The Return of Cash

Recently, the Financial Times ran an article predicting the “end of cash” and the rise of mobile payments with smartphones. Certainly as the article makes clear, this will benefit the poor in the Third World, as they now get access to banks and credit and more security, than they would before. They can even bank in alternative currencies, perhaps Google or Facebook or some other company will offer “credits’ that are easily convertible to major “hard” currencies and have more luster, not being subject to most of the major players habit of fiat creation of far more money than they should (China, the US, the UK, Japan, and Europe all are guilty there).

But cash is not going away. Indeed, as it might fade away in places like Mali, or South Sudan, or Malawi (would you hold their currencies if you could avoid it?), cash is poised for a comeback in the US and First World.

As much as governments like non-cash transactions (the better to track and TAX you my dears) ordinary people LOVE cash. Cash allows the Craigslist economy to flourish. You can hire a plumber, or electrician, or carpenter, or IT guy off the books. For a modest amount, paid in cash, they can do things for a LOT less (often a third or a quarter of the official quoted amount). You’d be surprised how much that happens in suburbia. When budgets are tight. You would not remodel your house that way. You might get a plumber to unclog a drain that way, though. Cash, simply held in a sock drawer, and used to make grocery payments, or whatever, is untaxable. Since it never officially exists. People who don’t like or trust their governments (most of the Western World these days) love cash for that reason.

Cash is also cheaper for merchants. The reliance upon electronic payment by gas stations is hurting gas stations. Most are small businesses, owned by private individuals (the oil companies sold out in the late 1980’s) and operate on thin margins. Money is made by cash purchases of gas, or impulse buys at the counter of snacks, and such.

Because consumers these days use plastic even for spontaneous small purchases such as gas, snacks and smokes, the station owners say their margins are eroding. Card-processing fees are typically a percentage of sales—ranging on average from 1% to 3% depending on the card—plus a flat fee of about 10 cents per transaction.
Whenever the price of gas rises, as it recently has to about $4 a gallon, an owner’s profit margins become slimmer. If the bill for a tank of gas comes to $50 and the fee is 1% of the sale price plus 10 cents per transaction, an owner pays about 60 cents to the card processor. But if the price of gas goes up, and you have to charge your customer $60 for the same amount of gas, the fee is now 70 cents.
Frank Reluzco, owner of an Exxon station, auto-repair business and convenience store in Frederick, Md., said that roughly 90% of his sales are paid by credit card today, compared with about 75% five years ago. “It costs so much to fill a tank right now; no one’s going to carry around that much cash,” said Mr. Reluzco.

Then of course there are the scams. Global Payments is in the news recently for losing an astonishing amount of customer credit and debit card data (1.5 million) in recent weeks. Criminals unsurprisingly, if they are sophisticated, love crimes with high rewards and low risks. Targeting, increasingly third-party payment systems and small businesses makes that easier, as banks and major Credit Card payment systems have beefed up security spending. Many of these cyber criminals operate in places like China or Russia, beyond any extradition or even pressure.

Then of course there is the old reliable, the card reader scammers who steal your card info and pin numbers by tiny, blue-tooth enabled readers glued inside card readers on pumps. Similar incidents involving ATMs, card readers at a Southern California art mart chain, and other places come to mind.

In short, the cost of plastic is going up. The short lived attempt by Bank of America to charge customers for each transaction involving debit cards is sure to return, as banks look to gouge depositors any way they can to pump up their balance sheets and pay off investors and make bonuses to bankers. That’s why they are bankers!

Customers will pay more, to cover costs of increasing fraud and stolen card data. So too will merchants. The payments system is a high-barrier to entry, Google and Facebook don’t have the cash or expertise or certification to install mobile payment terminals, make deals with banks, and merchants. That is why they are pushing smartphone payments. But those, “near field” payment systems, and phone-based payment systems, only make the field riper for thieves and scammers. Who in turn love low risk and high reward scams and rip-offs.

Cash, is harder to duplicate. Eventually, the US will have to like most Western nations combat rampant tech-thievery by using cash. Yes the dollar is easily counterfeited, but the move to replace the paper dollar with a coin version is a step in the right direction. The Susan B. Anthony, Sacagawea, and Past Presidents coins are a flop, of course. The trick is to make the coin beautiful and representative of value.

At some point, the US dollar like every major currency is facing collapse. Fiat creation of more and more currency eventually reaches a discontinuous point, and the acceptance of the currency collapses like Weimar. This is likely to happen very suddenly. Gold is not the answer, because no one has enough of it, not even Fort Knox. But silver is. Being mildly inflationary (recall that William Jennings Bryan speech about a “Cross of Gold”?) they serve a purpose of an expanding economy while still preserving purchasing power for consumers and savers. Silver has real value, unlike fiat currency, and coins with the traditional (but not late Roman denarius based) seignorage provides an emotional floor to a currency, useful when transitioning from a failed one.

This is also much harder for criminals to duplicate. Coinage with silver requires industrial machinery, not a bank of computers connected to cyberspace in Russia or China. They also have to be distributed, and made far cheaper than what the materials and labor and distribution costs. Silver alloy coins, using the St. Gaudens or similar designs of various denominations: $1, $2, $5, $10, $25, and $50, would do a lot to help restore confidence. The designs are beautiful and timeless, deserve to be revived, and speak to an America filled with confidence. And again, Silver has value.

