The case for cash
PremiumCash must survive as a basic necessity even as digital money and zippy payment methods take off
Those who run the financial system and also those who are a part of it don’t like cash. For them, digital payments are the way forward. As the Reserve Bank of India states in its latest annual report: “The focus… was on leveraging technology to facilitate digital penetration… towards a “less cash" dependent society." Nonetheless, the rise of digital payments need not mean the death of cash. But that’s how the entire issue is projected with headlines like “The end of cash" and “Cash will no longer be king". The equivocation fallacy is at work here.
Brett Scott explains this in Cloudmoney: Cash, Cards, Crypto and the War for our Wallets: “The term [‘cashless’] now refers both to the general case of a society without cash (‘cashless society’), and to the specific case of a single digital payment (a ‘cashless payment’)."
This is a situation where two different things have been given a single name, leading to an equivocation fallacy “in which the separate meanings pollute each other". As Scott writes: “Given that [digital payments] go under the name of ‘cashless payment’, it is impossible to speak about them without implying the end of [cash]."
Now there is no one batting for cash; neither central banks in most cases, nor financial institutions. On top of this, many governments love the idea of digital currencies.
Central banks are excited about the idea of a central bank digital currency. The primary job of any central bank is to maintain low inflation, while ensuring economic growth. It tries to achieve these objectives through its monetary policy, which involves pushing interest rates in a certain direction. If the economy is slowing down, interest rates are lowered in the hope that people and firms will borrow and spend.
But low interest rates don’t necessarily imply that people and firms will spend. It also depends on the level of confidence they have in their economic future. One way for central banks to get around this is to push interest rates in a negative direction. As Eswar Prasad writes in The Future of Money: “If banks… [paid]… negative interest rates on deposits, consumers and businesses would surely save less and spend more, as they would lose money by saving."
While this makes sense in theory, it is difficult to implement because people and firms can withdraw their savings and keep them in cash. In a world where only digital currency prevails, negative interest rates can become a reality forcing people and firms to spend money.
For governments, especially those with dictatorial ambitions, digital money can help build a social credit system that could in turn be used to squash societal dissent. As Prasad writes: “In 2014, the State Council, China’s key policymaking body, proposed a social credit system to build a composite measure of creditworthiness that would undergird a ‘harmonious socialist society.’"
As for financial institutions such as banks, digital money means lower costs. Less use of cash means less need to move cash around for storage in ATMs and bank branches. Fewer ATMs and bank branches hurt those who don’t have a smartphone. Most digital money transactions happen through smartphones. Further, the older lot, used to a certain way of doing things, can get left out.
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New-age fintech firms love digital payments because it gets them access to mobile phones and that means access to monetizable data. Given this, they project the inevitability of digital money. “All digital payments companies…" Scott writes, “ project a sense that ‘new money’ is a real phenomenon, being carried along by a movement of empowered people." This technique is called interpellation: an idea is programmed into people as if they already agree with it.
When it comes to privacy, the argument offered by those running fintechs is that if someone has nothing to hide, there shouldn’t be a problem. Again, this is a classic public relations strategy of muddying the water to equate a person’s legitimate desire for privacy with a desire to hide things.
Scott offers the example of Winton Motor Carriage Company, which was the world’s first automobile company to bring out an advertisement. In this ad, it compared the automobile to a horseless carriage. The ad even said it had no odour and no vibration. Cash now is presented as a horse-drawn carriage of the payment system, which is portrayed as something that needs to be done away with. Nonetheless, the truth is that both digital payments and cash can co-exist. Cash is like a bicycle. Just because motorized vehicles are in fashion doesn’t mean that a bicycle serves no purpose and should stop being used.
In the aftermath of the covid pandemic and the disruption it wrought in global supply chains, there has been a lot of talk about building redundancies into societal systems. And there is no bigger system than the money system. Digital money systems can and have broken down in the past, particularly during times of a weather emergency. There is also the threat of viruses and hackers lurking online. Cash is beyond the reach of all these problems.
To conclude, Scott offers an even better analogy: “Lifts have their use, but no responsible property developer would ever only install a lift without having emergency stairs." Cash is the emergency staircase that we all need.
Vivek Kaul is the author of ‘Bad Money’.
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