Cash: important for a fairer economy

One interesting economic story over the past year has been the growth in grassroots support for cash payments. Against the backdrop of the Covid‑19 pandemic and now debunked rumours that coins and banknotes could be significant transmission vectors for the virus, it may seem surprising that public support for cash is growing more vocal

In the US, a new obligation for every store to accept cash is being lobbied for by consumer organisations and actioned by bipartisan lawmakers. Although many Americans have adopted greater use of electronic payments and online shopping, most payments made in the US are still conducted in cash. The consumer-driven effort to protect their ability to pay with cash is as sharp as any debate over monetary policy, not least because it is an issue that directly affects almost every citizen. In any case – pun intended – these issues are two sides of the same coin.

Part of the renewed interest in cash payments is being driven by a surge in inflation. As supply chains become stretched, and ‘staff wanted’ signs begin to appear across the US, scarcity of supplies and talent are producing inflationary pressures, at home and abroad. In the financial industry, this drives discussion about monetary policy. In the real economy, as the public braces for higher prices, millions of Americans are trying to work out how to budget for their increasingly costly weekly shop. A common recommendation from debt counsellors to households trying to make their money go further day-to-day is to budget everything in cash, because physical money is easier to visualise and psychologically more difficult to spend.

The politics of a right to pay in cash is also being driven by the fact different parts of society use cash for different purposes. Although many of the wealthy and well-educated continue to use cash – either out of force of habit – as a store of value or as insurance against emergencies, these groups are more likely to use digital payments. Their support for a cash payment mandate is commonly based on the right of an individual to make purchases in complete anonymity. In contrast, the under-banked and unbanked in the US are estimated by the Federal Reserve to constitute around 18% of the adult population but, in some social groups, as much as 40% are using cash out of necessity – it is their only means of payment. For these groups, if businesses are enticed by e-payment firms to refuse cash, further economic discrimination and exclusion will result.

In response, organisations such as Consumer Action and the Consumer Federation of America (CFA) are bringing attention to the impacts of a refusal by businesses to accept cash. In a joint letter to US lawmakers, Linda Sherry of Consumer Action and the CFA’s Susan Grant stated that “the economic dislocations caused by the pandemic have fallen most directly and most harshly on low-income populations; people in inner-city neighbourhoods and in rural areas; the unemployed and underemployed; the elderly; and racial and ethnic minorities. It is crucial for people to be able to obtain necessities at their local stores and restaurants without being turned away because they want to pay with cash.”

These organisations, which are forming alliances with others concerned about the erosion of personal privacy that comes from forcing all payments to be made electronically, are coming forward to support the right to use cash. These calls are becoming louder as the business models of digital payment providers shift from the collecting transaction fees to the analysing and selling of consumer data.

Technology can help

Recently, Swedish banknote designer Karin Mörck‑Hamilton commented in a seminar with central banks that “how banknotes are recognised by machines is today at least as important as how they appear to humans”. One might expect a banknote designer to focus on the artistic merit of banknotes and their function in expressing the identity and aspiration of the nation, so Mörck‑Hamilton placing cash automation on an equal footing with public engagement is instructive. The act of paying, whether by credit card, debit card, smartphone or cash always bears a cost to consumers and businesses, but the huge growth in modern self-checkout terminals is lowering the cost of cash by increasing the speed and accuracy of transactions, while improving security and growing sales.

According to Robert Morrow, an expert in point-of-sale cash validation with Crane Payment Innovations – whose terminals are used in more than 100 countries – automated ‘bill acceptors’ are no longer confined to carwash centres and vending machines, but are now integral to many of the world’s largest retailers. Modern payment terminals routinely accept all denominations of banknotes, including $100 and €200 without any human oversight. Many also issue change using lower-denomination banknotes taken during other purchases. These machines can recognise almost all genuine banknotes regardless of condition and ensure no counterfeits are accepted. This increasing automation of cash acceptance may be one factor driving the growth of the use of cash during the pandemic.

Nearly a decade ago, in the context of an economic history dominated by bouts of high inflation, the Fed set an inflation ceiling of 2%. Then, it seemed unlikely we would see a long period of low inflation and it also seemed the ability to pay with cash would continue to be assured. Covid‑19 has magnified economic challenges and inequities, but it has also revealed opportunities to foster economic equality and inclusion. One such opportunity is using the change to a 2% average in the inflation mandate of the central bank of the world’s largest economy to take greater account of the impact of monetary policy on the real economy. Another is the use of technology and legislation to protect point-of-sale use of cash, to prevent exacerbation of the financial challenges felt by some of the most vulnerable in society.

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