The end of paper money!

Bundles of Kenya shillings - image courtesy of internet

I work in Telecommunications industry. I see our customers, myself included, transact a lot in virtual cash! Alas, the end of paper money! A couple of weeks ago, our marketing manager made a comment about money that might make ordinary mortals blink.

She cheerfully predicted that in a decade’s time cash probably won’t exist. Yes, you read that right: all those ugly Uganda shillings, grubby greenbacks and tattered euro bills in your wallet are heading for the dustbin of history. “There is no need for it,” She declared. “It is terribly inefficient and expensive.” Can we believe her? Not if you look at the data.

First, and most obviously, digital and cyber finance is spreading rapidly. Second, some governments are belatedly realizing that reduced use of cash is helpful in terms of security and fighting crime. After all, drug dealers and Islamist militants generally do not use bank accounts or mobile payments. So one way to cut terrorism and crime might be to withdraw the big denomination bills they prefer. The European Commission is already pondering this: it announced sometime back that it is looking at whether to curtail the use of €500 notes. This seems a sensible step, one that other governments should consider.

The third factor that could influence cash usage in the next few years is, again, the stance of central banks themselves. As rates turn negative, central bankers in places such as Switzerland are scrambling to prevent consumers dashing into cash as this not only makes financial transactions less efficient but also makes monetary policy less effective. After all, if people hold physical cash — which, unlike a bank account, is not directly affected by negative rates — central bankers have less control.

So far, nobody has seriously tried to ban cash to make negative rates more effective. But the idea has been floated by people such as Andy Haldane, Bank of England chief economist, and Kenneth Rogoff, the Harvard economist. The idea still seems far-fetched — but the longer rates stay low or negative the more “unthinkable” proposals could become mainstream and (if nothing else) prompt official support for electronic finance.

It may take longer than a decade for virtual cash prediction to come to pass; but it would be dangerous to discount it. For better or worse, the nature of money is changing. And who knows? If this revolution helps curtail tax evasion and terrorist finance — and makes our lives more convenient along the way, too — it might turn out to be one of the better developments to have emerged from the finance industry in recent years.