, or stored—on deposit—in banks. When depositing money, a person never gives up their ownership.
When a person “stores” his money in a bank, he continues to have an unlimited claim against it and is entitled to take it at any time. Consequently, these deposits—called demand deposits—are part of money. At any point, part of the cash stock is stored, i.e. deposited in banks.
So in an economy, if people have $10,000 in cash, the money supply of that economy is $10,000. But if some people have saved $2,000 in demand deposits, the total money supply will remain 10,000 — $8,000 cash and $2,000 in demand deposits in banks.
If all individuals deposited their entire cash supply in banks, then the total money supply would remain $10,000 — all held as demand deposits.
The case of credit
This should be contrasted with a credit transaction. Credit always involves the creditor’s purchase of a future good in exchange for a present good. As a result, in a credit transaction, money is transferred from a lender to a borrower. In reality, these are loans to the bank.
With these deposits, the lender of the money waives to the bank his claim on the money for the duration of the loan. These credit transactions (ie loans), however, do not change the money supply in the economy.
Digital money – What is changing and the risks
Does digital money change the above? Digital money is not money in itself, but a special way of using existing money.
For example,
- via electronic devices A can transfer $1,000 to B.
He could also transfer the $1,000 through a check written against his deposit at Bank A.
A, in turn, can deposit the check at his bank.
After clearing, the money will be transferred from A’s cash deposit to B’s cash deposit.
Note that all of these transfers—whether online or by check—can happen because the $1,000 in cash is physically there.
Without the existence of the $1,000 nothing can be transferred.
Now, if A pays for his purchases by credit card, he is actually borrowing from the credit card company, such as MasterCard.
For example,
- if he buys $100 worth of groceries using MasterCard, then MasterCard pays the grocer $100.
A, in turn, pays his debt to MasterCard.
Again, all of this could not have happened without the prior existence of cash.
After all, what exactly has been transferred?
The fact that cash itself was not used in the above example does not mean that it is no longer required!
On the contrary, the fact that they exist enables various forms of transactions to take place through advanced technology such as digital transfers. These various forms of transfer are not money in themselves but just a specific way of transferring money. The medium of exchange is still cash — it’s just that the means of transporting that cash is different in a digital world.
The digital currencies of central banks
What about central bank introduction of digital currency?
Could this replace cash?
Arguably, this would not make the digital currency the accepted medium of exchange.
- In order to become money, a thing must undergo the selection process of the market.
- It cannot become money because the central bank said so.
- If the authorities imposed digital currency on people, then people are likely to use some other things as money, i.e. means of exchange.
- If the government were to implement vicious regulations, then this is likely to destroy the market economy.
- Any attempt to remove cash—money—implies the abolition of the market’s chosen medium of exchange and, ultimately, of the market economy.
- The introduction of money came about because exchange was inefficient.
- Therefore, in the absence of money (ie the medium of exchange), the market economy could not function.
- Those who support the phasing out of cash are unwittingly supporting the destruction of the market economy and humanity’s movement into the dark ages.
- The argument that abolishing cash will eliminate tax evasion and crime is dubious.
- Tax evasion would be reduced if the incentives for it were removed – high taxes based on big government.
- The fact that during a financial crisis people run to the banks to withdraw their money shows that they have probably lost faith in the banking system and would like their money back.
- Regardless of the level of technological advancement of the economy, money is what we exchange goods and services against.
- Therefore, any policy aimed at phasing out cash runs the risk of destroying the market economy.
