In yesterday’s Markets and Money we left off with the idea that a cashless society promotes tyranny. That might seem like an odd subject to begin with today, given the show-stopping 50 basis point cut in the cash rate by the Reserve Bank of Australia (RBA) yesterday. But our job at the Markets and Money is to be forward thinking. So let’s move forward and think about the future of money.
The future begins now. Actually, it began in 2010 when buses in Sweden stopped taking cash to pay fares. To catch a ride today you have to use your mobile phone. With new payment technologies, mobile phones are also becoming wallets. Sweden is now talking about going completely cashless.
In fact, 97% of all retail transactions in the country are already done electronically. That’s something, when you consider Sweden was the first country in Europe to issue banknotes back in 1661. In the US, electronic transactions account for about 93% of retail sales. We were unable to find the figure for Australia.
None of this seems like a big deal at first. Going cashless is about convenience and efficiency. No one likes carrying around a pocketful of loose change. The gradual digitalisation of money has led countries to quit minting smaller denomination coins. New Zealand stopped minting one and two cent coins in 1990. Australia followed suit in 1992.
Björn Ulvaeus — you know one of the B’s in Swedish pop sensation ABBA — says that a cashless society would reduce crime. He cites figures showing that bank robberies in Sweden are down since some banks stopped carrying cash. He’s also motivated by the fact that his son has been robbed three times. He believes eliminating cash from your pockets will leave robbers with nothing to steal.
There is some debate within the Catholic Church over whether theft is a mortal sin or venial sin. Then again, there’s a good argument to be made that sin is sin no matter what. In either case, we’re betting that people will find a way to rob one another even if there’s no cash. And that’s one of the more obvious issues about moving to a cashless society: security.
Security in a Cashless Society
Physical crime might decrease with a cashless society, but that doesn’t mean crime will decrease. It will just get more sophisticated in nature. It will include identity theft. And it will include ways of stealing your money that we haven’t even dreamed of. What’s more, moving to a cashless society increases the chance that the government and bankers can steal your money even more efficiently than ever through debasement of the currency. We’ll return to that in a second.
Efficiency vs Stability in a Cashless Society
There is an argument to be made that moving to a cashless society increases efficiency by reducing transaction costs in an economy. The example banks like to use is processing physical cheques. To clear a cheque a person has to look at it, then enter a certain number of keystrokes at a terminal and then stamp the cheque, which then has to be stored. All of that time and labour, and time is money!
It’s hard to argue with. The digitalisation of cash transactions corresponds with a huge spike in global trade and commerce. When moving money around the planet is easier, so too is moving around goods and services. Does a cashless society promote more trade and prosperity?
Well, the absence of cash in the financial world has also led to an explosion in cross-border investment and speculation. Here we’re talking about foreign exchange markets, where many trillions of dollars worth of transactions are conducted every day. And don’t forget the derivatives markets, including interest rate futures, which are also conducted on a cash-free basis. Has this made the world a better, safer, more stable place?
If anything, reducing the friction in global money flows has made the world more unstable. Money — or its digital equivalent — sloshes around the planet at lightning speed. Is this efficiency? Or does it just accelerate instability?
In the event, proponents of a cashless society seem to take it for granted that mobile phone networks will always work. What if the network goes down? What if an EMP burst renders all technology with circuit boards useless? What if someone attacks the network? How resilient, redundant, and robust is an economy that uses only electronic cash?
All these issues — efficiency, reliability, privacy, security — are practical issues about moving to a cashless society. If they were the only issues, you’d think they’d be resolved sooner or later. Once resolved, the world could move on to a glorious cash-free future. But there is one last issue left. Namely, what is money?
How Will Money Be Defined in a Cashless Society?
Is money a real thing, a commodity? Or is it an abstraction and a social construct? Normally you wouldn’t have to ask a question like this. You reach in your pocket and trade the paper there for the thing you want. It works without thinking. But it only works if everyone agrees on what money is.
If money is an abstraction it certainly makes it a lot easier to do business. But it also makes it a lot easier for the government to watch your every move. If every transaction is digital, it’s traceable, and can be produced when you’ve been audited by the tax authorities.
Every Move You Make in a Cashless Society
This may sound a little conspiratorial. After all, if you have nothing to hide, why should you worry about the government snooping around your cashless transaction history? But when people phrase the question this way, they assume that the burden of proof that you are not doing something illegal is on you.
In other words, without arguing it, they have effectively said that the government has the right to know what you do in your private life. Is that a society you want to live in? Is that a free society? Or is that a society where individual liberty is undermined through the digital payments system?
There is also a practical aspect to our paranoia. Many governments in the Western world are broke or headed that way. Keeping tabs on electronic transactions makes it easier to track down tax dodgers and tax avoiders. Governments that are desperate for any money they can get will welcome the ability to trace, track, and tax every single transaction you make.
If you’re one of the people that thinks that is a good thing, you should probably stop reading now. You should also probably unsubscribe from the Markets and Money. Immediately.
Control in a Cashless Society
But really it’s more than just a tax collection issue. It’s an issue about what money is. Governments and central banks use control of the money system to engineer inflation. Inflation grows GDP in nominal terms. But over time, it decreases the value of your savings. And to the extent inflation decreases purchasing power, the money system also decreases the value of your labour. The money you earn for the work that you do is worth less over time. It’s like taking a pay cut without knowing it.
Theft through inflation of the money supply would be much easier in a cashless society because there would no theoretical limit on how big the money supply could get. When money becomes a digital abstraction, you can create it with a few keystrokes, as the Federal Reserve and European Central Bank have done over the last two years. When money is electronic, the restrictions on its supply are removed.
We’d argue that a cashless society means money is fully abstract. This has one practical side effect. You will be unable to legally engage in transactions that involve cash. If you do so, you’re a criminal. Nevertheless, you’d expect to see a lively black market emerge in cashless societies.
Currency and the Cashless Society
But the real effect is that the likelihood of government tyranny is greatly increased as you move to a cashless society. It’s not just that petty bureaucrats and tax collectors and agents of the State are likely to abuse their ability to monitor what you do with your money, although all that is true. The real risk is that a completely cashless society removes any check on the debasement of the currency and thus allows the government to grow even larger and more intrusive in private life.
If you’re still reading, we assume we haven’t frightened you away with our suspicion of ever-expanding State power. But then, that’s really our point. Control of the money system is what enables the State to grow. Central banks were set up to be lenders of last resort to governments. Most central banks have a monopoly on currency creation. Removing physical currency from circulation cements that monopoly and increases the chance of even more government spending on wars, foreign and domestic.
The good news is that money is not an abstraction. It is a physical representation of value that you can exchange for something you desire. People know this intuitively. People stop using money when they realise its quantity can be increased arbitrarily, thus reducing the value of their labour and savings.
People stop using a currency when they realise it has no value because it’s being used as a tool to preserve a certain system. The move to a cashless society is another attempt to preserve the power and the privilege of that system. It’s not about convenience and efficiency. It’s about power and control.
But it’s bound to fail. For example, can you imagine Judas using BPAY for his betrayal of Jesus? Or EFTPOS? No. That kind of transaction took thirty pieces of silver. Silver is real money, as is gold. Don’t expect that to change any time soon.
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