In God we trust, all others pay cash.
If you live in a primitive society and want to buy something you must barter, hoping that you can offer something that the seller will accept because they want it or can use it to barter elsewhere.
Now just imagine how difficult it would be to operate in today's society if you had to barter for everything. Paying for everyday items such as a bus ticket, petrol, or your weekly shopping would be a nightmare. Society would grind to a halt and we'd soon be back in the Middle Ages.
Happily this dilemma was solved by the Sumerians some five thousand years ago when they invented money. The Sumerian empire collapsed a thousand years later, but money lived on and shortly afterwards the Babylonians under Hammurabi created what has become one of the banes of the modern motorist, the monetary fine.
Back then if you were fined for breached one of the laws in Codex Hammurabi you had got off very lightly; "he shall be put to death" is a very common punishment in Hammurabi's Code!
Today physical money, what we call "cash", is used all over the world. However, cash is increasingly coming under threat from electronic payment systems, primarily debit and credit cards. Is cash doomed?
The Evolution Of Money
Originally cash was made from precious and semi-precious metals, but over time these were replaced by low-grade metallic coins and paper money, invented by the Chinese.
Many countries encouraged the use of paper money and coins by allowing them to be converted into gold but when the gold standard finally collapsed in 1971 what remained was fiat money, a form of money which is money because the state says it is money and will accept it as payment for taxes.
For several centuries the main alternative to cash was the cheque, a personalised order drawn against a deposit of money. Cheques never became as popular as cash because many people refused to accept cheques for immediate payment; requiring that the cheque cleared with their bank before they would supply the goods. Furthermore cheques are impractical for small payments because their processing costs are disproportionately high.
I Owe My Soul To The Company Store
An alternative form of cash, popular in the 18th and 19th centuries, was the "truck ticket." Employers would pay their workers in scrip which they could redeem for goods at the company. Unfortunately for the employees they could get only cash by selling their truck tickets at a discount to their face value, which is why their use was eventually banned.
Truck tickets form the basis of the song Sixteen Tons (if you activate the link you'll hear the song); a surprise number one hit for Tennessee Ernie Ford which contains the classic line "I owe my soul to the company store."
The End Of Cash?
According to recent reports Britain's banks are planning to stop using cheques by 2018 because most cashless transactions are now performed using credit and debit cards.
But cash is also coming under attack not just from credit and debit cards; increasingly the mobile telephone is becoming a substitute for cash. In some countries, most notably Finland and Japan, many vending machines and some stores are equipped for mobile 'phone payment; just dial the machine or store's number and your 'phone account is debited accordingly.
Mobile 'phones are particularly useful when it comes to making small payments as these are very expensive to process using credit cards. Mobile 'phone companies should capture much of the global market for small money transfers in the near future which could easily see the likes of Vodafone (LSE: VOD), O2 and Orange evolving into banks.
Cash And Crime
Cash is king for organised crime as this story shows, and it is also ideal for anyone who wants to hide their income from the tax inspector, which is one of the reasons why governments are increasingly promoting electronic payment systems.
If you've seen the TV show Minder you'll no doubt remember that Arthur Daley was always trying to hide his deals from the taxman by dealing in cash wherever possible. But Arthur also regularly demanded a discount whenever he paid cash as he assumed that the seller wouldn't charge him the VAT!
Electronic payment systems are unlikely replace cash in the markets for illegal goods, perhaps with some bartering, because cash doesn't leave an audit trail. Imagine trying to buy several hundred cheap cigarettes from the back of Del Boy and Rodney's van with a debit card!
People Will Still Want Cash
As very few people carry a portable debit card reader, at least nowadays, people will still want to carry some cash. Cash also has the distinct advantage of being a portable store of wealth.
But cash isn't a good investment because it doesn't pay any income and won't grow in value, unless you pay it into a deposit account or if inflation turns to deflation. Cash does at least holds its value if inflation is 0% (an unlikely scenario) which is more than can be said for many investments in recent times!
A demonstration of people's preference for cash in troubled times was seen in September 2007 when there was a run on Northern Rock bank as depositors rushed to turn their money into cash, despite (or perhaps because of) government reassurance. Cash doesn't vanish when a bank fails, but deposits can disappear.
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