What would happen if paper money became obsolete?
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Listener Muhammad Arbaz Khan asks:
I usually wonder what would happen if paper money suddenly became obsolete altogether and every transaction was required to be digital. Is it really compulsory to keep the paper money in circulation anyhow or somehow?
More Americans are going cashless, with about 41% saying they don’t make any of their purchases in cash in a typical week — up from 24% in 2015, according to a Pew Research Center survey released late last year.
Digital apps like Venmo and Apple Pay along with digital assets like cryptocurrency have gained steam over the past decade (although crypto had a highly publicized implosion last year).
As people move toward more electronic or digital forms of payment, it might seem like paper money is on its way toward obsolescence. But experts say that cash will always be around.
A world without cash
Bill Maurer, an anthropology professor at the University of California, Irvine, has a straightforward take on what would happen if paper money longer existed: “It would be terrible.”
He explained that there would be issues surrounding accessibility, security and privacy. For example, all non-cash payments require having a bank account or a connection to a formal financial institution.
About 4.5% of U.S. households, or 5.9 million, were unbanked in 2021, meaning they didn’t have a checking or savings account with a bank or credit union, according to data from the Federal Deposit Insurance Corp.
Those who are unbanked are shut out of the digital or mobile economy, Maurer said, noting that we live in a country with high levels of inequality.
“If paper money goes away, those people are stuck with no way to pay,” Maurer said.
He pointed out that this was an issue when the government sent out relief money to people at the beginning of the pandemic. Those who were unbanked received debit cards, which can come with fees if you make more than one withdrawal, or paper checks, which will cost you if you’re using a check-cashing service to obtain that money.
Even the world’s most cashless societies, including Sweden and the Netherlands, have recommended people keep paper money in case of emergencies, he added. Weather-related disasters, like hurricanes, have caused power outages that prevent people from using ATMs or making electronic transactions.
Paper money also isn’t subject to cybersecurity risks or potential privacy violations, he added.
“When I hand you a $20 bill, there is no data captured by anybody from that transaction…it’s a relatively anonymous private thing, whereas all digital forms of payment generate data trails,” Maurer said.
In a worst-case scenario, Maurer said governments could use digital trails to surveil a population and prevent them from using mobile or digital services if they disapprove of their financial activity. Or a platform could target people with financial products they don’t need.
One economist, Jay Zagorsky of Boston University, actually decided to pay his taxes in cash to the Internal Revenue Service this year. After securing an appointment, he went down to a high-security federal building where it took him half an hour to make a payment.
“They filled in what appeared to be a four-part carbon form, so the IRS has not yet automated this part of their business,” he told Marketplace.
This experiment doesn’t mean we should be anti-cash. On the contrary. It’s supposed to highlight why the IRS needs to make cash payments more seamless, he explained.
And that’s because as we move toward cashlessness, he said, we need to take into account the aforementioned disadvantages, like weather-related disasters and the exclusion of the unbanked.
But Maurer said there would be advantages to going completely cashless — if financial inclusion and financial justice are taken into account. There are still theft risks in cash-based economies, he noted.
And along with other clear advantages to digital-payment methods, like ease of use, going cashless can also prevent illegal activity, like tax evasion.
What are the cashless proposals out there?
Some forms of digital currencies have started to gain traction, including the possibility of a central bank digital currency from the Federal Reserve (which is currently being debated), and privately issued stablecoins, which are digital currencies or cryptocurrencies that are tied to a stable asset, like the U.S. dollar.
Christina Skinner, an assistant professor of legal studies and business ethics at the Wharton School, said that moving toward CBDCs would shift the monetary power from the private sector, or banks, to the government.
There are several goals for a government-issued digital currency, such as modernizing our payments system, being more inclusive, preserving the dollar’s status as the reserve currency of the world, and enhancing financial stability, explained Skinner.
However, she thinks there are flaws with each of these arguments. For example, she noted that much of the money we use today is already electronic, through demand deposits, while a big reason people don’t use banks is because they don’t trust them. If you’re already skeptical of the financial system and potentially the government, a CBDC might not change those views, Skinner said.
The FDIC’s 2021 survey on the unbanked found that the second biggest reason people cited for not having an account was not having trust in banks.
Skinner also said the reason the U.S. dollar is the reserve currency of the world is because people trust the U.S. for a slew of reasons, which aren’t tied to any of the dollar’s technological capabilities. “We have a stable currency, we have a robust rule of law, we respect property rights, we enforce contracts, we have an independent judiciary,” she said.
Proponents also say a CBDC could enhance financial stability by warding off stablecoins, Skinner said. Although they’re backed by stable assets, they come with their own risks. Just like there are bank runs, there could be a run on stablecoin.
However, Skinner said central banks are intent on bringing stablecoins into “the regulatory perimeter” anyways. We’re also far off from people using stablecoins in everyday transactions, she added, even though some have raised the possibility that the stablecoin could one day replace the U.S. dollar.
Meanwhile, the current proposals for CBDC aren’t currently aimed at completely replacing cash, while it remains to be seen whether the government will end up creating a digital currency. “The political appetite around CBDC ebbs and flows,” Skinner noted.
Do we need paper money to keep the economy humming along?
There isn’t necessarily an economic reason that dictates a need to keep paper money. It’s more that it’s what people want, Skinner said.
And as long as someone wants paper money, we will always have it, Maurer said.
“The Federal Reserve has the position that it should facilitate choice in payment. And it is agnostic about what kind of payment, but it does want to make sure that there are as many available choices as possible for people who need them,” Maurer said.
At this point in time, Maurer said cash needs to be kept in circulation because so many people still use it despite the move toward cashless payments. The same Pew Research Center study that pointed out cashlessness is on the rise also noted that nearly 60% of Americans say they pay cash for at least some of their purchases in a typical week.
Despite all the excitement surrounding new forms of digital currencies, physical cash is also innovative, adapting to people’s needs. Places such as Canada and Hong Kong, for example, have added tactile features or braille to help those who are visually impaired.
You could even say cash is its own form of technology.
“Cash always works. It’s a really magical technology for value transfer. All I have to do is give it to you, and then I have transferred value to you,” Maurer said.
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