Blogging about

The Bottom Line

Evan Davis gets to the heart of the big finance stories at The Bottom Line.

In the turbulent 20th Century, you could start a riot with a piece of paper – it just had to be printed with revolutionary slogans and handed out to disgruntled crowds. In the atmospherically obsessed 21st, the same mayhem can be triggered by rolling it up and smoking it, yet soon there’ll be a bigger sin than lighting a cigarette in the building; bringing out a banknote at the checkout. Paying by cash is fast becoming a form of anti-social behaviour – the point-of-sale equivalent of wearing safety-pin jewellery, watching Jonathan Ross or window-shopping with a brick.

Seasoned users of ‘ready’ money may already be noticing a backlash against cash. While cardholders swipe and type, cash customers must ride the glare of chafing chip-and-pins, maddened by the mutual fumbling over miniaturised coins. Travellers’ only rescue from a ticket queue longer than their journey is a machine which laps up plastic, but chokes on all but the most freshly-ironed banknotes and gives no change. Sales are shifting at double-digit rates to an internet which recognises Mastercard, Visa and PayPal infallibility, but sees no virtue in any non-virtual token.

Paper profits

Not long ago, people in power loved paper money. It was a commercial invention, devised to circumvent the physical inconvenience of gold and silver. Instead of issuing invoices which then had to be swapped for precious metal, buyers and sellers started trading the bits of paper, only rarely visiting the bank to withdraw the underlying riches. Private debt had become a convenient form of currency, fulfilling the traditional requirement of storing value and speeding up exchange. This also had immense political advantages, freeing rulers from the fiscal inconvenience of scarce and theft-prone bullion.

Governments could now print notes to represent their official reserves, keeping these locked in suitably fortified central banks, and once people trusted the paper currency, more could be issued – an especially useful tactic for rulers struggling to squeeze subscriptions from their nobility, or keener to raise an army than the accompanying tax. Medieval kings and emperors could only expand the money supply this way by clipping the gold and silver coins, or smuggling base metals into the mint. Their modern successors have the happier option of issuing public debt, spending more now while passing the bill to taxpayers still too young to vote.

Issuing more public debt than private investors want to hold – today’s innocuous sounding ‘quantitative easing’ – is traditionally condemned by monetarists as cruelly clawing-back the handouts through a hidden inflation tax, but this is an occasional public indulgence in a practice that’s second nature to commercial banks. They routinely make loans that are a multiple of customer deposits, pushing assets (and corresponding liabilities) far above what is actually held in reserve. Indeed, governments only rush to quantitatively ease when banks are on their collective knees because their credit has ceased to flow.

Paper money enables the same capital to be put to work in many places simultaneously. Productivity is multiplied by turning each asset into collateral for another, and re-lending many times the wealth that used to sit idly in a vault. Securitised debt may recently have stalled the world economy, but it’s only an extension of the forces that previously drove it. That’s why governments splashed the blank cheques to redeem the chequered banks.

A bullet through the wallet

If paper money opened all these doors, why is its future in any danger? For the same reason that an abstract axe hangs over the Royal Mail, printed newspapers and music on disc. Just as we could get value from precious metal without minting it, we can now get value from an invoice without printing it. Once money’s more manageable as an electronic pulse, suspicion surrounds those who still want it in physical form.

The problem with paper money is that it leaves no ‘paper trail’. Governments have long resented the way cash transactions enable legal traders to sidestep taxes, and illegal traders to launder their profits into regular circulation. The growing skill of forgers also challenges the most jealously guarded monopoly of sovereigns, who aren’t flattered when their likeness runs off someone else’s printing press.

More influentially, big retailers and manufacturers curse cash deals that fall outside their customer databases, so it can’t then be ‘mined’ for appropriately personal marketing ploys. They also regret needing a fleet of armour-plated couriers to empty and fill their cash-heavy tills. Finance directors declare war on the ‘off card’ transaction, which lets executives scupper the expense tracking system with improbable taxi fares and budget-busting bar bills.

Cash stands accused of causing banks to crash and civilisations to clash. Lenin famously viewed debauching the currency as the quickest way to undermine capitalism. Hitler came close to putting such pecuniary subversion into effect, with a wartime scheme to bomb Britain with banknotes, a road to ruin via rampant inflation. Guy Fawkes’s belated knighthood, for services to the global firework industry, is obstructed by his financially illiterate choice of tactics. Instead of lighting the blue touch-paper, he should have been faking the banknote paper and causing an unsustainable credit explosion.

Governments seeking faster, cheaper and more visible transactions are keen to kill the dollar bill – and its counter-clogging counterparts in the euro, yen and sterling zones. Corporations are equally concerned to stamp out logistically wasteful, electronically untraceable cash flows. To meet their demands, innovators who once promised a licence to print money now offer grand designs for making it vanish. Amid a general dearth of political visions, that of cashless society stands out like a viable mortgage in a sea of sub-prime debt.

Why cook the books when they can be vaporised?

In the brave new banknote-free world, cards will rule even at the bus stop and corner store, with mobile phones as an alternative means of payment. The mobile internet will move against cash by spreading direct transfers that have already shot down the once-mighty cheque. Formerly well-thumbed Adam Smith, Charles Darwin and Elizabeth Fry will be banished to the portrait gallery, while royal heads retreat to the postage stamp.

If robbed of officially sanctioned cash, won’t people just invent their own? Economies that ran short of legal tender were famously quick to adopt a replacement, from cigarettes in prisoner-of-war camps to elaborate IOUs in post-Soviet Russia.

However, the death of cash means only the de-materialisation of money, not its disappearance. Indeed, the biggest danger is that paperless money be further detached from underlying wealth, drowning us in devalued riches. Air Miles already rival the world’s major currencies in terms of quantity and acceptability, but so many have been created that running flights for them all would fry the world before a fraction of the holders could fly round it. Second Life is shielded from excess of virtual currency only by the infinite expandability of online real estate.

Prophets of the cashless economy promise that risks of monetary excess will be reduced, with every deposit and withdrawal electronically matched. New regulatory schemes to avert further meltdowns, including a giant register of to check that banks’ balance sheet assumptions really add up, underline the faith in data-based trading to guarantee transparency and monetary stability.

What of those who can’t afford a plastic card, aren’t online and don’t carry a mobile? Cashless commerce will compound an already serious digital divide. Those barred from the virtual marketplace may have to form their own cash-trading communities, until connections to new networks are as ubiquitous and affordable as those of the savings banks and post offices they replace. Pulling out a banknote could soon be an act of solidarity with the socially excluded, but you’ll still have to swap them on windy street corners, after the tobacco smoke has cleared.

Take it further

Getting a good deal - things to think about when shopping online.

Courses

You and your money: personal finance in context

Foundation degree in financial services

Introduction to financial services

About the author

Alan Shipman is lecturer in economics at the Open University, and a former financial journalist. His books include The Globalization Myth, The Market Revolution, and Transcending Transaction. He is involved in OU's new courses on personal finance, and research on insurance pools, 'chaos pricing' and Eastern Europe.

Subscribe to Alan Shipman's posts