We are now on the threshold of a new era of turmoil. Cash is disappearing and the digital technologies that replace it may change the nature and possibilities of money. Today, central bank money serves as a unit of account, medium of exchange and store of value at the same time. But digital technologies could lead to those functions being separated as certain forms of private digital money, including some cryptocurrencies, gain traction. That shift could weaken the dominance of central bank money and spark a new wave of currency competition, one that could have lasting consequences for many countries, especially those with smaller economies.
In ancient societies, objects such as shells, beads, and stones served as money. The first paper money appeared in China in the seventh century, in the form of certificates of deposit issued by renowned merchants, which supported the value of the banknotes with commodity stocks or precious metals. In the 13th century, Kublai Khan introduced the world’s first unbacked paper money. His kingdom’s bills had value simply because Kublai decreed that everyone in his domain must accept them for payment on pain of death.
Kublai’s successors were less disciplined than he in controlling the release of paper money. Subsequent governments in China and elsewhere gave in to the temptation to recklessly print money to fund government spending. Such wantonness usually leads to a rise in inflation or even hyperinflation, which basically means an abrupt decline in the amount of goods and services that can be bought with a given sum of money. This principle is relevant even in modern times. Today, trust is in a central bank that ensures the widespread adoption of its notes, but this trust must be maintained through disciplined government policies.
However, for many, cash now seems largely anachronistic. Literally handling physical money has become less and less common as we can easily pay with our smartphones. The way people in rich countries like the United States and Sweden, as well as residents of poorer countries like India and Kenya, pay for even basic purchases has changed in just a few years. This shift may seem like a potential driver of inequality: if cash disappears, you might imagine it could strip the rights of the elderly, the poor and others at a technological disadvantage. In practice, however, mobile phones are almost saturated in many countries. And digital money, if implemented correctly, could be a major force of financial inclusion for households with little access to formal banking systems.
Cash still has some life in it. During the covid pandemic, even as contactless payments became more common, the demand for cash rose in major economies, including the US, presumably because people viewed it as a safe form of savings. Many states in the US have laws to ensure that cash is accepted as a form of payment, something that would protect people who can’t or won’t pay by other means. But consumers, businesses and governments have generally welcomed the shift to digital payment methods, especially as new technologies have made them cheaper and more convenient.