When will paper money become obsolete? Your predictions.

Brite_Cloud

I read this article today "Hard times for hard cash" (see below) and thought that people here might be interested in giving their opinion on it.

P.S. - There are no 'conspiracy theories' in this article and it seems to have been written by a qualified economist of some sort. It's a good, thought-provoking read (at least it was for me anyway).



Hard times for hard cash ( SOURCE: http://neronline.co.uk/economics/hard-times-for-hard-cash/ )
BY JAMES EARL – MARCH 31, 2011

Money doesn’t really exist. Currency as we know it is nothing more than ‘a promise to pay’ and only holds value by order of the ruling government; this is termed ‘fiat money’. Historically, currency has existed in the form of commodity money, based on the intrinsic value of the medium of exchange. This developed into a gold standard system, in which an economic unit of exchange is directly related to a fixed weight of gold. Today however, currency is independent of gold and is government determined.

The reasoning behind any sort of money system is to solve the ‘double coincidence of wants’ within a transaction, where the wants and needs of the agents involved are likely to differ, such that the transaction is unlikely to take place without a common medium of exchange. This solution, coupled with the idea of a fiat money system, proves that there is theoretically no need for paper money; any form of transfer of government-approved tender is suffice to achieve the aim of completing the transaction between agents. It has become commonplace in modern society to make this transfer electronically, where the value that paper money infers is represented simply in the form of a number on a screen. This is not just your everyday consumer purchasing from a producer but government purchases, bank lending, cross country transfers, commodity trading. This sparks the core debate of this paper: could the rise of technology render paper money obsolete?

Certainly, there is evidence of a growing trend away from hard cash. For consumers in 2010, credit card spending in the UK was greater than the use of cash for the very first time. Perhaps most striking is that for the months of July through to September, credit card spending was 11% higher than for the same months in the previous year. Whilst cash still accounts for just under a half of all consumer transactions, the sheer rate at which this is changing is remarkable.

The implications of this change are vast. Electronic transfer can exist in many forms, from the use of mobile phone technology to the standard chip and pin format. Significant changes are afoot in the market with new ‘wave and pay’ cards, working similarly to a normal debit card but without the need to input a pin code. These are designed at first for small purchases but with the potential to expand far beyond, even integrating with current pre-paid card systems. These innovations all have a common goal – efficiency gain. For economists devoted to the idea of maximum efficiency it is difficult to argue against a system that promotes these ideals, replacing the costs of printing cash, withdrawing it and actually physically spending it with an easy to use system that is hopefully seamless and at a low cost.

The convenience of electronic money should not be underestimated. The typical individual faces a choice as to how much cash to hold based on the profitability of keeping it in a bank account (interest rate) and the cost of withdrawing the money (transaction cost). This trade off is noticeably altered in its nature by adding technological innovations in money accessing into the equation – lower transaction costs mean that money demand will be lower and households will prefer to hold more of their assets in the form of bonds rather than in the form or hard currency. Ultimately, this newfound convenience will benefit households through greater interest earned on their assets plus the direct benefit from not having to hold cash.

Clearly, a cashless society would be a markedly altered one. A key change would undoubtedly be on crime levels, but it is difficult to determine the exact direction of this change. Potential criminals would face new incentives; gone would be the days of balaclava-clad villains snatching handbags from old ladies, replaced by a new form of cyber-thief, looking to hack a money system wholly based on software and networks. The flip side of this is that cash forms the core of the black market, which accounts for an estimated 5-8% of the UK economy. This is not just drug barons and hooded gangs; this is the neighbours paying for their building work or the colleague smoking smuggled cigarettes. By replacing cash as a form of a payment, the system should become a more transparent one in which it becomes difficult to evade taxes and illegal activities are tougher to facilitate. In a time of economic uncertainty, where the UK has to face up to a debt estimated at 57.6% of GDP at the end of January (2011), dealing with the issue of the black economy has never been more appropriate.

