Can We Do Without Cash?

(MoneyWatch)  The point of money is very obvious, until you think about it.

I was in the island of Yap some time ago. There, they maintain the tradition of stone money. Stones are kept outside houses and advertise the wealth of the home owners. The larger the stone, the more valuable it is. The stones were traditionally carved in a far away island and carried back by canoe, until the canoes started to sink under the weight of the stones: each generation of young men would attempt to bring back ever larger stones. This was a very visible form of monetary inflation: the stones got larger so smaller stones became worth less.

The stones passed the three basic tests of money. Good money should be:

• A store of value, at least it is until inflation sets in as in Weimar Germany.
• A unit of account: a one pound coin is worth the same everywhere and to everyone..
• A medium of exchange: money can be used to buy things.

Of course, we are now more sophisticated. We have moved onto paper money. This used to be backed by gold, so that we could in theory exchange our paper for gold, but paper was much easier to handle. And gold had a habit of getting debased: in the Middle Ages kings regularly debased the coinage: they added base metal to gold coins to make it easier to pay off their debts. Today, we are more sophisticated and call the same process quantitative easing. And the mints would often clip coins to make them smaller and the workers would keep the profit. Until Henry I found out and had 94 royal mint workers castrated and their right hands cut off.

But is paper money going the way of stone?

In Sweden, there is a campaign afoot to get rid of paper money. The campaign has some high-profile supporters, including former Abba band member Bjorn Ulvaeus."There are no direct practical reasons, as far as I can see, to have coins and banknotes" he claims.

The theory is that you stop bank robberies because they will have no money to steal. Brilliant. But I found out last week what happens when low life can not rob banks any more: they rob me. For the fifth time in ten years I have been the target of attempted identity theft and card fraud. Whisper it quietly but my bank did a great job to spot it and stop it.

So here are four reasons why we need to keep paper money:

• I value my privacy: I do not want Big Brother knowing about every fifty pence I spend on chocolate.
• If I am robbed of paper money, my losses are limited. If I am robbed electronically, I can be cleaned out and bankrupted.
• Pocket money for kids, donations to buskers and the like: how will they work?
• Paper is fast: I may discover my inner axe wielding maniac if I have to wait for two minutes again while the person in front of me fumbles for a card and PIN number to pay for ?£1.70 for a tea.

But with the way our paper money is going, perhaps it is time to get back to gold. Failing that, we can go back to stone and the people of Yap will suddenly become the world's new billionaires.

(Pic: Paraflyer cc2.0)