I don’t think credit and debit cards are going away, they in some form are indispensible for e-commerce. But the costs of everyday transactions are likely to push people in the developed world (with more motivated, higher skilled criminals) back to some form of cash.

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About whiskeysplace

Conservative blogger focusing on culture, business, technology, and how they intersect.
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8 Responses to The Return of Cash

  1. Columnist says:

    Again, you hit the nail.

  2. mike says:

    Get rid of the penny like Canada just did. Also, get a 1 and 2 dollar coin, maybe a 5. The Sacajawea is a good coin. It’s gold and won’t be mistaken for another coin. They must get rid of the paper dollar so people will have to use the coin. I never get coin dollars for change so how am I going to use them?

    The British Pound is unmistakable.

    Make sure you make the coins light. You could even have a little coin pouch for your pocket so they don’t jiggle.

  3. mike says:

    The 2 dollar coin could look like this: gold and silver.

    http://www.eurocoins.co.uk/images1euros.html

    They must be light and small like the Pound or ! euro. They should be no bigger and preferably smaller than a quarter. They could get a new quarter too.

  4. Ode says:

    A common theme that has been played or perhaps over played in sci fi movies is a future world where cash money does not exist and all transactions are done electronically. I agree that cash will always be around. One reason is that people value their privacy.

    Every time you walk into a store and buy something with a credit card it’s not just what you bought and the price that is being recorded. The location of the store and the datetime of the transaction is also recorded. So technically speaking a credit card can also be thought of as a “position locator” recording WHERE and WHEN you have been or more accurately stated the entire credit card infrastructure system. Yikes that’s a tremendous loss of privacy.

    Even if hypothetically I were to live in a Star Trek universe of faster than light travel The way I see it, it’s nobody’s damn business what, when, where I do something unless of course I’m doing business with them. I think the Ferengi had it right. Gold pressed Latinum is a superior form of currency compared to the electronic federation credits. Grin

  5. Dr Van Nostrand says:

    In short, the cost of plastic is going up.”

    Perhaps literally! As the price of oil go up,so do its byproducts.

  6. boqueronman says:

    “Gold is not the answer, because no one has enough of it, not even Fort Knox.”

    There’s not enough space to address this mistaken idea. But for a fairly straightforward presentation of why Whiskey and Ben Bernanke are both wrong, here is the link to an open letter to “The Bernank” from Keith Weiner, senior investment officer at UBS, at the Acting Man finance/economy web site:

    http://www.acting-man.com/?p=16026#more-16026

    Here are the two introductory paragraphs. Read the letter and do some of your on research on the subject (and get acquainted with Austrian Business Cycle Theory). The issue of when and how to re-establish sound money on a global basis is one of the most important issues facing the world economy today.

    “Dear Ben:

    You have publicly gone on record with some off-the-wall assertions about the gold standard. What made you think you could get away with it? Your best strategy would have been to ignore gold. Although I concede that with the endgame of the regime of irredeemable paper money near, you might not be able to pretend that people aren’t talking and thinking about gold. You can’t win, Ben. In this letter I will address your claims and explain your errors so that the whole world can see them, even if you cannot.

    Before I get into your specious claims, I want to point out two of important facts. First, the gold standard exists when people are free to choose what they wish to use for money. Gold has won this market competition over thousands of years, but the key is that when people are not forced to use government-issued scrip they choose gold. And that’s the shabby little secret of your irredeemable paper money, Ben. You have legal tender laws to force creditors to accept it, whether they would or not. Will you please let people be free?”

    • I would argue that the silver, not gold standard, has been the default currency for most of civilization. There is just not enough gold even at values of $2,000 an ounce to institute a gold-backed currency, the effect would be quite deflationary, think Great Depression. Great for savers and those collecting debts, not great for those owing money. Or fueling an expanding economy which the US needs.

      Hence, the history of silver in everday coinage. The Romans almost never issued gold coins and those they did were hoarded, almost never spent. By the end of the Western Empire the denarius was almost all lead, of course, and debasement of currency is a problem. But the US bi-metallic standard worked well enough for a long time. Bryan’s demand for “the dollar of our daddies” and silver coins made sense for Western farmers owing money. Yet because its physically backed, and has also considerable industrial uses, the silver coin has a physical floor that as long as care is taken not to debase it too much, will hold value.

      My take is that the paper currency will become so debased that by default we will have to go to coins. There, silver is handier. You can’t break change for say, a $500 gold coin, which itself lends to scraping, hollowing out, etc. [Reeding patterns on the edges are meant to deter hollowing out the center with a drill btw.]

  7. blert says:

    Whiskey…

    I wish I’d said it first.

    To buttress your points: there are, essentially, no silver mines left. That’s how cheap the metal is.

    99% of all production is from scrap and as a BYPRODUCT of mining other metals.

    I’m unaware of Any silver mine that can make a go of it resting upon silver extraction, only.

    Historically, this is a complete break.

    Should silver revert to classic 16:1 values true silver mines will pop up all over Mexico and Peru.

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