Will Privacy Concerns Prolong Use of Cash?
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 purchasers privacy. Cashs
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 purchasers identity as a credit purchase does. This
distinction is likely to keep money in use, according to a
recent Atlanta Fed working paper.
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 purchasers identity. In a scenario in which information
about a purchaser is available following a credit-based payment,
the possibility of theft exists since the purchasers
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
Despite advances in theory that cast doubt on cashs 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.