Are We Headed for a Cashless Society

Predictions of a cashless society have been around for decades, but they have not come to fruition. For example, Business Week predicted in 1975 that electronic means of payment "would soon revolutionize the very concept of money itself," only to reverse itself several years later. Pilot projects in recent years with smart cards to convert consumers to the use of e-money have not been a success. Mondex, one of the widely touted, early stored-value cards that was launched in Britain in 1995, is only used on a few British university campuses. In Germany and Belgium, millions of people carry bank cards with computer chips embedded in them that enable them to make use of e-money, but very few use them. Why has the movement to a cashless society been so slow in coming?

Although e-money might be more convenient and may be more efficient than a payments system based on paper, several factors work against the disappearance of the paper system. First, it is very expensive to set up the computer, card reader, and telecommunications networks necessary to make electronic money the dominant form of payment. Second, electronic means of payment raise security and privacy concerns. We often hear media reports that an unauthorized hacker has been able to access a computer database and to alter information stored there. Because this is not an uncommon occurrence, unscrupulous persons might be able to access bank accounts in electronic payments systems and steal funds by moving them from someone else's accounts into their own. The prevention of this type of fraud is no easy task, and a whole new field of computer science has developed to cope with security issues. A further concern is that the use of electronic means of payment leaves an electronic trail that contains a large amount of personal data on buying habits. There are worries that government, employers, and marketers might be able to access these data, thereby encroaching on our privacy.

The conclusion from this discussion is that although the use of e-money will surely increase in the future, to paraphrase Mark Twain, "the reports of cash's death are greatly exaggerated."

www.federalreserve .gov/releases/h6/Current/

The Federal Reserve reports the current levels of M1, M2, and M3 on its web site.

supply, which are also referred to as monetary aggregates (see Table 1 and the Following the Financial News box).

The narrowest measure of money that the Fed reports is M1, which includes currency, checking account deposits, and travelers checks. These assets are clearly money, because they can be used directly as a medium of exchange. Until the mid-1970s, only commercial banks were permitted to establish checking accounts, and they were not allowed to pay interest on them. With the financial innovation that has occurred (discussed more extensively in Chapter 9), regulations have changed so that other types of banks, such as savings and loan associations, mutual savings banks, and credit unions, can also offer checking accounts. In addition, banking institutions can offer other checkable deposits, such as NOW (negotiated order of withdrawal) accounts and ATS (automatic transfer from savings) accounts, that do pay interest on their balances. Table 1 lists the assets included in the measures of the monetary aggregates; both demand deposits (checking accounts that pay no interest) and these other checkable deposits are included in the M1 measure.

The M2 monetary aggregate adds to M1 other assets that have check-writing features (money market deposit accounts and money market mutual fund shares) and other assets (savings deposits, small-denomination time deposits and repurchase agreements) that are extremely liquid, because they can be turned into cash quickly at very little cost.

Table 1 Measures of the Monetary Aggregates

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