War on Cash Could Destroy the Economy

War on Cash Could Destroy the Economy

Frank Shostak

According to some “experts,” there is an urgent need to remove cash from the economy. It is held that cash provides support to the “shadow economy” and permits tax evasion. Another justification for its removal is that, in times of economic shocks, which push the economy into a recession, the run for cash exacerbates the downturn—it becomes a factor contributing to economic instability. Moreover, it is argued that, in the modern world, most transactions can be settled by means of electronic funds transfer. Money in the modern world is allegedly an abstraction.

The emergence of money

Money emerged because barter could not support the market economy. A butcher, who wanted to exchange his meat for fruit, might not be able to find a fruit farmer who wanted his meat, while the fruit farmer who wanted to exchange his fruit for shoes might not be able to find a shoemaker who wanted his fruit. The distinguishing characteristic of money is that it is the general medium of exchange. It has evolved as the most marketable commodity. On this process, Mises wrote,

“...there would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money.”

Just as in nature there is a great variety of skills and resources, so there is a variety in the marketability of goods. Some goods are more widely demanded than others, some are more divisible into smaller units without loss of value, some more durable over long periods of time, some more transportable over large distances. All of these advantages make for greater marketability. It is clear that in every society, the most marketable goods will be gradually selected as the media for exchange. As they are more and more selected as media, the demand for them increases because of this use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media—in almost all exchanges—and these are called money.

...The removal of cash is going to harm the market economy

Any attempt to remove cash—money—implies the abolition of the market-selected medium of exchange and, ultimately, the market economy. The introduction of money came about because barter was inefficient. Hence, in the absence of money (i.e., the medium of exchange), the market economy could not emerge. Those commentators that advocate phasing out cash unwittingly advocate the destruction of the market economy and moving humanity towards the dark ages.

The argument that removing cash will eliminate tax evasion and crime is doubtful. Tax evasion would be reduced if the incentives for it—high taxes based on big government—were removed. The fact that during an economic crisis people run to the banks to withdraw their money indicates that they have likely lost faith in the fractional-reserve banking system and would like to have their money back.

Conclusion

Irrespective of the level of technological advancement of the economy, money is that against which we exchange goods and services. Therefore, any policy that is aimed at phasing out cash runs the risk of destroying the market economy.

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