The Ascent (and Hopeful Descent) of Cash

(The title of this piece comes from a play on words of economic historian Niall Ferguson's book and PBS series, The Ascent of Money, which the Kauffman Foundation helped fund.)

By automating the checkout process at the Foundation lunchroom (where the food is incredible, by the way) the machines don't accept cash, only credit cards. What happens to unlucky staff like this author (lost card) and his research assistant (stolen identity, so he says)? It makes one wonder, will there ever come a day when we do not have cash? When money exists in 1s and 0s and nowhere else? 

Here's a bold prediction (from Atlas, the wunderRA): That day will arrive by 2025, if not sooner.

True, there have been stabs at moving us closer to that day, but none of them have really ignited. For those looking for a really good read, I recommend the book, The PayPal Wars: Battles with eBay, the Media, the Mafia, and the Rest of Planet Earth. The book is written by Eric M. Jackson, who was one of the first employees of PayPal and is reviewed at Reason Magazine by Radley Balko. 

Balko describse my favorite chapter in the book, 

Jackson recalls a speech Thiel gave to Confinnity employees, just a few days after he began work, in which he described his hopes for PayPal to become a borderless private currency. He saw PayPal facilitating trade in currency for anyone with an Internet connection by enabling an instant transfer of funds from insecure currencies to more stable ones, such as U.S. dollars. Thiel explained to his young staff how governments had historically robbed their own citizens through inflation and currency devaluation. The very rich could always protect themselves by investing offshore. It's the poor and middle class, Thiel explained, who get screwed. "PayPal will give citizens worldwide more direct control over their currencies than they ever had before," Thiel predicted. "It will be nearly impossible for corrupt governments to steal wealth from their people through their old means because if they try the people will switch to dollars or pounds or yen, in effect dumping the worthless local currency for something more secure."

Sadly, it seems that the libertarians in the room may have been too optimistic and that the only full scale innovation we will see is if the government exits the currency market a la Hayek's theory of competitive and therefore stable, currencies.

 

If history is any indication, privatized money can work. See economist George Selgin's great book, Good Money: Birmingham Button Makers, the Royal Mint, and the Beginning of Modern Coinage, 1775-1821, which documents the coinage entrepreneurship of Matthew Boulton, who built one of the best mints in existence after he landed a government contract to mint coins for Britain. People loved his coins and so use of the Royal Mint's coinage fell. Of course the British government's Royal Mint wasn't pleased about decline of their coinage and so it reasserted control and gave it back to the initial monopoly.

We all know the dangers that printing excess money can do to an economy. Milton Friedman's restatement of the quantity theory of money -- and subsequent Nobel Prize for Economics -- leaves little doubt. And yet, in light of the recent economic downturn, I think we must ask ourselves, Can we afford paper currency? 

A recent Wired Magazine article makes the point that minting them coins ain't cheap and that it cost in excess of 848 million dollars in 2008 alone, just to print things we'd just as soon not have. Here's the essential paragraph: 

To maintain our stock of hard currency, the US Treasury creates hundreds of billions of dollars worth of new bills and coins each year. And that ain't money for nothing: The cost to taxpayers in 2008 alone was $848 million, more than two-thirds of which was spent minting coins that many people regard as a nuisance. (The process also used up more than 14,823 tons of zinc, 23,879 tons of copper, and 2,514 tons of nickel.) In an era when books, movies, music, and newsprint are transmuting from atoms to bits, money remains irritatingly analog. Physical currency is a bulky, germ-smeared, carbon-intensive, expensive medium of exchange. Let's dump it.

Wow, talk about wasted resources. Fortunately, companies like PayPal, are leading the way to a cash- (and check-)less future. 

Between 2003 and 2006, noncash payments in the US increased 4.6 percent annually, while the percentage of payments made using checks dropped 13.2 percent. Two years ago, card-based payments exceeded paper-based ones—cash, checks, food stamps—for the first time. Nearly 15 percent of all US online commerce goes through PayPal. Smartcard technologies like EagleCash and FreedomPay allow military personnel and college students to ignore paper money, and the institutions that run dining halls and PXs save a bundle by not having to manage bills and coins or pay transaction fees for credit cards.

Hmm... avoiding cons and bills... maybe Kauffman's dining hall was on to something, after all.  But not so fast! MIT economist, Amy Finkelstein, has found that when EZ-passes are installed on road high ways, the charges to the tolls become less noticeable and therefore become subject to higher increases. Might that hold true for services or goods that are sold in non-competitive markets as well? I guess, we'll just have to wait and see.

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