Should America go cash-free?

There are two big problems with the prospect of a digital-only dollar

Is cash history?

The arrival of the digital age has inspired many people to argue its demise is inevitable. Sweden and Japan have both launched studies about a cash-free society, and India recently declared a huge portion of its cash supply null and void. Credit card companies are rolling out ad campaigns like "Cashfree and proud. And in the U.S., advocates make the case that switching to digital money full-time could help the Federal Reserve run better monetary policy. It's not crazy to think America could eventually ditch the greenback and go all in on the digital dollar.

But eliminating a staple of society wouldn't be without its hurdles. There are two big problems we'd need to deal with before achieving a cash-free utopia.

The first is how poorer people would fare in this new world.

It helps in this case to think of the bank system and the cash system as two separate things. Practically speaking, getting rid of physical cash would mean relying exclusively on the banking system to carry out all our exchanges. But while cash in America and most everywhere else is a public good provided by the government, the banking system is a for-profit businesses.

The cash system creates two-party exchanges: If you want to buy something, and a business wants to sell it, you give them cash and that's that. But if the transaction is run through the banking system, it becomes a three-party exchange: you, the business, and the banking middleman. If it's not profitable for the middleman to facilitate the exchange, then it won't. And the exchange won't happen.

The problem is that the business model for most traditional banks assumes a middle-class income flow: steady, predictable, and large enough to provide a cushion. The rules most banks have for their services and accounts are built around the assumption that customers earn enough money to park some at the bank, and consistently enough that they'll have more left over to make reliable payments.

But one of the features of being poor in modern America isn't just that your income flow is lower — it's also lumpier and more erratic. This does not mesh well with traditional banking. When poorer Americans use traditional banking methods, they find themselves hit by unexpected fees and overdraft charges and bounced checks. These inconveniences are no big deal for a member of the middle-class, but for a poor person who needs to make every dollar count, and who needs each dollar at very specific times and places, they can be catastrophic.

As a result, lots of banks just don't bother opening branches in low-income neighborhoods. That's why so many low-income families rely on alternative financial services like payday lenders and check cashers.

But these services are hardly magnanimous; they exist at the corner of profit motives and practical reality. Their punitive fees are even worse than those of traditional banks — people who rely on these services exclusively can burn 10 percent of their income on the additional charges — but their services are structured in a way that is more attuned to the rhythm of financial life at the low end of the income spectrum. Being able to borrow quickly and irregularly is more suited to financial instability, but it often creates a vicious cycle of debt.

For poorer Americans, cash is still king, and they can still rely on physical cash when they can get it. But if we moved to a cashless economy, we'd be forcing them to rely exclusively on these alternative services. As it stands now, about 7 percent of all Americans already rely on these services exclusively (amounting to roughly nine million households), while another 19.9 percent combine these services and traditional banking.

The fix to this problem would be to establish a public banking service, open to all, provided by the government the same way it currently provides cash. That certainly wouldn't be unheard of; several state governments already have public banks, and there are growing calls for the post office to provide free basic banking services to anyone who needs them. Indeed, the national government already runs a public bank as well, in the form of the Federal Reserve. It's just a bank for other banks rather than for the citizenry.

While a cashless society is seen as a non-ideological and technocratic goal, a public option for banking services is usually seen as a radical left-wing fever dream. But for America to go cashless in a functional and humane way, a public banking option would absolutely have to follow suit.

The second problem with a cashless society is even harder to solve. It's the question of privacy.

It's certainly true that physical cash can help play a role in crime and tax evasion. But it's worth noting there's a plenty of digital financial crime as well: identity theft, wire fraud, and data breaches. On top of that, the worst form of tax evasion is corporate tax evasion, which certainly isn't a matter of paying cash under the table.

More to the point, to the extent cash facilitates those things, it's because cash provides privacy and anonymity. That's a strength as well as a weakness. Lots of people have perfectly good, non-nefarious reasons to prefer their purchases and aspects of their lifestyle remain off anyone's database.

Unfortunately, our proposed public option for banking services could actually make this problem worse. It would vastly increase the number of transactions made under the government's direct supervision. But even as it stands, our private banking system is run by a small number of huge corporations, who are generally eager to cooperate with state and cultural powers-that-be. WikiLeaks' donations dropped by 95 percent for a few years when Visa, Mastercard, and PayPal cut it off under pressure from the U.S. government, for example. Gun control advocates are also pushing for banks to stop facilitating certain firearm sales.

You don't have to be a fan of WikiLeaks or guns to be worried by this, or to wonder what other ways the power to control who participates in the payment system could be misused. How much do you trust government and corporate authorities to run a public banking system in a liberal and open manner, and to not use that power to punish either political ideologies or social behaviors they don't like? One glance at the Trump administration's shenanigans on the nightly news does not provide much encouragement.

America and much of the rest of the world may well eventually go cashless. But we should go into the transition with open eyes. Getting rid of cash isn't a bold and progressive step into the future — it's a fraught experiment that could easily go bad.


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