Financial Update (Fourth Quarter 2004)



FEATURES

 Appraisal Reviews
 Maintain Soundness

 GLBA Spurs
 Banks’ Insurance
 Activities

 Conference Focuses
 on Remittances

 New Fed
 Brochures About
 Check 21

 Fed Distributes
 Redesigned $50s

 Atlanta Fed Chair,
 Vice Chair
 Reappointed

 Will Privacy
 Concerns Prolong
 Cash Use?

 Fed Governor
 Sees Oil Prices
 Staying High

 Greenspan on
 Challenges of
 Aging Population

 Helping Consumers
 Avoid Overdrafts

 Examining Fannie
 Mae and
 Freddie Mac

DEPARTMENTS

 Data Bank

 Circular Letters

STAFF

SUBSCRIBE ONLINE

Will Privacy Concerns Prolong Use of Cash?

As the cost of credit-based payment systems continues to decline, some economists argue that cash will gradually fall into disuse. But cash affords one function that credit-based payment does not: It preserves the purchaser’s privacy. Cash’s role as an imperfect recorder of transactional histories is a strength when the purchaser wishes to retain his anonymity because a purchase made with currency or cash does not reveal the purchaser’s identity as a credit purchase does. This distinction is likely to keep money in use, according to a recent Atlanta Fed working paper.

Related
“Money Is Privacy”
“Money is Memory”
FTC survey of identity theft

Authors Charles M. Kahn, James McAndrews, and William Roberds construct a model of a simple trading economy that allows for various forms of moral hazard, especially the theft of a purchaser’s identity. In a scenario in which information about a purchaser is available following a credit-based payment, the possibility of theft exists since the purchaser’s address and other information become known. Such information is not available following a cash payment. The analysis shows that in an economy with imperfect safeguards against this sort of hazard, the anonymity that money confers on the user is also its advantage, solving the problem of transactional privacy.

Despite advances in theory that cast doubt on cash’s value in technologically sophisticated economies, Kahn, McAndrews, and Roberds conclude that “the ‘demotion’ of money to a poor cousin of credit-based arrangements may have been premature.”

Cover