Future of cash: what we can learn from the history of money

The ongoing pandemic has highlighted the paradoxical development of the usage of cash: its use as a payment instrument has decreased yet, at the same time, its use as a store of value has reached record growth rates. To understand this development, it is useful to reflect on the history of money.

Money is commonly defined as anything that can be used to make a payment or settle a debt. Without taking a stance in the debate over whether there are any historical examples of the most primitive form of exchange, namely barter, sooner or later people started to agree on a common means of payment or unit of account. This led to the usage of commodity money. Pieces of metal were one popular form because, first, they were valuable and therefore commonly accepted and, second, they were easily exchangeable and measurable based on their weight. The weighing process, however, could be simplified as people started to make standardised metal pieces of fixed sizes and weights and stamped them with marks authenticating their value, thus creating coins. The standardised design increased confidence and made transactions more efficient, with the result that issuers even began requesting a premium.

There is a long road from these first examples of money to today’s online, mobile and contactless payments. Looking at these innovations, every one of them has been developed to make a certain type of transaction more efficient, and this new ‘money’ can only been successful on a more permanent basis if there is confidence in its issuer and its preservation of value. The efficiency of a payment instrument can manifest itself in a variety of ways, be it directly as a decrease in the cost of a payment transaction, or indirectly, in the form of better availability or improved user-friendliness and convenience.

During the breathtaking development of new payment instruments, it is often forgotten that cash and its management has also continuously evolved with regard to confidence and efficiency. From the beginning, signatures were used as a means of fostering confidence in banknotes. Since the early days it has been evident that confidence can also be fostered by design themes. Furthermore, continuous efforts have been made to render counterfeiting difficult. New threats have necessitated the development of new security features, most recently in particular optical features such as holographic and micro-optic structures, as well as special inks, which are difficult to reproduce. Similarly, new innovative substrates have been developed to deter counterfeiting.

The evolution of reproduction technology has also changed radically the philosophy of banknote communications. Until only a few decades ago, the secrecy surrounding security features was considered part and parcel of banknote security. Central banks have since been obliged to educate the public and professional cash-handlers on how to authenticate a banknote using its security features, which should be difficult to imitate in technical terms but easy to recognise.

Measures designed to increase the efficiency of banknotes often went hand in hand with those aimed at maintaining confidence. Introducing steel in the 19^th century as the material used to produce printing plates meant they lasted longer, thereby boosting printing efficiency. At the same time, it justified more complex engravings to hamper counterfeiting and to increase confidence. Similarly, when colour inks were introduced as a measure to counteract the new threat of photography, they also made it possible to distinguish between various banknote denominations, which enhanced their user-friendliness. The development of printing machines and devices also contributed to the achievement of both goals.

The development of polymer substrate is a more recent example of efficiency and confidence measures going hand in hand. While the idea behind the development project carried out in Australia in the 1970s and 1980s was to counteract the threat of counterfeiting, the result could also address efficiency issues in banknote management.

The trends of the cost-consciousness of various stakeholders involved in the cash cycle and the availability of an increasing number of other payment options require a major shift in the attitude of central banks towards other stakeholders

User requirements regarding banknote sizes came to the fore when machine processing and use in vending machines became widespread from the 1970s onwards. The first machine-readable features on banknotes were developed around the same time. Besides speeding up and simplifying the processing of banknotes, machine-readable features have facilitated the use and acceptance of cash in vending and other machines. The almost exponential growth of the latter has improved the user-friendliness of cash dramatically.

As well as reflecting the monetary system, denominations have always been based on the needs of the payment system. When banknotes were first introduced, they were particularly useful in large transactions, which would have otherwise required significant amounts of coins. The need for very large denominations of banknotes has decreased gradually as more efficient payment instruments for high-value payments have been developed.

Future of cash

What are the conclusions of this short history regarding the future of cash? Even before the pandemic, confidence in cash increased in an environment of low inflation expectations and low interest rates. Developments during the pandemic highlight even better confidence in the product itself. However, innovations are needed in the future.

The operational environment of currency management has changed in several respects over the past few decades. To understand what is necessary for the future it is appropriate to consider what the new payment landscape requires in terms of efficiency. The trends of the cost-consciousness of various stakeholders involved in the cash cycle and the availability of an increasing number of other payment options require a major shift in the attitude of central banks towards other stakeholders. The cash cycle has to be considered comprehensively from the design of banknotes up to their destruction, with the needs of other stakeholders in mind. The concept of banknote efficiency has to be widened to include availability, convenience and handling from the point of view of all stakeholders both in its own right and relative to other payment instruments.

There are good reasons cash should remain a payment option: its nature as a public good and part of public infrastructure; the embodiment of financial privacy; and resilience against the increasing threat of cyber crime. All are difficult properties to replicate, but that doesn’t mean the future of cash is self-evident. Therefore, central banks should focus on the efficiency of cash management. Neutrality towards society’s chosen payment methods does not mean indifference.