The "Ease" and "Sophistication" of E-Money

       Is the elimination of cash convenient for exchange and a good idea?  No.  It is not.  It is a very palpable loss of freedom. It is foolish because it is complicated and more subject to abuse and manipulation.  We hear daily reports of hackers and credit data bases being compromised.  We have Lifelock advertisements pitching us to protect our online identity.  The digital payments world is a jungle that threatens your financial well being.  Now in fact we actually make a lot of exchanges without actually using paper money and given the option of both e-money and standard currency can freely choose how to protect our wealth.  By value I would surmise that 90% of transactions are done with checks or electronic payments.  Perhaps measured by number of transactions  more small transactions are done with cash. Cash normally completes the deal.  When it changes hands, the contract  is done.  Cash is the paper note form of the legal tender. It is actually as necessary as gold WAS to an honest monetary system.  What can it possibly mean for the government to claim that the money cannot be touched or held but only assigned to your electronic ledger as a number? "Dollars" become "numbers" that the Bank says you can spend in approved ways.  How many ways can that "right to spend your own money" be limited?   Do you have money if you cannot use it? The variability and undefined nature of money subjects the users to potential abuse.  “Flexible” money is subject to manipulation.  Fixed money is subject to shortages.

         The whole question of a “good” monetary system turns on the definition of money.  Is money a thing or an idea?  Money to be truly useful (and honest) needs a specific definition.  A vague idea is certain to be misunderstood or manipulated.  So despite money being a medium of exchange and store of value it is also a unit of account which is the characteristic that requires a specific definition.  Quantities of abstract things are nonsensical viz. how much do you love me?  Our money, a dollar, is undefined. You are paid in dollars that are undefined. You save in dollars that are undefined. But a foot is this far.  A pound weighs this much.  That’s what a “standard” is.  This matters to me but does not seem to be a major concern to most people.  Essentially the approximate historical value of a dollar is good enough for it to “work” for most people. I want to know who gets to define it and what prevents them from re-defining it when it is convenient or necessary. Who gets to say what a dollar is; you, your bank, or the government?

      I confess to being a hard money guy but let’s look at the ease and convenience of electronic money.  It is being touted as “better than cash”.  So you work at a job to earn money and that is Real.  You have to put in the hours. And what do you get for that?  Chits that allow you to buy things. When you are young your parents may have given you an allowance that you either did chores for or were responsible for spending for some defined needs to teach you budgeting, saving, and managing money. The allowance was “conditional”, if you did what you were supposed to, you were allowed to continue receiving it.  If you failed at managing it in some way, say by buying marijuana rather than clothes, your allowance could be stopped.  Your ability to spend was controlled by your overseers (parents).

  Electronic money is somewhat similar to an allowance.  Your money is “yours” in a provisional sense, someone else (the bank) must agree that you have it to spend.  You can make only certain kinds of transactions.   Every transaction is a banking act; Buying bubble gum, Paying a babysitter, selling used goods at a garage sale, loans to friends.  Every transaction must be certified and approved to be you.  The rules to prove that it is in fact you require you to be dependent upon another party (your bank) agreeing that you are you and have authority to spend your own money.  Every transaction is almost like a credit approval. “You” are the “credit score” or “ID proof” that is allowed to spend the money  in your account.  A dollar is merely a unit of account number in your bank account.  You can spend until your bank says you do not have any more.  Do you have money or credit?  Is there any difference?

Frankly I have a problem with the complexity.  Think about it.  Every transaction needs the internet.  To properly certify the transaction both parties must have a computer.  Each computer must be connected in some way to a certifying bank.  If either personal computer(or phone) is down—if either  bank computer is down –if the internet is down or not available—the transaction cannot be accomplished.  Let’s go further,  what if the power is off? Do you have money?

If the authorities were to eliminate cash for our ease of use, then what exactly “is” a dollar? “Numbers” in an account.  A dollar, just a floating idea of what everybody thinks it is.  Its value is what the two parties engaged in exchange agree that it is. This value may or may not remain constant and so makes it difficult to consider it a store of value.  When you have a Rewards account with an airline or credit card the ‘rewards’ can be adjusted by requiring more ‘digits’ for a flight or can be phased out by a particular date.  This complicates the idea of “saving” since it is not clear what the future value could be.  Can the government produce all the dollars it wants with a magic Aladdin’s lamp?  Then they are not bound by the numbers they have in their accounts.  If they want something—they rub the lamp(push a digital button to put more numbers in their  account).  I have  to work, they rub the lamp. Taxes are not necessary if the government can produce all the money it needs or wants.  Stupid me, I work--the government (through a fair and impartial system) puts money in its own account. Then it can give it to whoever it wants!   Some might consider there is a fairness issue here.  I consider a system like that-Unjust. 

E-money is completely dependent upon a functioning electricity grid and the internet.  All transactions then become embedded in a web of contract law that makes them provisional.  All transactions take place over time rather than settle with an exchange at a particular point in time. In short, when exactly do you buy something?  When you hand over the cash, the item is yours.  With e-money, ALL transactions are “reviewable” for their appropriateness.  They become “approved” transactions that happen over a period of time.  They enter a legal world.  Let me give an example.  Several years ago, as a dentist, I had a new patient who required a small surgical procedure.  He had insurance that we checked and it paid 80% of the cost.  The remainder was the patient’s responsibility.  So on the day of service we did the procedure the patient paid his 20% and 3 weeks later the insurance company sent us the balance due of the fee.  Transaction done.  One year later I received a nice note from Blue Cross that they had recently done an audit of their accounts and realized they had inadvertently provided coverage to patients who in fact did not have coverage.  My patient did not have coverage when we provided the service and so they were billing us for the payment they had made.  Wait a minute I protested—you said he had coverage you can’t expect me to pay you back?  Well yes they did and they had a means of enforcing it.  I have other patients with Blue Cross coverage and they would deduct what I owe from those payments.  They would “pay” Mrs. Smith’s claim that they owed me and apply it to the balance I owed.  Sweet(for them).  They said I could collect from the former patient.  Right.  Money thus enters this nether world of contract law. 

For 40 years I have been aware that I have a “battery” problem.  I don’t mean I beat my wife.  I mean when I am ready to use some device or machine, the battery is dead.   I jump in my car, the battery is dead (or stolen).  I want to take a cute video of my son.  I haven’t used the camcorder in a month, dead. I forget to charge my phone overnight, the next day I am on fumes.  It winks out.  How do I buy lunch when my phone is dead?  Go to plan B.  Credit card.  Debit card.  Suppose there are transaction fees or limits or I forgot my card.  Do I go hungry?  E-money becomes inconvenient. 

What about Simplicity?  Suppose I would like to buy a donut from a street vendor?  He takes Apple-Pay and I don’t have the app.  I suppose the critic would say the seller should be savvy about all the ways a customer could pay but he may be charged for it and not want to.  Once encumbered in this manner, the fees begin to mount.  With no cash a seamless web of payments would be nicked for fees all along the payment scale just as now an ATM visit dings the holder for $2-$4. 

The government considers itself responsible for producing the legal tender.   It is illegal to transact in any other private money.(That is a separate rant and one that would entail a large change too)  The reason is obvious—a purchase entails taxes and a payment for labor especially creates “obligations”(worker’s comp) and  taxes as well. If you transact privately, government has missed a tax opportunity.  It considers this illegal.    Every exchange has a transaction cost associated with it.  With a cash payment this responsibility is hidden.  E-money makes it easier to ensure the authorities are paid their required fees and it creates the possibility of transactional costs added by the facilitators of the exchange—banks, credit card companies, etc.  With e-money—money only exists in banks.  It can be exchanged but it cannot be removed from the system.  You are not allowed to take your own ball and go home.

     It seems to me that E-money will necessitate a black market currency.  I guess it is possible to buy heroin with a bank card if you call it something else (I myself don’t know) but people would necessarily be unwilling to do black market transactions with the legal currency.  So two currencies would likely develop—undercutting the usefulness of e-money. 

Cash is the paper note form of our money the dollar.   It is a shared social idea of value.  We all agree it has some rough value in exchange for any other good.  It’s “worth” 1/100^th of a shoe or an apple or 7 inches of copper pennies.  It itself is not defined.  It used to be defined as so many grams of silver—specifically 371 g of silver but gradually that definition has disappeared.  When dollar redemption for gold in 1933 was suspended domestically and then internationally in 1971, the dollar became “an idea” of value.  Who decides what a dollar is worth?  We all do by our acceptance of it.  Where do dollars come from?  Most of us know the answer to that question; the Federal Reserve, banks, and people based upon the power to do so.  I create dollars when I charge shopping purchases and banks create dollars when they make loans.  The central bank makes dollars when it credits dollars and accepts “assets”.  There is no limit to the number of dollars that can be created.  I find this paradoxical.  There is a fixed amount of fresh air, clean water, land, and resources and they are essential to life but they have a dollar value while a dollar that is imaginary can be created in unlimited quantities.  Curious.

