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A Cashless Payoff

by Elaine Schwartz    •    Dec 14, 2011

Paying with a phone swipe makes Starbucks lines move faster. Less time in line means more productivity and society benefits.

So, should we accelerate our movement toward a cashless society?

Imagine having no currency. No wallets necessary? A useless U.S. Mint? No seignorage to be earned by the Federal Reserve when it provides financial institutions with currency? 

Hoping to curtail tax fraud, Italy has banned cash transactions above 5000 euros and now is dropping the number to 1000.

Using a cost benefit approach, this academic study concluded that  society will benefit from cashlessness. One Slate columnist even hypothesizes that a cashless society can avoid recessions (but I am not so sure about that).

I wonder, though, if there are no dollar bills in several generations, what will come to mind when we picture a dollar.

The Economic Lesson

To be called money, a commodity needs 3 characteristics:

  1. It should be a medium of exchange. (People willingly use the commodity for exchange.)
  2. It should be a store of value. (In the future, it still will have relatively comparable purchasing power.)
  3. It should be a measure of value. (When someone says one dollar, you know what that means.) 

Today, in the U.S., the basic money supply includes cash, currency, travelers checks and demand deposits (checks). Thinking of ATM payments and the phone swiper at Starbucks, the traditional examples of the money supply are not quite working anymore.

An Economic Question: How might using cash affect a transaction?

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