Many are touting the coming of a cashless society: economists, social scientists, and, most recently, Fortune. Credit and debit cards have long given cash — pardon us — a run for its money. And now technology companies like Square and eBay’s (EBAY) PayPal unit are looking to get ahead. But as popular as electronic payments have become, is the institution of cash really in critical condition? We talked to an economist, a rare currency dealer, an author, people at various trade organizations and more to discover some of the quirks of how cash is used and accounted for, and why — at least for the time being — people still use it.
1. It is all about the Benjamins.
The amount of U.S. dollars in circulation today is valued at $1.1 trillion, the highest it has ever been. That’s an increase of about 9% from last year, and it’s been climbing steadily for more than a decade. But that uptick in available greenbacks does not necessarily mean the country’s appetite for cash is growing. About 75% of that value is in $100 bills, which says little about the use of cash for everyday purchases, usually carried out in smaller bills from $1s to $20s. (The Federal Reserve calls these small bills “transactional denominations,” as opposed to “store-value denominations” — the $50s and $100s).
The demand for larger notes could possibly point to illegal activity, using $100s to anonymously cover the costs of sizable transactions for example. “For all we know, it could just mean there’s more drug trafficking,” posits Ben Friedman, a Harvard economics professor. Still, the amount of smaller bills has increased too, so there is little to glean about cash usage from circulation alone. (Even the $20s sitting dormant in ATMs are included in that number.)
2. The big money is still out there.
About $300 million worth of cash circulated is in high denomination bills that are no longer issued, but still considered legal tender — $500, $1,000, and $10,000 bills. There is even a $100,000 bill, but it was only used for official transactions between reserve banks. The $100,000 man? Woodrow Wilson. The bills didn’t generate much use, and — much like with the $100 bill — officials were concerned they would spur illegal activity. They were last issued in 1969.
3. There is a martyr in the electronic payments revolution, but for now it’s not cash.
Cash may be on its way to oblivion, but there is another, more immediate victim at the guillotine: consumer checks. Before 2003, the Federal Reserve designated 45 locations as check processing facilities. Now just one remains, in Cleveland, Ohio. This is partly the result of better processing technology allowing the Fed to consolidate locations. But census information shows the commercial check payments declined about $6 billion between 2006 and 2009, while electronic payments have shot up about $20 billion.
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4. Most US cash — about 50% to 66% — is held abroad.
This is another reason usage of U.S. currency is so hard to gauge. While the status Euro has been uncertain, the U.S. dollar is especially popular in the Eurozone. And because U.S. currency is based on assets held by the Federal Reserve, the dollar is perceived as more stable. “If you had your whole life savings, would you rather have it in schillings or in dollars?” says David Wolman, author of The End of Money. And there are other practical reasons for choosing greenbacks. The smallest paper denomination of a Euro is a 5-Euro note.
5. It’s safe.
Just like those abroad who have clung to the dollar for its stability, Americans have done so too, especially since the economic downturn of 2008, says Friedman. And unlike electronic payment methods, cash is secure in a strictly Luddite way: paper doesn’t run out of battery like your iPhone might, and a power outage or disaster won’t stop you from handing over a dollar bill.
But the most well researched reason to embrace cash is its function as a budgetary tool. Several studies, including a major 2008 study by two MIT Sloan School of Management professors, show that electronic payments like credit cards promote overspending. The carelessness with plastic can even go beyond personal finance habits — like posting your debit card willy-nilly on the Internet.
6. Old habits die hard.
It’s difficult to replace a system that has worked so well for so long. “You can’t overstate cash’s staying power,” says Wolman. “It’s a marvelous technology.” And at this point, it’s still the easiest and most convenient payment method. There aren’t many places in the world that don’t accept a greenback.
So then when is this cashless society coming? And it is coming, according to many of the people we talked to. “In four years, of course not,” says Wolman. “In 14 years, probably not. But you can already hear some reluctance in my voice. But 24 years? You’re crazy if you can confidently make a prediction as to what technology can and can’t do.”
