Some so-called “experts” believe that it is urgently necessary to eliminate cash from the economy. They argue that cash supports the “shadow economy” and provides an easy way for tax evasion. Another reason for eliminating cash is that during economic shocks or recessions, a run on cash can worsen the recession, becoming a factor of economic instability. Additionally, some believe that in modern society, most transactions can be settled through electronic fund transfers. They view the currency in the modern world as an abstract concept.
The emergence of money is due to the inability of barter to sustain a market economy. A butcher wanting to trade his meat for fruit may not find a farmer looking to buy his meat, and likewise, a farmer wanting to exchange his fruit for shoes may not find a cobbler interested in buying his fruit. The distinguishing feature of money is that it serves as a universal medium of exchange. Money has evolved to become the most marketable commodity. Renowned American economist and prominent advocate of free markets, Ludwig von Mises (1881–1973), in his work “The Theory of Money and Credit” (2013), wrote:
“…among a series of commodities used as media of exchange, the chooser among the less marketable commodities has been eliminated until at last only a few, or perhaps only one, is left universally employed as a medium of exchange—namely, money.”
Similarly, American economist Murray N. Rothbard also pointed out in his work “What Has Government Done to Our Money?”:
“Just as in the realm of skills and resources there are many varieties, so too is there a great diversity of marketability among commodities. Some goods are in widespread demand, some goods are more easily divisible without loss of value, some goods are highly durable, and some are easily transportable over long distances. All these advantages make some commodities more marketable than others. It is evident that on the market these more marketable products will be chosen as media of exchange. As more and more goods are chosen as media of exchange, the demand for them increases, making them even more marketable. The result is a spiraling process: improved marketability leads to wider use as a medium which leads to further improved marketability, and so on. Ultimately, one or two commodities are used as common media for almost all exchanges—these are called money.”
As the general medium of exchange emerges from a wide range of commodities, money is also considered a commodity. Rothbard argued that:
“Money is not an abstract unit of account, separable from a concrete good; it is not a useless token only good for exchanging; it is not a ‘claim on society’; it is not a guarantor of a fixed price level. It is simply a commodity.”
Furthermore, Mises wrote in his book: “… a commodity cannot be used as money unless, at the moment when its use as money begins, it already has exchange-value based on some other use.” Why is this necessary? Rothbard further explained:
“Money, as against direct-use consumer or producer goods, must have pre-existing prices as a basis of demand. The sole method of achieving this is from useful commodities of barter trade in prior times and then attempting to base money on direct-use demand (e.g., gold for ornaments).”
Therefore, money serves as a medium of exchange for all other goods and services. After thousands of years of continuous selection, people ultimately chose gold as money. In today’s monetary system, the money supply is no longer backed by gold but consists of coins and paper currency issued by governments and central banks worldwide. This fiat money still retains exchange value as it has an established link to real money, and people have accepted this fiat money as the general medium of exchange.
In everyday life, people store money in wallets, under mattresses, safes, or deposit it in banks. When depositing money, one never relinquishes ownership of the money. In the case of someone, like John, depositing money in a bank, he still has unlimited ownership of the money and the right to retrieve it at any time. Therefore, these bank deposits known as demand deposits are a part of the money supply.
At any given time, a portion of the cash stock is stored away, such as in bank deposits. Therefore, in an economy where people hold $10,000 in cash, the money supply of that economy is $10,000. However, if some individuals deposit $2,000 into demand deposits, the total money supply remains $10,000, consisting of $8,000 in cash and $2,000 in demand deposits. If all individuals were to deposit all cash into banks, the total money supply would still be $10,000, with it all as demand deposits.
Corresponding to bank deposits are credit transactions. Credit transactions always involve creditors purchasing future goods for present goods. Therefore, in credit transactions, funds move from the lender to the borrower. These transactions include savings deposits, which are essentially loans made to banks. With these deposits, the lender relinquishes their claim on the bank during the lending period. However, these credit transactions (i.e., loans) do not alter the money supply within the economy. If John lends $1,000 to Mary, that money would shift from John’s demand deposits or wallet to Mary’s account.
Will electronic money change this traditional scenario? Electronic money itself is not money but a special way of utilizing existing money. For instance, John can transfer $1,000 to Mary using electronic devices. John could also issue a $1,000 check marked for Bank A and offer it to Mary, who could then deposit the check into her Bank B account. Without the physical existence of $1,000, any transfer would be impossible.
Now, if Mary uses a credit card to pay for groceries, she is effectively borrowing money from the credit card company (e.g., MasterCard). If she purchases groceries worth $100 with her MasterCard, MasterCard pays $100 to the grocery store, and Mary would need to repay the debt to MasterCard. Similarly, without the presence of cash, none of this transaction can occur. After all, fund transfers require supporting documentation.
The above examples do not entail the direct use of cash itself; however, that does not imply that cash is no longer necessary. On the contrary, the presence of cash allows various types of transactions to occur through advanced technologies like digital transfers. These different forms of transfers are not money themselves but unique means of transfer. Cash still serves as the medium of exchange, with only the transfer method of cash changing in the digital world.
So, what would happen if central banks introduce digital currencies? Can digital currencies replace cash? It can be said that this will not automatically make digital currencies recognized as a medium of exchange. To become money, it must undergo a market selection process and cannot become money solely by decree of central banks. If the government mandates the use of digital currencies, individuals may opt for something else as their medium of exchange. Implementing malicious regulations could potentially disrupt the market economy.
Any attempt to phase out cash currency implies eliminating the medium of exchange chosen by the market and ultimately dismantling the market economy. The emergence of money is due to the inefficiency of barter trade. Therefore, without money (i.e., a medium of exchange), a market economy cannot exist. Those critics advocating for the gradual phasing out of cash inadvertently support undermining the market economy, leading humanity into a dark age.
Some believe that eliminating cash will eradicate tax evasion and crime, a claim that is understandably dubious. The incentive for tax evasion is rooted in high taxation based on a large government. If this incentive is removed, tax evasion would diminish significantly. The fact that people rush to withdraw money from banks during economic crises suggests that they may have lost confidence in the fractional reserve banking system, hoping to retrieve their funds.
Regardless of the level of technological development in modern economies, money serves as the tool for exchanging goods and services. Therefore, any policy aimed at phasing out cash runs the risk of damaging the market economy.