What is the Future of Coin and Paper Money?
Is a cashless society in our future? James Mee evaluates.
On 10th of March 1862, the American government issued its first 5, 10 and 20 dollar bills. 150 years later, the powers that be are considering the future of coin and paper money.
Over the years, we have progressed from a cash-only to a hybrid-based system, transacting in both cash and some form of electronic payment. Today, an increasing proportion of payments are made electronically (indeed, in North America, just 55% of transactions are performed in cash(1)), and the current technological revolution playing out in the payments space is only increasing our ability to live without cash on a day to day basis(2).
While the payments system shifts beneath our feet, discussions are being had about the removal of physical money altogether, in the hope that a cashless society will help central banks positively affect the real economy.
So, how will the end of paper money help the banking system?
Today, you and I can go to our bank branch, make a withdrawal of our savings and leave with it in hard cash. This is a problem for Central Banks which are tasked with managing the level of inflation and the general health of the economy. One of their main policy tools is the level of interest rates, which affects spending and investment decisions for individuals and companies. Moving rates to negative levels is an extreme form of this policy (already adopted in Europe and Japan) but the option to withdraw cash and hoard it under the mattress makes the policy ineffective. If all money were held electronically it would be much harder for consumers to hoard and avoid the cost of storing it in an account which charges interest just to hold it there.
So, are we likely to see the end of paper money anytime soon? No; not for the foreseeable future. Apart from the necessary and significant investment in systems infrastructure, before even considering such an extreme policy, the political complexity of getting such a system set-up is overwhelming. If we consider the global monetary system, a cashless society would likely require international agreement and likely some supranational regulatory authority to manage the global system. In a world where political compromise is increasingly rare, and where the vast majority of transactions in emerging markets are conducted via cash, it seems unlikely an international accord will be struck any time soon.
Cash will remain the bedrock of our monetary society. For now, at least.
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1 Mastercard; Measuring progress toward a cashless society; http://www.mastercardadvisors.com/_assets/pdf/MasterCardAdvisors-CashlessSociety.pdf
2 A wealth of information on the subject can be found here:http://www.mckinsey.com/industries/financial-services/our-insights/payments