Whilst transparency is undoubtedly a coveted characteristic of an economy, the demise of cash has consequences for personal anonymity and privacy. Currency spends a short amount of time in the wallet of a particular consumer and as such is difficult to trace. In contrast, an electronically dominated money structure involves a relationship between the consumer and the bank in which personal details are exchanged and a close rapport is maintained with the aim of serving the needs of the consumer and protecting both of the agents against fraudulent activities. This protection is a desirable outcome and will become ever more important as digital money expands but there is evident concern over the information that is provided and the invasion of privacy that this entails. As society continues to adopt electronic money systems, the incentives for government monitoring of electronic payments will increase. A delicate trade-off between protection from fraud, laundering and black market activity and the invasive side of this information collection must be balanced. Despite the obvious gain to the government from the possibilities for tax monitoring and the protection against black market activity (particularly terrorism), the issue is likely to be extremely contentious and politically divisive.

The theory behind this new order of electronic money dominance is certainly attractive but the actual implementation of such a system is daunting. The pioneers are typically East Asian, with Singapore keen to develop a cashless society through the use of CEPAS (Contactless e-Purse Application) stored-value cards. Their aim is to use these cards to replace those small cash transactions that are most prohibitive to a cashless society, such as public transport and retail services. For a country that is 350 times smaller than the United Kingdom, this is a much more realistic aim than for many other countries but by leading the way they set the example for others to follow, providing the initial innovation necessary to make a cashless economy feasible and economically viable for others. Even the UK is welcoming the switch to electronic payment by committing to phasing out cheques by 2018, a move that signals the importance that the developed world has attached to this issue.

Though it may be efficient to switch to electronic payment and economically prudent, there are equity concerns. The elderly, the homeless and those living in remote areas would be particularly vulnerable to a change and are in fact already suffering from a degree of economic isolation, with the rise of the internet for both personal consumption and banking. Despite the efficiency failings of cash it is the universal language by which the world operates, available to any who choose to work for it and by its very definition cannot be rejected as a means of payment. As this inevitable switch to electronic payment gains momentum, society must remember the origins of money and the reason that it is so successful at solving the ‘double coincidence of wants problem’ – it is universally accessible. The decline of cash and the rise of electronic payment must be managed in such a way that this characteristic is maintained, or risk losing the very reason that money was created in the first place.

The movement away from paper money is undeniable and is deeply ingrained in our everyday lives. If nothing else, the sheer cost of printing and handling cash is hampering efficiency in our monetary system. Steve Perry, executive vice president of Visa Europe, stated that “we [UK] spend more on payment than we produce on food,” in terms of relative GDP. It is obviously overly idealistic to imagine a society where cash is entirely obsolete but there is something fundamentally backward in pursuing a cash method which inflicts such a cost on our economy. Changes are afoot and they must be embraced – the revolution is here.

SOURCE: http://neronline.co.uk/economics/hard-times-for-hard-cash/

cavedave

One possibility for a much earlier switch over than people imagine wold be if a country left the euro. And yes we are into conspiracy theory territory here. But one of the good arguments by people who say it would be impossible to leave the euro is that what would people use as physical money the next day? Declan Ganley has suggested printing up punts so they are there when needed. But I believe such an action would be damn near impossible. But what might be possible at least physically if not politically is to change the currency in electronic form and make all government payments to local people in the same electronic form. They might have to give out something like ATM cards to all government workers and social welfare recipients that dont have a bank account but that should be a really small number. Not that Ireland is anything near the most likely country to need to try something like this.

Purely electronic money might get round the scrip problem described here
Getting out of the euro?

andrew

To be clear, the deleted post was deleted because it linked to a wiki page about a dystopian novel which has nothing to do with the OP's post; cavedave your post is fine

The exact mechanism a currency changeover (say from the euro) could take is really interesting. Even though it's the kind of thing which ideally would happen overnight, I really don't see how it could. Surely it'd have to involve a long term transition....involving a lot of capital flight, or something.

lomb

Nope, bank accounts would be converted at close of business on a Friday to a new currency and cash withdrawals would be limited to a limited amount say 100 euros a day for a period of time. The currency would be printed and ready for circulation within a month. In the mean time transactions would happen in punts electronically through credit cards and direct debit etc and in euros by cash. Eventually the euro would be free floating against the punt so anyone who had euro in cash or abroad left could convert them in the markets at whatever the rate of exchange at that point.
Doubt it will happen though:)

andrew

It's the period during which cash is in short supply which I think might be damaging. I suppose on the one hand since people tend to hold less cash nowadays it's less important, but on the other hand there's something about being unable to get cash if you want it which would spook people a lot. Though given the hypothetical-ness of this scenario, it's probably a relatively insignificant factor.

