So What’s In Your Wallet?...

I am guessing $4,200 in crisp greenbacks. Statistically I am right but in reality I know I am way off the mark. Let’s do the math. Divide the value of all the dollars in circulation by the U.S. population (man, woman and child) and the result is that everyone should be walking around with $4,200 in their pocket.

But we aren’t. So what’s the explanation? First, not all dollars are circulating anywhere near us. Approximately 70% of all U.S. currency is physically held outside the U.S. As you might imagine many bricks of dollars are stuffed inside hard sided briefcases passed in the dead of the night for the purchase of who knows what illicit good. But many other dollars are used for perfectly legal transactions and some countries actually use the dollar as their national currency (Ecuador and El Salvador are two).

Why were the original greenbacks green? Because green wasthe hardest color for early photographers to copy.

A second reason we are not carrying that much cash is we are using less of it. Fewer than half of all retail transactions today in the U.S. are done in cash. And some countries are moving much faster than us. It is estimated that 80% of retail transactions in Sweden are now done online either with credit cards, debit cards or mobile devices. Culture plays a big part in this however. Notice below how Germans and especially Italians still favor wads of cash in their pocket.

Many shops in Sweden (and Denmark, Norway and Belgium too) don’t even take cash. Everything has to be settled electronically. The same for banks. It is estimated that half the branches of the largest banks in Sweden no longer have cash on hand. Cash is costly, you have to have vaults and pay people to deliver the stuff and people to count the stuff and of course there is the security issue of cash getting stolen.

Here in the U.S. a drumbeat is building calling for the elimination of the largest denomination bill, the $100. The drumbeat is still faint but it is getting louder. Kenneth Rogoff the Harvard economist has a new book out “The Curse of Cash”, in which he argues that eliminating the $100 bill would improve tax collection, cut down on illegal immigration (illegals often get paid in cash) and make monetary policy more effective. In countries with negative interest rates for instance, there is always the option of just keeping stacks of bills in your drawer. Without cash, aggressive easing strategies by Central Banks might lead more quickly to increased investment and spending.

There are downsides however to a cashless society. The elderly are not as comfortable with high tech gizmos. They favor cash. Sparsely populated rural areas might find transacting without cash difficult. Finally, and this may be the biggest issue, privacy is a concern. Identity theft and electronic scamming become more of a concern in a cashless society. Transactions using cash are elegantly anonymous and straight forward.

One of the biggest arguments for retiring the $100 bill is, when was the last time you used a $100 bill? When you did I bet you felt like a criminal. The bill was examined closely, the color-shifting ink and the security thread were viewed against the light and the paper was felt for authenticity. You were guilty until proven innocent in this transaction. A cashless society will certainly change many of our ways. How can we say “Cash is King” if cash is no more?