Author:Michel, Norbert J.

There has been a steady shift from paper-based payments to electronic means of payment in the United States during the last 30 years (Federal Reserve 2016). Many consumers and businesses have relied more on credit and debit cards, as well as electronic transfers, instead of on checks and cash. Of these electronic methods, credit and debit card transactions account for much of the growth. The percentage of U.S. consumer expenditures with debit and credit cards (combined) was only 3 percent in 1986 but rose to 25 percent by 2000 (Lyon 2006). In 1995, debit and credit cards (combined) accounted for less than 20 percent of all noncash payment transactions but increased to more than 40 percent of this volume by 2003 (Lyon 2006). As of 2015, cards accounted for more than 65 percent of all noncash transactions (Federal Reserve 2016). More recently, smartphone-based payment services have rapidly gained importance as a noncash form of payment, "increasing from 0.3 billion payments in 2012 to 1.3 billion in 2015, or 71.9 percent per year" (Federal Reserve 2016).

Globally, mobile phone-based financial services are having a major impact in the developing world. Since 2007, more than 250 such services have reached more than 300 million customers in 89 countries, with more than half the services deployed in Sub-Saharan Africa (Burns 2015). This shift also coincides with the rise of bitcoin and similar blockchain-based digital currencies, the underlying technology of which serves as a digital payments system. The first bitcoin was created in 2009, and there are approximately 16.5 million bitcoins as ol November 2017, as computed at the website bitcoincharts.com. Though it is difficult to tell precisely how many people transact with bitcoins or similar digital currencies, Coinbase recently estimated that more than 10 million people worldwide hold a material amount of Bitcoin (Torpey 2017). To date, overseas remittances remain one of the most prominent uses for such digital currencies. In 2016, remittances totaled more than $429 billion, with some of the largest markets in China and the Philippines (Young 2017).

Even though bitcoins--or some offshoot--may become a generally accepted medium of exchange in the future, these digital currencies do not yet rival established national currencies such as the U.S. dollar. Nonetheless, there is no doubt that bitcoin proved thousands of economists wrong: private markets can, in fact, successfully issue digital currency that is not backed by any government or any physical commodity. Most economists, polled prior to bitcoin, would likely have predicted that no such digital currency would ever take hold because people would not accept it. But the privately produced cryptocurrency bitcoin is clearly an example of a market innovation that allows people to choose their own mediums of exchange, and it happens to be a digital means of payment rather than a paper-based method. Although the success of bitcoin, smartphone-based payment applications, credit and debit cards, and other electronic forms of payment have led many to predict the demise of cash (Wolman 2012, Norris 2016), it is striking how many people still use cash.

Federal Reserve data shows that "consumers choose to use cash more frequently than any other payment instrument, including debit or credit cards," and that cash still plays "a dominant role for small-value transactions" (Bennett et al. 2014). Furthermore, cash is still frequently used for relatively large transactions, particularly by lower-income consumers, and is the leading payment instrument for several expenditure categories, such as (1) person-to-person gift transfers, (2) food and personal care supplies, and (3) entertainment and transportation expenditures (ibid.). As of 2012, cash accounted for roughly 40 percent of U.S. consumer transactions by volume, and approximately 14 percent by value (ibid.). Anyone predisposed to the benefits of private competition would recognize these trends for nothing more than what they are: people revealing their preferred ways of making payments as technologies change. Not surprisingly, many people see these trends as an opportunity to impose their will on others.

Overview of War on Cash

Several prominent academics and policymakers throughout the world have been actively seeking to either phase out or (at least partially) ban the use of paper currency. (1) Three commonly cited reasons to support a ban on cash are (1) paper currency requires an inefficient use of resources; (2) paper currency facilitates tax evasion and criminal activity; and, (3) paper currency makes monetary policy more ineffective when interest rates are at the zero-lower bound. One study estimates that cash cost U.S. consumers $200 billion per year, including expenses associated with collecting, sorting, and transporting cash, as well as ATM fees (Chakravorti and Mazzotta 2013). Banning cash, or certain denominations of paper currency, to stamp out tax evasion and criminal activity is perhaps the most often cited justification, with one author calling on policymakers to "consider the broad spectrum of socio-economic gains--things like reduced criminal activity of nearly every stripe and the promotion of financial inclusion" (Wolman 2012).

Perhaps the most recent rationale for banning cash deals with monetary policy and the somewhat obscure topic of negative interest rates. Negative interest rates on deposits are effectively a penalty for holding cash in a bank account, so any bank customer faced with such a penalty is likely to remove his money from the bank and keep his cash at home. Of course, if enough people keep their cash under mattresses, total spending in the economy will fall. The anti-cash crowd's solution is to ban cash so that people have no choice but to use electronic means of payment. Thus, government officials would always be able to assess a penalty on people when they believe aggregate spending is too low, thus providing a bulletproof mechanism to incentivize people to spend money rather than save it (Rogoff 2014, 2016; Michel 2016).

Aside from the merits of these arguments, many of the G20 countries have undertaken some type of effort to ban, or at least curb the use of, cash. For instance Australia recently moved to a cashless welfare system to more tightly control which items benefit recipients could purchase (ABC News 2015). The Canadian government disallowed the payment of taxes in cash (at service counters) in 2007 (CBC News 2007), stopped accepting cash as a payment for passports in 2010 (Toronto Star 2011), and eliminated the penny in 2013 (Smith 2013). In 2016, the European...

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