More relevant to OP's post, I'd love to be able to pay for things with my phone. I hate having 20 euro of 'credit' on my phone but only being able to use it for phone calls. And more relevant to economic theory; if all money were electronic, and the money supply could be monitored in real time (or a large proportion of it could be, somehow), what would that mean/lead to?

Cavehill Red

Paper money becomes obsolete when its value reaches zero and it cannot be swapped for tangible goods or services.

Hyperinflation has repeatedly rendered the Zim dollar obsolete in recent times, for example. Confederate dollars also have no value except as collector's items.

In the current fiat currency world we live in, where money is backed only by confidence, it is inevitable that all such currencies will eventually tend to zero in real terms of value. This process is accelerated by the likes of quantitative easing that the US and UK (and it seems now the ECB too) are engaged in.

However, this doesn't mean that we will enter an all-electronic currency world, as it is even cheaper to undermine a currency electronically (by 'creating' money on a keyboard rather than going to the trouble of printing notes). This causes the same problem - collapse in inate value and eventual loss of the confidence propping up the currency.

There will always be parts of the world differently developed from others. There will always be places with patchy or sporadic engagement with the electronic tech infrastructure required. And there will always be people who prefer to see the tangible evidence of their stored wealth in return for labour, services or products.

So, there will always be some form of currency that is non-electronic. It may be money, it may even be notes and coins. However, in the future, as at times in the past, it is likely to be gold and silver.

andrew

Cavehill Red wrote: »

In the current fiat currency world we live in, where money is backed only by confidence, it is inevitable that all such currencies will eventually tend to zero in real terms of value.

How do you come to this conclusion? And what kind of time frame are you talking about?

Cavehill Red

andrew wrote: »

How do you come to this conclusion? And what kind of time frame are you talking about?

It's what happens to all currencies in the end. The halflife of some has been extremely brief, in fact, due to this very phenomenon of loss of confidence. Often they are replaced by a new currency with the same name as the old, but they are nevertheless new currencies.

The loss of the gold standard in 1971 (almost 40 years ago to the day) simply accelerates the process, as the only thing propping up fiat currencies is confidence. I suspect we could already be in the endgame for some major currencies presently. Certainly the dollar's global reserve status seems doomed, and likely in a relatively short period of time.

The euro is a more problematic structure than the dollar, as it is not the global reserve and the eurozone is not subject to full fiscal union. That makes it inherently unstable, as we've seen. The result is as some economists predicted at its dawn - the rot manifests in weaker fringe regions first, spreading later to the centre.

I'm loathe to put a timescale on the death of the dollar, euro or sterling, but their deaths are as inevitable as yours or mine, at least in their current incarnations. However, I do believe when it happens it will be fast, just like a property crash or a stock market collapse. Weimar Germany or post-war Hungary are salutary lessons in how quickly these things occur.

We have been lucky to live in an age and region without currency collapses. However, that may also mean that we lack experience of how to deal with such scenarios when they occur. I'd put it this way - I don't expect my grandchildren to experience the dollar as global reserve, nor to be spending the euro. And my eldest is of an age to be a parent already.

andrew

Cavehill Red wrote: »

It's what happens to all currencies in the end. The halflife of some has been extremely brief, in fact, due to this very phenomenon of loss of confidence. Often they are replaced by a new currency with the same name as the old, but they are nevertheless new currencies.

But the only thing propping up any currency (including gold) is confidence. I think it's a bit of a sweeping generalisation to say that all currencies are doomed to failure. While this is the case with many currencies, it's not inevitable. The pound, for example, has been around for ages. If the euro comes through the current crisis, and there's greater fiscal union, then why couldn't it last at least a hundred years? I think 'lifetime' time periods are too short, given the length of time several currencies have been around in the developed world,

Cavehill Red

andrew wrote: »

But the only thing propping up any currency (including gold) is confidence.

