The end of cash

Canada has abolished the penny; Sweden is almost entirely cash-free. Are we heading for a future with no notes or coins? And does it matter? Matthew Partridge reports.

What's happened?

In March this year, Canada decided to phase out the penny (one cent) coin. Although it will still be legal tender, retailers will have to give any pennies they receive to the Royal Canadian Mint. They will also be encouraged to round to the nearest five cents when giving change.

In the longer term, the Mint hopes to replace other coins and notes with a digital currency called MintChip. According to the Toronto Star, "MintChip will ultimately let people pay each other directly using smartphones, USB sticks, computers, tablets and clouds.

The digital currency will be anonymous and good for small transactions just like cash." Although many dismissed it as a stunt, or even a joke, the competition to write software for MintChip attracted 500 applicants in four days. Meanwhile, Barclays has already developed a system in Britain, called PayTag, which allows users to pay by swiping a sticker on their mobile phone over a reader.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Why do this?

Cost is a big part of it. According to the Canadian government, it costs 1.6 cents to produce each one cent new penny. It also notes that inflation has meant that the penny "retains only about one-20th of its original purchasing power".

Indeed, "some Canadians consider the penny more of a nuisance than a useful coin". Economist Stephen J Dubner points out on his Freakonomics blog that once you take into account the cost to banks of handling all those low denomination coins, the penny is even more of a burden.

In 2006, the penny cost Canada's economy about $150m, according to Quebec-based bank Desjardins. "Canada's big banks alone handle more than nine billion pennies a year, which costs them $20m annually to process." David Wolman, writing in The Wall Street Journal, thinks that by extension all cash should go. "In an era when books, movies and music are transmuting from atoms to bits, the greenback and those increasingly costly metal rounds are looking more analog by the minute."

Have any other governments followed suit?

America has decided not to follow Canada, instead cutting minting costs by changing the metal content of smaller coins. But many others including Israel, Brazil, Australia and the Scandinavian nations already have no penny equivalent, notes Ian Austen in The New York Times.

Many governments are also gradually making it harder to pay by cash. France, Greece and Spain have all put limits on the maximum size of cash transactions to try to cut tax evasion. Britain's anti-money-laundering rules, introduced in 2003, make it difficult to pay more than £10,000 for anything in cash. But no country has gone as far as Sweden in trying to move away from cash (see below).

How important is cash to the modern economy?

It's been nearly 45 years since any British prime minister talked about "the pound in your pocket" (Harold Wilson justifying devaluation.) Today, it sounds rather quaint. Nonetheless, credit cards and online payment systems, such as PayPal, have failed to kill the global enthusiasm for hard currency.

Although cash's role in the total money supply of most developed countries has fallen, it is still important. According to Federal Reserve data, the amount of currency in America circulating outside banks has grown by 7% a year since 1959 to more than $1trn. The Bank of England estimates that £61.8bn of notes and coins are still circulating somewhere in the British economy.

Does cash have any defenders?

Eric Wen in US magazine The New Republic notes that a study of retailer behaviour "found that between 60% and 93% of transactions would round up, costing consumers nearly $600m a year. Because the poor tend to use cash more often, they would shoulder most of that burden."

Also, people who rely on physical cash tend to shun debt. BusinessWeek notes that "Italians are the euro region's least-indebted consumers and among its biggest savers, according to Eurostat data. This frugality is linked to distrust of non-cash payments. Italian credit-card holders make only 26 transactions on their plastic each year, on average five times less than in Britain, according to the Bank of Italy."

A popular outcry even forced the government to scrap a €1,000 limit on cash transactions. The Daily Telegraph's Martin Vander Weyer also points to the security, anonymity and discipline of cash. "Bank notes and coins have a utility, a symbolism and a significance that we should not rush to abandon: save the tenner before it's too late."

Sweden's cash-free economy

In Sweden, only around 3% of transactions are now cash-based. In most cities, pubs don't accept cash; tickets are prepaid or purchased with a text message. A small but growing number of businesses only take cards and some bank offices (which make money on electronic transactions) have stopped handling cash altogether. Some even think that coins and notes will cease to exist in Sweden within 20 years.

However, not everyone is happy with this trend. Pensioners, who tend to do lots of small transactions, complain that their lives have been made harder. Small businesses are also unhappy about the level of credit-card fees charged by the banks. While the number of bank robberies has dropped, "computerised fraud cases, including skimming, surged to nearly 20,000 last year from 3,304 in 2000".

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri