Could we live without cash?

Like euthanasia, proposals to do away with physical currency could remain controversial for a long time to come

I’ve just started to give my daughters pocket money, and it’s fascinating to see how they deal with it – not the income, that is, but the physical cash itself. The younger Miss Harford hasn’t figured out that by tradition, the five [doh!] seven-sided coins are worth half as much as the stubby fat ones. (The swaps that her clued-up older sister proposes have to be monitored with some care.) She has also failed to gain any visceral appreciation of the fact that these metal discs can be used to obtain sweets and toys, useful things. She is fascinated by the coins as objects in their own right.

The visceral appreciation for cash will presumably arrive. Cash, it seems, does strange things to us. Ask people to count money and then subject them to pain, and they are more resistant than a control group who have been asked merely to count pieces of paper. Cash is also a social anaesthetic. In another cash- or paper-counting study, experimental subjects were asked to play “catch” in a group comprised of stooges. They never received the ball. The cash counters were less likely to feel socially excluded. Huge bonuses for bankers are both the cause of, and the cure for, their public humiliation.

Physical cash also makes us cautious relative to spending money on credit cards. Drazen Prelec and Duncan Simester, behavioural economists at MIT, ran an experiment in which two groups of subjects were allowed to bid on tickets to sporting events. One group had to pay in cash within 24 hours, the other had to pay with a credit card. The cash buyers offered substantially less – in the case of the best tickets, less than half as much.

Then there is the idea that cash makes us honest. Dan Ariely, author of Predictably Irrational, has found that people are reluctant to cheat in order to win physical cash, but will gladly cheat in order to win poker chips that can immediately be redeemed for cash. (In a less compelling study Ariely placed either six-packs of Coke or plates with six $1 bills in student dorm refrigerators. The Cokes vanished quickly and the cash remained – perhaps because your first instinct after finding cash in a refrigerator is that you are entering the “twilight zone”.)

All this and more came to mind on reading David Wolman’s new book, The End of Money. Wolman spent a year largely living without physical money, using a variety of electronic payment methods instead, and he thinks it would be a good idea if the rest of us did likewise.

After a while, Wolman’s cash-free lifestyle begins to look like a compulsive disorder. Offered bills, he would “flick them away like mosquitoes”, imagining “the stepped on, sweat-drenched, and hyper-handled life cycle of that cash”.

To his credit, Wolman also reports that cash is highly unlikely to be much of a vector for disease. A more telling complaint is its use for crime. For all the fuss we make about online transactions and credit card fraud, the simple anonymity of cash makes it irresistible for all manner of illicit business.

Wolman is worried about the $100 bill and simply cannot fathom why Europe has a €500 note – allowing a cigarette packet to contain €20,000. Law-abiding citizens would surely find it more convenient to load cash on to a chip contained in a card, a watch or – most likely – a mobile phone. Mobile phones could easily zap cash to each other, when friends want to split a restaurant bill or repay a small debt.

We probably do not appreciate the huge costs of defending cash from thieves and counterfeiters, and Wolman makes a brave case for the idea that “killing currency wouldn’t be a trauma; it’d be euthanasia”. Like euthanasia itself, I suspect that proposals to do away with physical currency will remain controversial for a long time to come.

Also published at ft.com.