Kenneth Rogoff, the Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University and former Chief Economist at the IMF, recently posed the question about the future of paper money. I reported the academic paper myself last month and the arguments he put forward for Cryptocoinsnews. At that time, I agreed with Rogoff on the technological obsolescence of paper money however I now wish to look at some of the reasons, that society must consider, for holding onto paper money.
I have an acquaintance that works as a handyman, he has two prices that he charges per day, one for cash and another one for ‘through the books.’ So if he paints my house for $1,000 and puts it through the books the government gets… say 20% in income tax and he gets $800 for himself, money that he saves and spends according to his needs. If I pay him cash, I get the job cheaper, and he gets more money and the government gets nothing. We, in effect, split the government’s share… or do we? If I retain $100 extra what do I do with it? Well, I have two options for each dollar, I can spend it or I can save it. If I choose to spend it the government gains from purchase taxes and increased business turnover leads to greater employment and profits that act to benefit the national accounts. If I save more money then I improve the deposit ratio and give the banks, and insurance companies, more money to loan to new enterprises and entrepreneurs. Is the problem simply, perhaps, that my great crime is one of choice? I have withdrawn from the government the choice of how it spends my money and made that choice myself.
One of the criticisms of the existence of cash is that it limits the state in selection of interest rates and prevents negative interest rates. If the governments wants to start people spending they act to reduce deposit rates, to make deposits less attractive. If the rate goes too low then people choose to withdraw and hold their money in the form of cash. There is an opportunity benefit in holding cash.
One of the problems with cash is the cost of maintaining and handling it, that has been estimated in the US, in a report titled “The Cost of Cash in the United States”, to be as high as $200 Billion. Yes, Billion. The cost of, driving around, looking for an ATM has even been estimated. But Seigniorage, the profit that the state makes from printing notes and minting coins accounts for large proportions of this figure. There are still several reasons remaining that people prefer to hold paper money.
Paper money is not without its hidden costs, however, poorer citizens tend to carry more cash than wealthier ones, due to credit cards and retail accounts, and this leads to greater levels of crime as well as the inability to negotiate terms and prices, the uncomfortable fact that cash is more expensive for the poor than for the rich. However, there is one more question to be asked, should a person choose to buy recreational (illegal) drugs, or employ the services of a person of, shall we say, negotiable virtue, would the transaction be undertaken using PayPal, or Bitcoin? Would the legendary privacy of Bitcoin engender enough confidence for consumers to undertake a Bitcoin transaction… or would a handful of small denomination notes generate a greater level of security?
Money in the form of cash is a tangible embodiment of value. It is widely acceptable and highly unlikely to disappear.
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Last modified (UTC): June 17, 2014 10:08