The history of cash is prone to disruptive events and like anything else it lends itself to the forces of creative destruction. War is often the catalyst behind such changes, forcing kings to finance new loans, banks to extend new forms of credit and prompting people to change their behaviour. For instance, England issued its first banknotes in 1694 to raise money for war in France and throughout the 18th-century war placed pressure on gold reserves, allowing for banknotes to replace smaller sums of money. Additionally, the first world war temporarily broke the link between money being pegged to the gold standard, as did the Vietnam war finally severing the link in 1973. However, just as wars have stimulated the evolution of money, so has the pandemic in changing people’s attitudes towards cash. In 2020, there was a 60% fall in cash withdrawals and with 54% of people admitting they now avoid the use of cash (BBC, 2020). In truth, contactless technology has made it easier for people to make payments online rather than using notes, whilst online services like apple pay/ PayPal have improved storing and transferring money digitally. Is the digitalisation and ultimate death of cash on the horizon?
The pandemic has accelerated the trend to a cashless society, with people choosing to spend more online and retailers opting for digital payments. This is in part by the fear of cash transmitting coronavirus but is also part of a greater trend of consumers opting not to use cash. Thus, the coronavirus has only accelerated the trend towards a cashless society. Therefore, it is not surprising that central banks and policymakers have been rushing to adopt a new strategy for the future. For instance, the Bank of England and the HM treasury this year has created the CBDC (Central bank digital currency) taskforce to explore whether to implement a digital fiat currency. The Bank of England is not alone in this, in other areas in the world, digital currencies are already being piloted, like the Chinese digital yuan. This could have far-reaching consequences, such as morphing central banks into mega institutions by draining deposits from the banking system and swelling the central bank’s balance- sheet with an entire population's deposit. This is because in theory individuals could convert their bank deposits into central bank digital currencies. If this were to happen in the US, it could extend the federal reserve balance sheet from $8trn to $21.5trn (The Economist, 2021) and in the process hollow out the entire banking system. Despite suggesting that the coronavirus helped spur policymakers to turn their attention to digital currencies, other factors such as multinational digital currencies (Facebook’s proposed Libra) have helped central authorities consider the idea.
In addition, there are some concerns about moving to a cashless society. Firstly, people who use cash the most tend to be elderly, the more vulnerable, technologically illiterate and are often on lower incomes. If we were to adopt digital currencies, it could leave people behind and adversely affect the lowest-income groups. It is estimated that 20% of the population rely on cash (BBC 2020), with much of that being tradespeople and small businesses who need it to keep the tax burden down. Equally, rural communities with less digital infrastructure would be at a disadvantage to areas that are highly connected. However, the more developed economies seem slower to adopt digital payments than emerging and developing economies. Take Brazil, they are in the process of implanting PIX, a real-time payment system that will incorporate 45 million people who are without bank accounts into the economy. In countries in Africa, mobile payments have long been the norm for accessing credit and transferring payments. These new forms of digital payments help extend access to credit and provide stability in areas where confidence is low, or shortages are ripe in local currency.
To conclude, it would seem that we are on the horizon to accepting a heavily digitised financial system. This is a trend that has been accelerated by the coronavirus pandemic but also by the threat of multinational digital currencies, crypto coins and a growing acceptance of digital payments. In many emerging and developing economies, mobile payments and digital payments are already the norm, it looks as if developed economies have finally caught on. Just as war has triggered the major evolutions in money in the past, it is looking like the pandemic will have the same catalytic effect.
By Henri Willmott
Content Manager