Introduction: This article is translated from the New York Magazine article "The War on Cash" by Malcolm Harris. June 22, 2022. The content of the article does not represent the views of the translator.
At the end of the 20th century, many futuristic expectations were put forward, some of which have been realized today, such as mobile digital payments. In today's society, whenever you need to pay for something, you can mostly use a bank card, a mobile phone, or even a smartwatch. In the first decade of the 21st century, cash dropped from the first payment method to the third in the United States. Debit cards surpassed cash in 2018, and credit cards surpassed cash in 2020 (the first year of the COVID-19 pandemic).
Now, cash accounts for less than 20% of all transactions, only 7 percentage points higher than direct bank transfers and 5 percentage points higher than "other". Every day, we are one step closer to the fairy tale version of a cashless society; this transformation is certainly a good thing for companies that manage digital currency systems, but not necessarily for the rest of us.
There is no denying that digital payment methods do have their advantages: convenience. Ideally: beep, beep, transaction completed. However, convenience always comes at a cost. Let's talk about it here. News reporter and former derivatives broker Brett Scott attempts to convince readers in his upcoming book "Cloudmoney: Cash, Cards, Crypto, and the War for Our Wallets" that we all have a stake in this war on cash. Scott's goal is to introduce the movement to computerize all transactions and the inevitable historical transition from cash to digital, as claimed by those anti-cash interest groups. He states in the book that the development of a cashless society will be very rapid, and some people are destined to be left behind.
The cashless transaction method will make banking transactions and payment processing easier. If you are not familiar, you might imagine how it works like this: there is a safe on a shelf with your name on it, and there are some banknotes in it. Your card gives you the right to use these banknotes, and the bank reconciles at the end of each day. The bank card here becomes something you can use to make actual currency payments. Mobile payment apps even include analog images of plastic cards, which link to your cash vault through proxies.
Scott explains that this understanding is incorrect. Readers may be surprised: in fact, there are two types of currency. One is the cash we are familiar with, which is government-backed currency, also known as "base money". The one we use when swiping cards is "bank money"; it is not issued by the government, but comes from banks, as the name suggests. Scott uses the example of a casino to help understand: there is a window at the entrance of the casino that converts your dollars into tokens/chips representing dollars. Banks do the same thing. When you deposit cash, your account number represents bank money; the bank does not have a cash vault with your name on it, but only an index of account holders. Customers can "withdraw cash" at ATMs or teller windows. Similar to a casino, banks do not want you to do this.
Banks do keep some reserves of base money, but these reserves only need to account for a portion of the bank money chips they issue—this is why it is called a "fractional reserve" system. When a bank lends money, it does not transfer your money to someone else's shelf, but simply marks some new chips. In this way, banks have a very strong position: they not only have the power to decide who is worthy of their money printing, but they can also charge fees on their own chips. No wonder banks don't want their customers to use cash.
Saving money with software is like driving a car. As long as you don't think about how the car works, it feels smooth and unobstructed. Scott says cash is like a bicycle. It is not fast and not as smooth, but riding a bicycle does not require a driver's license and does not rely on the fossil fuel industry that harms the earth. He writes, "The cashless movement is like closing a bike lane that runs parallel to a city road." Car companies have been trying to narrow the proportion of bike lanes and sidewalks on American roads, and the banking industry is doing something similar. In 2018, Visa provided $10,000 rewards to 50 small businesses in its "Cashless Challenge," but this investment is relatively cost-effective compared to future transaction fee revenue. The banking industry has always spread the concept of "unbanked" from a geographical descriptive word about market penetration to a personal adjective; it's as if every human should be squeezed by a wealthy bank, which is an inalienable right.
Although the combination of banks and digital technology is beneficial, the digital user interfaces provided by banks have not developed rapidly. This niche field is called fintech, and ambitious disruptors in Silicon Valley are striving for innovation. But Scott writes, "Fintech, broadly speaking, is not bypassing the existing financial system, but rather accessing it." PayPal is the best example of this: it was originally intended to be a revolutionary peer-to-peer technology, but it has become another layer of banking. Scott writes, "The dollars in your PayPal account are tertiary chips, whose promise is equivalent to secondary bank chips, and secondary chips promise equivalent to primary government dollars issued by the Federal Reserve."
If you treat the dollars in your phone as the same as the cash dollars in real life, you may face some risks. For example, what you hold may be a "stablecoin," which is not bank-issued bank dollars—similar to chips in a casino that are not issued by the casino. Distributed ledger technology (one of which is the well-known "blockchain") can permanently and publicly record the account list of holders, allowing companies to issue their own chips without worrying about someone modifying this list behind the scenes. These stablecoins are the bank money of the cryptocurrency market, and they should have "full reserve" backing because they are not backed by the government. However, as we have seen, money has different sources. Stablecoins may have a one-to-one relationship with bank money and base money or their equivalents, but they may not.
The issuance of "algorithmic stablecoins" is based on the calculation of reserves, and the portion beyond the set quota can be used by the issuer for investment; these reserves need to guarantee the value of the algorithmic stablecoin when needed (such as during a run). This is essentially a fractional reserve system. When the situation worsens, situations like Terra occur, where the algorithmic stablecoin plummeted to near zero after losing stability, and billions of dollars in assets evaporated. Well, anyway, it's mobile currency. The bank money people put into it did not disappear, but the holders can no longer redeem them with their worthless chips. But there were smart people who cashed out their chips early; there are rumors that Terra insiders sold billions of dollars' worth of chips before the big crash.
The risk of US bank or PayPal chips going to zero or even dropping to 99 cents is very small. (What about Tether's chips? I'm not sure.) But that doesn't mean we should flatten the bike lane. Scott points out that the banking industry, fintech, and cryptocurrency industry all have the same oligopoly structure: a few big players competing and cooperating with each other, getting rich, and most of the time, we don't have to worry about the relationship between the dollars in our phones and the US government-backed dollars in cash. But not everyone can drive a car.
Anyone can hold base money—just hold it, but bank money requires a bank. Electronic transactions generate data associated with your personal identity, and this data can be used for various purposes, from non-malicious to very malicious. Americans under the age of 18 need an adult co-signer to open a savings account. Undocumented immigrants may not be able to open a savings account, and people without a fixed address cannot either. Unlike the government, banks can set minimum deposit requirements and charge various fees. Settlement and fintech companies are subject to various political pressures, as extremist anti-pornography individuals have used this loophole to attack sex workers. Cash may not discriminate against anyone, but Mastercard may.
Efforts to promote a cashless society have encountered some resistance, and some proactive municipal authorities have passed regulations requiring businesses to accept government currency. There are also powerful stakeholders opposing the use of cash. In 2019, leaked emails between Amazon and Philadelphia officials regarding the language issue of the city's support for cash regulations revealed Amazon's efforts to delay legislation and its request for exceptions for Amazon's cashierless Go stores, as these stores were not designed to accept cash. Earlier this year, a bill supporting cash in Florida died during the legislative process. This is an active political issue, but I'm afraid it won't last long. Cash needs a certain number of users to function. Just like the barista at a coffee shop on Franklin Avenue explained to me on my recent visit to Brooklyn: although the coffee shop claims to accept cash, he can't accept it because there are no banknotes in the cash register.
For example, you can't ride a bicycle on a highway. Scott's metaphor points to a possible larger political stance: if cash is a bicycle, what would be the financial equivalent of urbanist political agendas? It would include a large number of bike lanes, but also supplemented by public transportation options such as buses (postal banking) and high-speed trains (central bank digital currency). There are also neighborhood communities within walking distance—public relationships that are not influenced by money.