[Dave Birch] It’s crazy to carry on using cash. The high social costs, the market-distorting cross-subsidies and sheer inconvenience mean that it ought to be vanishing, even though it’s actually gaining market in share in the U.K. I found some figures from the Bank of Portugal in European Card Review earlier in the year. Portugal has the highest ATM penetration in Europe, which is one of the reasons why cash is very expensive there, as these figures show. The only payment instruments that pay their own way in that market are direct debits and credit cards. All other payment instruments lose money and cash costs about 25 times as much as it brings in. In other words, there is a massive cross-subsidy to cash from other parts of the banking business, which loses about €1.77 every time someone uses cash in a retail transaction. No wonder it seems inexpensive to the retailers, who bear none of this cost. The big picture is that payments cost 0.77% of Portugal’s GDP (against the 0.5% average for Europe as a whole) and revenues only bring in about two-thirds of the costs. Isn’t there an old saying about holes and digging? When is cash going to be priced correctly?

With the costs and the revenues so out of line, surely there must be a case for driving retail electronic payments (ie, digital money) into the marketplace? But if cash does get priced appropriately, then what (and who) will be best placed to provide the alternative? What I mean by this is that if a combination of technological advance and dissatisfaction with economic arrangement reinforce each other, then we may find ourselves not only replacing the medium of exchange (ie, notes and coins) but also the store of value that it animates (ie, Sterling). After all, national currencies are (like nations) a relatively recent invention.

While Britain’s economy may move closer to that of the Congo every day, I don’t think that mobile phone top-up vouchers will replace the circulating medium of exchange i around here any time soon (obviously, since e-topup dominates in the U.K.), but perhaps there are a few people out there beginning to wonder if the Totnes Pound (or, more likely in my opinion, the Tesco Pound) mightn’t be a good alternative for the weekly shop and a better long-term hedge than Sterling (which dropped like a stone after last night’s speech by the Governor of the Bank of England). There seem to be proto-alternative currencies popping up all over the place at the moment, so there are a few people out there who are doing more than just moan about the fiat currency:

An East Sussex town is introducing its own currency in an effort to encourage shoppers to support the local economy.

[From BBC NEWS | England | Sussex | Lewes launches its own currency]

When the discussion of alternative currencies pops up from time to time, the “default” assumption alwasy seems to be that a return to gold or gold-back currency is the way to provide monetary stability and fiscal responsibility. There was an interesting discussion about this on Samizdata the other day, beginning with the obligatory reference to the Austrian school:

As an admirer of the writings of the Austrian economics school, I have a great deal of sympathy with this argument, although I do not think that gold per se needs to be the anchor of a currency. Given the vast gyrations in the price of gold in recent years, I do not see it as a very practical option for man

[From The enduring appeal of gold-backed money | Samizdata.net]

The gyrations in the price of gold, though, are surely more properly understood as gyration in the price of money. The price of a barrel of oil in gold is (I think — I don’t have the relevant chart to hand) more stable than the price of a barrel of oil in dollars. There must be someone out there who can tell me whether I’m right or wrong on this.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


  1. Dave, I suspect that no single payment method will replace cash. It will simply fade out amidst all the other options, from cards to e-money to a pair of pheasants exchanged for a lamb. Or something.

  2. Where’d that €1.77 figure come from? Is that the average fee for a credit card purchase? I guess the banks like to call the lost revenue. I call it saved expense. Lots of businesses save lots of tax expense with cash purchases, too. Easy to not report them, saving the theft the government gets on reported sales. Bravo!

  3. Although the article doesn’t say, my guess is that the figure is the cost of the cash infrastructure (ATMs, vaults, armoured vans etc) divided by the number of retail transactions. What the article is pointing out is that the cost of cash is high, but smeared out so it’s not visible.

  4. Here’s a use case: I arrived at M4 services this morning with no fuel in the tank to learn that their POS terminal was down and they could only take cash… very fortunately I had some!

  5. A word on these statements:
    – “the banking business … loses about €1.77 every time someone uses cash _in a retail transaction_”.
    – “Although the article doesn’t say, my guess is that the figure is the cost of the cash infrastructure (ATMs, vaults, armoured vans etc) divided by _the number of retail transactions_”.
    For a paper that I am writing, I have just been going through the original Banco de Portugal study and thought I might as well check where that €1.77 figure came from – because I was convinced that it could not possibly be correct.
    It turns out that it is not the net unit cost per retail transaction, but rather per _cash deposit or withdrawal at the branch counter_ (!) (p. 71).
    But your point that “it’s crazy to carry on using cash” remains valid 🙂
    [Dave Birch] Many thanks for the clarification Leo.

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