The Case for Cash

When I was growing up in the 1950's and 1960's credit cards were a rarity.

You had American Express and Diner's Club cards but they were generally the domain of the wealthy and only used at restaurants and high end retailers.

Credit cards for the middle class were generally only issued by gasoline retailers or department stores.

Most payments made by people were made in cash or by check.

When I was in college in the early 1970's one of my Finance professors spoke about the coming adoption by most retailers of universal credit cards named Master Card or BankAmericard.

Of course, it was only later that those brand names were changed to MasterCard and Visa.

In 1971 I remember thinking about the convenience of one piece of plastic in my pocket to take care of most of my needs and was blown away by the thought.

The advice that Dustin Hoffman's character in The Graduate (1967) received shortly after he graduated was really on point.

However, he surely was not talking about plastic credit cards at the time.

  

It was not until 1973 that the first computerized authorization, clearing and settlement process was developed.

The magnetic stripe on the back of a credit card did not come about until 1974 that made authorizations more efficient and reduced the chances of fraud.

In 1975 Americans with a credit card were in the minority.

Cash was king when people wanted to make purchases.

84% of American adults have at least one credit card today. The average adult has three.

Only 9% of all purchases are now made by cash or check, The rest are paid for by credit and debit cards.

Source: https://www.forbes.com/advisor/credit-cards/credit-card-statistics/

The one thing that distinguishes a credit or debt purchase from a cash purchase is that there are significant transaction fees attached to the former that do not exist with cash sales.

Retailers are typically charged from 1.5% to 3.5% on all credit transactions by the credit card issuer. Debit card fees are less but still average a .75% cost to the retailer.

Of course, none of these costs exist with a cash sale.

Consider how things have changed compared to 60 years ago when most everyone paid in cash.

(Hat tip to https://twitter.com/WallStreetSilv/status/1673704009213911040)

In 1963 if you took your spouse for dinner and drinks at a high end restaurant you would pay the tab with a $50 bill.

The restaurant owner takes the $50 and pays his food supplier the next day.

The food supplier uses the $50 to buy some clothes at a local clothier.

The clothier takes the $50 to pay a year end bonus to one of his employees.

After an unlimited number of payments through the economy, the $50 retains its value to each successive person in the chain of commerce.. 

$50 is still $50 in the economic system for those who buy and sell goods and services.

Fast forward to today.

If you go to a restaurant and pay with a credit card, the restaurant owner only retains $48.50. 3% goes to the credit card company.

In each successive credit card transaction the original $50 shrinks by 3%.

After 30 transactions the initial $50 in the economic system will have been reduced to only $5 and the remaining $45 will have become revenues to the financial services sector.

As the credit card industry grew is it just a coincidence that the financial services industry grew by leaps and bounds?

Getting a cut of an increasing number of retail transactions has undoubtedly been like high octane fuel for the financial services sector.

For example, in 1947 when there were almost no credit cards of any type, the U.S. finance industry comprised only 10% of total non-farm business profits in the U.S. By 2010 it had grown to represent 50% of all non-farm profits in the economy.

Over the same period, the income of the finance industry as a proportion of GDP tripled--from 2.5% to 7.5%.

There is considerable talk right now around the world of replacing cash currency with a Central Bank -issued digital currency (CBDC).

That includes discussions at the Federal Reserve in the United States.

Does anyone honestly believe that this digital currency would not also carry with it some type of transaction fee?

Do you think the credit card companies, banks and the U.S. government would introduce any digital currency unless it also carried transaction fees at least comparable to the level which now exists with credit and/or debit cards?

This is also not to mention the fact that a digital currency would allow the issuer the power to decide whether you would be allowed to spend your digital currency or not.

( Click here to view the video clip)

I expect discussions involving the introduction of a CBDC to become one of the biggest political issues in the United States over the next few years.

Governor Ron DeSantis has been the most vocal and visible opponent of the CBDC concept among the Presidential candidates.. 

DeSantis actually signed legislation in Florida earlier this year that prohibits the use of a federally adopted central bank digital currency (CBDC) in the state by excluding it from the definition of money within Florida’s Uniform Commercial Code. 

Source: https://www.flgov.com/2023/05/12/governor-ron-desantis-signs-first-in-the-nation-legislation-to-protect-against-government-surveillance-of-personal-finances/

Vivek Ramaswamy has also been a vocal opponent of CBDC.

As has Democrat candidate Robert F. Kennedy, Jr. proving that it is not just a partisan issue.

The positions of Biden and Trump on this issue are a little murkier.

The Federal Reserve spent money under both administrations to research and develop some infrastructure to support a CBDC and a crypto asset manager has stated that it believes both Biden and Trump would back a CBDC even though neither are fans of Bitcoin and other crypto currencies.

A Fed-backed U.S. digital currency is a different matter.

Source: https://cointelegraph.com/news/cbdc-supporter-likely-white-house-next-term-crypto-divide-not-red-v-blue-grayscale

Keep your eye on this issue and keep an eye on your cash.

There are a lot of arguments for retaining  cold, hard cash as our currency.

The big argument against cash is that the elites don't seem to want you to have it or spend it as you wish.

Cash does not allow them to get a piece of the action nor does it allow them to hold power over you.

As a result, it may become an endangered species in the not to distance future.

Keep these facts in mind as the debate about CBDC and cash gets more attention.