The Power of Cash: Why paper money is good for you and society
by Prof. Jay L. Zagorsky
Premise: Thirty years ago most people used cash. Today, the world has turned away from cash and towards a variety of electronic payments, like credit cards, Venmo and cryptocurrencies. Most young people don’t even carry paper money. While many see this movement as a wonderful trend, the digital shift has overlooked dark sides. Eliminating cash can harm us in many ways. It causes us to spend more, reducing our privacy and boosting prices we pay. It hits the poor especially hard by making them pay for bank services they cannot afford. It weakens our national defense by making us vulnerable to cyberattacks and natural disasters. It increases crime since criminals can target us from anywhere in the world.
Countless times technologists have presented the electronic future as utopia, but have failed to comprehend technology’s problems. This book sounds an alarm, because once paper money, ATMs and cash registers are gone it will cost billions to restore them. Cash is an essential tool and this book shows why preserving it for the long run makes us all better off.
Book Summary: Paper money is dying! Credit cards, debit cards, online bill pay, mobile payment apps, cryptocurrency and other financial technology offerings are taking the place of paying with old-fashioned cash. We are deluged with offers promoting credit cards with easy rewards and low interest rates. High technology companies push us to leave our old-fashioned wallets and purses behind and pay with our phones. New types of money and payments promise financial freedom for all. It all sounds wonderful, but it is not. The shift to digital and electronic payments has many overlooked dark sides. Eliminating cash is not a panacea. Instead, eliminating it will lead to new problems. These problems and the solution are examined in this book.
When you pay for something electronically a bank, a credit card company or another financial technology company takes a small sliver of your transaction. That small sliver multiplied by billions of transactions adds up to a huge amount of money.
As a business school professor I teach thousands of students how to run businesses and make money in a capitalist economy. These companies are not evil, but it is not in their interest to point out the downsides of abandoning cash. I am writing this book because society needs someone to stand up and show why supporting the use of cash is crucial to the world’s continued economic prosperity, resilience and safety. After reading this book I don’t expect readers to abandon their credit or debit cards. Instead, I hope to prevent readers from abandoning cash.
Cash is important. The book’s first part lays out the defense of paper money by highlighting the positive aspects overlooked by many people. The second section explains how we got into this mess by laying out the facts and history of our transition from a cash to a cashless society.
Overview of Section I
Ads, marketing materials and many people extoll the convenience, speed and safety of cashless transactions. However, the cashless society has many downsides, some hidden and some in plain sight that are covered in this section. Each chapter is summarized in a paragraph below.
Paying with cash hurts. About thirty years ago researchers discovered people experience a small amount of discomfort when making purchases with paper money. They called this the “pain of paying.” The pain arises because there is momentary regret when cash leaves your hand. Electronic methods don’t have the “pain of paying” because there is time between making a purchase and paying. Chapter one points out that shifting to a cashless society boosts people’s spending. If you are rich, this isn’t a problem. However, there are many financially fragile people with no savings and growing debts. Using cash and experiencing the pain of paying reduces spending and boosts financial well-being.
Is privacy dead? Do you want businesses or the government to know your every purchase? The second chapter highlights using cash is a simple way to maintain financial privacy. Using cash is not just about hiding illegal transactions like buying drugs or sex. Instead, the cashless society generates a large permanent amount of data with every legal transaction. Not everyone wants their life to be an open book where others know when they are pregnant, seeing a therapist, using weight loss products, coloring their hair, or buying lottery tickets. Even if you don’t care what purchases are revealed, showing the amount paid can lead to embarrassment.
Who wants to pay more for everything? The third chapter points out that using cash reduces prices. Merchants who accept electronic methods of payments are charged between 2% and 3% for this privilege. Merchants pass on these processing and interchange fees. This boosts prices since the merchants’ cost of handling cash is often less than the cost of accepting cashless payments.
Inclusion is important for societies to function, but going cashless excludes people. How are you going to give money to a homeless person when cash is gone? Do we need to force every person in society to have a bank account and credit card just to buy food or clothes? For the poor, bank accounts and credit cards are expensive with fees for withdrawals, overdrafts and account maintenance. This pushes low income people closer to the financial edge. This chapter points out the cashless society marginalizes the poor and unbanked resulting in a society that only works easily for people with money.
