Is it time for world to say goodbye to cash?

Last weekend I spent $15. I bought a Coke and a bag of Fritos at the Georgia Theatre Conference at Augusta University's Maxwell Theatre, an Italian ice at my son's soccer club, and a meal at Zaxby's.

 

While $15 is an unremarkable expense, what was interesting, at least to me, was that it was made in cash.

I have been reading about the decline of cash recently, and my favorite economic podcast, Freakonomics Radio, has been advocating for an even more cashless society.

What is going on?

According to the 2014 Survey of Consumer Payment Choice from the Federal Reserve Bank of Boston, about 25 percent of all transactions are still made in cash. This is down from 30 percent in 2009.

Debit cards account for 31 percent of all transactions. Credit cards account for 23 percent and have increased in use as memory of the Great Recession fades. Electronic transactions (online bill paying, for example) have remained largely unchanged at 11 percent of all transactions. Use of checks has seen the largest decline, now accounting for just 8 percent of transactions.

Freakonomics Radio asked "why are we still using cash?" Some transactions cannot be completed with cash (ever tried to use cash online?). With increased security, people are more confident using electronic forms of payment, whether directly via electronic transaction or indirectly via a card.

Ken Rogoff, an economist at Harvard University, explains that there is $1.5 trillion of paper currency in circulation today. That equates to $3,500 per person. Yet the average cash holding (in a wallet, purse or a jar at home) has declined to just over $200.

Have I lost $3,300 down the back of my sofa? (No – I've looked).

The answer is that much of the money is used for illegal activities, such as drug trafficking and other crimes including tax evasion and bribery. Rogoff advocates for a less-cash society, arguing that the ilicit costs of cash far outweigh the benefits. He said we should start phasing out large notes, such as the $100 bill, that are frequently used in criminal activities before moving on to smaller denominations.

Rogoff acknowledges the concerns, including the privacy issue (cash is anonymous) and the negative impact on the poor, who disproportionately rely on cash.

Other countries have moved more rapidly to a less-cash society. Sweden does not use checks at all, and cash only accounts for 2 percent of its gross domestic product (it's about 7 percent in the United States).

India has a card called Aadhaar that was issued to a billion people for electronic transfers. It also acts as an ID card that could raise privacy issues, but one of the unintended consequences was that it increased poorer Indians' access to credit, enabling them to establish a payment history and gain access to small loans.

So the next time you put a $100 bill in your pocket, which just might be contaminated with cocaine, ask yourself, is it worth it?

Simon Medcalfe is an associate professor of finance and Cree Walker Chair in the Hull College of Business at Augusta University.

 

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