What is cash actually for?

[Dave Birch] Cash has some unpleasant side-effects and these really ought to be factored into the big picture when it comes to examining the transition to digital money.

In terms of public safety and national security, the sooner the world moves to a digital cashless economy, the better.

[From Turn In Your Bin Ladens – NYTimes.com]

Most of the cash “in circulation” (I use the quotes because it is not, of course, actually in circulation at all but being hoarded in various places) is used only for criminal purposes: tax evasion, money laundering, drug dealing and so forth.

Somali pirates are reported to have received a total of $12.3m (£7.6m) in ransom money to release two ships. They are believed to have been paid a record $9.5m (£5.8m) for Samho Dream, a South Korean oil tanker, and nearly $2.8m (£1.7m) for the Golden Blessing, a Singaporean flagged ship.

“We are now counting our cash,” a pirate who gave his name as Hussein told Reuters news agency.

[From BBC News – Somali pirates receive record ransom for ships’ release]

Once again, these miscreants aren’t looking for prepaid mobile phones, gift cards or PayPal accounts: they are after cash, and I’ll lay a pound to a penny that they didn’t want Yuan or Roubles or Kenyan Shillings and an M-PESA account in a false name: they wanted dollars, and in $100 bills. The cash was dropped from a helicopter on to the ship. Now, I’ve heard some people — including some people from banks — say that this is fair enough, because the seigniorage on the cash represents a tax on criminal activity and it’s better to collect this stealth tax from the bad guys that impose more taxation on honest, hard-pressed taxpayers. But I have two objections to this line of thinking:

1. First of all, it is not at all clear to me that the state should live off of criminal earnings. If something is legal and taxed, fine. But if it’s illegal, it’s illegal.
2. Secondly, the revenues that accrue to the central bank from this enterprise are small compared to the revenues denied to other parts of government. So in the central bank books, life looks good. But over at the treasury, there’s a black hole where the revenues from honest enterprise should be.

Perhaps the non-central bank parts of government might look to the central bank to use some of seigniorage revenues to subsidise the introduction of electronic payments to parts of the economy dominated by cash. But what kind of electronic payments? I suppose the government could start developing its own form of e-cash, but I’m not sure that’s the best way forward. Maybe there’s another way. Perhaps we need a new form of e-cash (that we haven’t seen yet) for the new economy because we are trapped using money developed in a previous age for the commerce of the next. In his excellent book “The Birmingham Button Makers“, Professor George Selgin explains how the British economy faced that same problem during the industrial revolution.

Today, the big problem of small change is no longer such a big problem, although shortages of wanted coin continue to occur sporadically around the world (e.g. here and here) as well as surpluses of unwanted coin. Nevertheless, the basic problems of private coinage were trust and credibility. Modern issuers of digital cash face the same problems and thus Selgin’s history is a valuable reminder about the scope and potential of alternative monetary institutions.

[From Marginal Revolution: Good Money]

Indeed, and apart from a general interest in the history of money, this is precisely why I found George’s work so interesting. Could we see a similar trajectory in the post-industrial economy? This would suggest that private operators might step in to the market to fill the void and then when the competition had run its course and the “best” coinage had been established, then the government would step in and provide it as a public good. Perhaps the Bank of England should run its own version of PayPal and the government should insist that everyone has an account if they want to receive state payments of any kind: welfare, pensions, wages and so on! Once all of money is digital, as opposed to the current 96.3% (in the UK), who knows where that will take us.

As money becomes completely digitized, infinitely transferable, and friction-free, it will again revolutionize how we think about our economy.

[From The Future of Money: It’s Flexible, Frictionless and (Almost) Free | Magazine]

I think this is true. You’ll have a chance to kick around these kinds of ideas if you come along to the 14th annual Consult Hyperion Digital Money Forum in London on 2nd/3rd March 2011, where George Selgin will be along in person to give a keynote talk.

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