Earthquakes, floods, hurricanes, typhoons and massive wildfires fill the news. Scientists are warning of increasing ferocity of these disasters as the world warms. Minor natural disasters disrupt electricity, telecommunications and computers. Major ones wipe them out for long periods of time. Failure of any of these blocks electronic transactions. However, during and after major natural disasters are key times when people need to make purchases. This chapter points out that paper money works when electronic transfers fail since cash does not need power, connections or computers. It even works when soaking wet!
War and geopolitical rivalries have existed for thousands of years. One common method of waging war is to soften up a rival. Previous generations have used blunt tactics like naval blockades, starving cities into submission and bombarding military and civilian targets. In a cashless society a simpler and more effective method is to deny people access to their money and block their ability to spend it. Without money it is difficult to buy food, pay for medical care or use transportation. Russia’s continuous bombardment of Ukraine’s electrical grid and cyberattacks against its banks are a current example. This chapter explains why keeping cash around bolsters national defense and keeps an economy from grinding to a halt in either a hot or cold war.
Crime, corruption and terrorism are all things society wants to minimize. Proponents of a cashless society argue getting rid of cash will reduce these problems because the inability to trace cash transactions makes it easier to engage in prostitution, sell illegal drugs, and bribe politicians. This chapter shows crime flourishes without cash. Some of the earliest usages of cryptocurrencies like Bitcoin were transactions on the Internet’s dark web to pay for illegal drugs. Cash actually reduces crime because criminal actions with paper money must be done in-person. Shifting to electronic forms of money means criminals can target anyone, anywhere in the world, at any time. Think about how many times your credit card numbers were stolen and used to make unauthorized purchases.
The last two chapters focus on cash and central banks. Countries like China have experimented with electronic currencies in the general population. When the money in your electronic wallet is created and tracked by the government, dissidents can be silenced and political opponents sidelined simply by denying them the ability to make purchases. Governments can block purchases it opposes, such as particular music, magazines or medicines. Keeping cash around reduces a government’s ability to control citizens.
Should we punish people who save? For thousands of years the world’s economies have rewarded savers and penalized borrowers. The last chapter shows the rise of the cashless economy has given central bankers the ability to push interest rates below zero, turning these two fundamental ideas on their head. Negative interest rates mean savers are punished for not using their money while borrowers are rewarded for taking out loans. Keeping cash around constrains the power of central banks from engaging in multi-year negative interest rate policies.
Overview of Section II
How did we get into this mess and how do we get out? The second part of the book answers these questions. The first chapter of this section asks, is cash really disappearing? The data show the dramatic fall in the use of cash in day-to-day transactions. However, there is a second more surprising trend. The amount of paper money in circulation is dramatically increasing. People are switching from using cash to buy things, to holding cash in case of emergencies or to hide their money. The problem is, if people stop using cash, and stores stop accepting cash, then paper money stashed away for emergencies will no longer be useful because merchants won’t accept it. The movement to a cashless society is not consistent around the world. Some countries like Sweden and the United Kingdom have jumped on the cashless bandwagon. Others like Japan have not.
The cashless economy is being promoted heavily by banks, credit card companies and many high technology firms. The next chapter outlines how much money they make from cashless transactions. It also investigates who else is pushing for a cashless economy. Surprisingly many retailers and even all levels of governments are helping facilitate the transition to a cashless economy.
How do cashless transactions work? Understanding the steps highlights the system’s weak points. Behind the scenes most credit card transactions take thirteen steps! Debit transactions take slightly fewer steps than credit but are still much more complex than cash. Even crypto currencies take many steps. All cashless transactions need three things to work seamlessly: electricity, communication and computers. This chapter shows disruptions to any of these results in the inability to make electronic payments.
What is the history of money and payments? Two chapters answer these questions by covering the history of cash and cashless economies. Early in mankind’s history, payments were made using crops, animals and pieces of precious metal. Payments then switched to being made using paper money backed by precious metals. Then fiat currencies, in which paper money is backed only by faith, appeared before the transition to electronic forms. Studying history is important because every phase solved some problems but introduced new unanticipated problems.
The world is seeing a resurgence of old-fashioned technologies. In the music industry vinyl record sales are exploding. New book stores are popping up and old book stores are expanding. Playing musical instruments that have no power cord is becoming fashionable. Will cash also enjoy a resurgence? We can’t wait to see the answer because once paper money, ATMs, cash registers and the other tools needed to make cash transactions are gone it will cost billions to restore them.
Credit cards, debit cards, mobile payments and cryptocurrency are not going away. However, the conclusion offers some simple ideas to ensure cash is used more often in conjunction with electronic payments. Cash is an essential tool and simply using it preserves paper money for the long run, making us all better off.