Not quite. Gold (and silver) have innate value and industrial applications. However, their perceived value (the confidence element of their value) relies on the longevity of their use as currency and money - some five millennia or more. In other words, the confidence propping up gold or silver is the confidence of aeons, as opposed to the confidence propping up fiat currencies, which is simply confidence in the current crop of politicians and confidence in the current and near-future market and economic realities.

andrew wrote: »

I think it's a bit of a sweeping generalisation to say that all currencies are doomed to failure. While this is the case with many currencies, it's not inevitable. The pound, for example, has been around for ages.

The pound sterling is an interesting example to choose, being clearly the longest established currency out there. Having said that, is the pound still the same pound it always was? Clearly not. Decimalisation was effectively a reboot, and it is salutary to recall that the phrase 'pound sterling' meant that its original value was of a pound weight of sterling (92.5% purity) silver. Which is an approximate decline in value to 1/360th of what it was. That's a decline to pretty close to zero already, effectively from 1 to 0.0027 or so (IE the purchasing power of a tenner today is the purchasing power of less than 3 pence decimal or an old sixpence when sterling was created in the late Seventeenth century).

The average lifetime of a currency is 27 years, based on a study conducted on 775 currencies from the Roman denarius to the present. The shortest lived was one month. The average lifetime of those already defunct was 15 years. Of those which are no longer with us, 24% ended through monetary reforms (such as the punt joining the euro), 21% were destroyed by acts of war, 20% were destroyed by hyperinflation (effectively most of the war-destroyed currencies would largely also have gone via hyperinflation and in most cases were doing so when they were ended), and 23% of those in the study were still in circulation. 12% ended as a result of acts of independence. (Source: http://dollardaze.org/blog/?post_id=00405 )

andrew wrote: »

If the euro comes through the current crisis, and there's greater fiscal union, then why couldn't it last at least a hundred years?

Two big ifs there. But even granting them, it won't last 100 years or near it, unless it is either linked to a commodities-backed global reserve or else becomes a commodities-backed global reserve.

andrew wrote: »

I think 'lifetime' time periods are too short, given the length of time several currencies have been around in the developed world,

Think about the number of currencies the world has seen, and think of how few have lasted any significant length of time, especially without declining massively in value.
Only a handful last a human lifetime, and of those, all of them have declined towards zero in value during that time.

cavedave

andrew

And more relevant to economic theory; if all money were electronic, and the money supply could be monitored in real time (or a large proportion of it could be, somehow), what would that mean/lead to?

Bruce Schneier the cryptographer says that politicians would never allow a fully traceable money system. Partly because it would make bribery impossible. But also even though we might not like to admit it we like that do not care enough about the illegal things of arms dealing, prostitution and drug dealing to really try and stop them. Drug money saved banks in global crisis, claims UN advisor . So I can imagine a short term cashless society but not one long term with completely traceable money. Warning this could turn into another Bitcoin thread.

While on the subject does anyone know how much time cash takes off your life? It is dirty and passed around person to person. It must help spread disease. But how much? A quick google and the word is 'fomite' for an object that spreads disease. There are plenty of papers that say that paper money has bacteria on it but no slam dunk that it actually spreads disease as far as I can see.

andrew

AFAIK (and this is without having done any googling, so I could be wrong, bacteria can't live for that long on surfaces like metal, where there are no nutrients for them. So maybe its not much of an issue. But apparently rats cant possibly have spread the black death as fast as it was spread...so maybe it was money...

soddy1979

Cavehill Red wrote: »

Not quite. Gold (and silver) have innate value and industrial applications. However, their perceived value (the confidence element of their value) relies on the longevity of their use as currency and money - some five millennia or more. In other words, the confidence propping up gold or silver is the confidence of aeons, as opposed to the confidence propping up fiat currencies, which is simply confidence in the current crop of politicians and confidence in the current and near-future market and economic realities.

Weren't shells used as a store of value for even longer then gold or silver?

Dr.Crump

Its started already!

An Irish man is behind the "cashless society".

Google, Zapa tag!