Cash – a Redundancy Safeguard

The punch line in the earlier “Massive Digital Outage” post was the last paragraph about cash being a useful redundancy to the digital transaction world. A redundancy in the sense of a backup in theme with the avoidance of mass catastrophe.

The history of commercial transactions is fascinating. From origins with nothing like it, through trust, to no need of trust, to trust again but called fiat that time, to no trust now with all the hacks on digital platforms. At least I do not trust it.

Before cash, which was most of our evolutionary time as tribes or nomads, there was no need for cash. Just swap or barter or promise (trust). But once civilisations emerged generating increased commercial transactions, a common intermediatory of accepted universal value served as a token of a transaction. No need for trust, because you had the token of equal value to whatever the transaction entailed. So if you did not get the oxen promised, you kept the cowrie shells. You could then use them to get oxen from somewhere else, or if it fancied you, pay someone to till your bit of land. The flexibility becomes obvious.

Eventually the global accepted unit of value was gold, hence the gold standard. But having a gold standard the way it was set up at least, meant collecting and storing it. So a stack of gold was needed equivalent to the transactions it represented, those notes and coins, cheques and bonds, IOUs and bank deposits. Hence a redundancy, a good thing. But having a commodity, a tangible item, on a global scale, had inconveniences too. Storage is one, think of Fort Knox. Or a theft dilutes the overall value.

So back to trust. Got rid of the gold. Nowadays money or the value of it, is represented as a promise by banks and or governments to cover its face value (somehow sometimes). A legitimate bank for instance when there is a run on its deposits, has government guaranteed insurance to cover withdrawals and savings, (at least to a limit). Banks now are the entities that create money. They simply say on paper, “We will have this much money thank you very much.”

This is possible because the amount of actual cash in circulation is a fraction of how much exists. So a bank can reasonably safely say I will operate on say a billion dollars, but my history shows I only need to have around 100 million at any one time. So a billion dollar bank (on paper) only holds a tenth of its value really.  That’s why a run on a bank is a catastrophe. There would be no problem if it actually held funds to cover the size of its operations.

It is a trust-based system at all levels, from the administration of the banks, to government legislation and regulation, to the ethical behaviour of individuals in the transactions. In fact it is called Fiat Money. But here is the rub. Since it is not a precious metal anymore, not a physical thing to move with trucks, it is ideal for digital processes.

Red flag to operators in the digital space, many nothing to do with banks, private enterprises, (banks are mostly just private enterprises too of course, I once worked with a large Tasmanian agricultural company exploring setting it up as a commercial bank, actually easy and inexpensive). Starting with one calling itself Diners Club, leading to the ones we know best, like Amex and Visa and Mastercard. Now everyone with a loyalty card has converted it to a credit card.

But this introduction of digital systems into the fiat money scenario has been a disruptive technology. Open to fragmentation, taking the power away from the banks. So along comes Bitcoin for instance, and dark-web transactions of unknown nature, and Sharia transfers, and the gradual consolidation of these entrepreneurial activities. As this has become consolidated, the consumers’ options and choices in the event of a massive data catastrophe, become limited. A cashless system is crazy. We no longer trust it. But we trust cash.

I’m in Bangkok as I write. A fascinating society. Every square inch of real estate space along almost all roads is commerce, everyone, families, kids, businesses, is making stuff and selling and buying. It is an amazing market economy.  Transaction methods of all kinds exist along side each other. From the latest instant QR code sales on mobile phones, to cash, to barter, to promises to pay. When our planned cashless system if it is implemented, inevitably crashes, it will be these highly redundant societies in a place like Bangkok that will survive and thrive.