So for 45 years we have had a currency unit that is not defined.  This could be considered unusual especially since a number of very important decisions are based on what value it has.  Everybody cares how much they get paid.  Most people consider saving money to be a good thing but it does not make sense if in the future it may have a different (lower) value.  If money is a social construct, it is not entirely “yours”.  If someone else can decide what YOUR money is worth—could we not argue that its value is suspect?  So I am not comfortable that money is simply a practical social idea used for exchange managed by government for the good of all. What are the dangers of this definition?  Danger #1 is changing the definition.  Danger #2 is producing too little or too much of it.  How much IS enough?  Danger #3 is its relative social importance.  Is having money more important than being honest?  I do not mean they are mutually exclusive –why not both- but its centrality to exchange in a complex society gives it a fundamental value similar to health.  How much health is enough?  Personally I want a fairly high standard for what is ‘healthy’. I also want a high standard of value.  If I am sick how much does health cost?  What is it worth?  Like the pearl of great price, everything I have.  In short to live in this society I have to care about money.  As someone once said about war—you might not be interested in war but war is interested in you.  You might not be interested in money but others are interested in your money.  If you have “no money” it could be said that your participation in our current civilization is marginal.  Money defines what you can do and so defines you.  If you don’t accept the label there may be a LOT you cannot do.  So go ahead and "drop-out" become a hunter-gatherer or self sufficient farmer.  Join a gift economy. The rest of us will talk about cash.

For years I have heard money managers talk about stocks bonds and cash.  As in, the market is getting over-valued and it is time to “go to cash”. Inconceivable.  I don’t think they mean what I mean when they use that word.  Cash means dollar bills in your mattress, wall safe, or wallet not money market funds, short term treasuries or bank CD’s.  Cash is federal reserve paper notes.  Going to cash in an investment account to my way of thinking is not possible.  You can go to money instruments but you do not hold cash in a Schwab or Vanguard account.  You do not have “cash” in the bank.  Everybody knows you have loaned the bank your money and the bank has loaned it out.  We’ve all watched Jimmy Stewart in It’s a Wonderful Life and there is some cash in the vault but it is not “yours”.

Having physical cash is a check upon the unlimited power of a bank to create loans and therefore money.  A monetary system without cash is one more remove from a defined unit of exchange.  A dollar reserve note is not redeemable for anything but another note BUT digital money is NOT even in your possession.  You own the right to the money but it is not “yours”. It is a social construct that can be re-defined by someone else.  A subtle but very important difference.

So let me make one more point about the “ease” of electronic money.  Let’s envision a system similar to an EZ Pay toll app that simply deducts numbers from your account as you go about your daily affairs;  picking up a magazine, buying a coke, getting lunch, it all just comes automatically out of your account as you do things.  Money goes into your account from however you earn it and it goes out as you do stuff.  This is easy.  Is it desirable?  Where is your say so in what comes out of your account?  Could you be charged for breathing valuable air?   What if they make the sidewalk downtown a toll road?  What if the price of things changes randomly so called “peak hour pricing” for certain goods or activities?  The algorithm is determining what goes into or out of your account.  You have the “freedom” to monitor it carefully or simply pay whatever is expected of you.  I am looking in vain for the freedom that would attend a system like this.  I see it as a lure to drain whatever numbers(money) you have into the reservoirs of the mega-rich and put you on a treadmill of debt.  I do not consider e-money an improvement to our current system which is itself seriously flawed. As I said, I tend to be a hard money advocate, preferring fixed money to flexible money. The big problem with defined money is the amount that goes into “hoards”.  If savings can be freed up to flow into other uses, then we have discovered the system that will permit the maximum amount of freedom for each and every one of us.  The essential problem is that we need a "tether" of value otherwise the rules of the game can be changed capriciously to some (or everyone's) detriment.  So let us ask, if we eliminate cash, Cui buono? You?  because you don't have to soil your greasy hands with it or someone else who can create what they need and siphon off what you have.  And if all else fails and they need it, well they can just take it.  Pass a law that what is yours is now mine.  So call your Congressman--who is paying him?