In economics, cash is money in the physical form of currency, such as banknotes and coins.
In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately (as in the case of money market accounts). Cash is seen either as a reserve for payments, in case of a structural or incidental negative cash flow or as a way to avoid a downturn on financial markets.
The English word cash originally meant 'money box', and later came to have a secondary meaning 'money'. This secondary usage became the sole meaning in the 18th century. The word cash comes from the Middle French caisse'money box', which comes from the Old Italian cassa, and ultimately from the Latin capsa'box'. [1] [2]
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In Western Europe, after the fall of the Western Roman Empire, coins, silver jewelry and hacksilver (silver objects hacked into pieces) were for centuries the only form of money, until Venetian merchants started using silver bars for large transactions in the early Middle Ages. In a separate development, Venetian merchants started using paper bills, instructing their banker to make payments. Similar marked silver bars were in use in lands where the Venetian merchants had established representative offices. The Byzantine Empire and several states in the Balkan area and Kievan Rus also used marked silver bars for large payments. As the world economy developed and silver supplies increased, in particular after the colonization of South America, coins became larger and a standard coin for international payment developed from the 15th century: the Spanish and Spanish colonial coin of 8 reales. Its counterpart in gold was the Venetian ducat.
Coin types would compete for markets. By conquering foreign markets, the issuing rulers would enjoy extra income from seigniorage (the difference between the value of the coin and the value of the metal the coin was made of). Successful coin types of high nobility would be copied by lower nobility for seigniorage. Imitations were usually of a lower weight, undermining the popularity of the original. As feudal states coalesced into kingdoms, imitation of silver types abated, but gold coins, in particular, the gold ducat and the gold florin were still issued as trade coins: coins without a fixed value, going by weight. Colonial powers also sought to take away market share from Spain by issuing trade coin equivalents of silver Spanish coins, without much success.
In the early part of the 17th century, English East India Company coins were minted in England and shipped to the East. In England, over time the word cash was adopted from Sanskrit कर्ष karsa,[ dubious – discuss ] a weight of gold or silver but akin to the Old Persian 𐎣𐎼𐏁 karsha, unit of weight (83.30 grams). East India Company coinage had both Urdu and English writing on it, to facilitate its use within the trade. In 1671, the directors of the East India Company ordered a mint to be established at Bombay, known as Bombaim. In 1677 this was sanctioned by the Crown, the coins, having received royal sanction, were struck as silver rupees; the inscription runs "The rupee of Bombaim", by the authority of Charles II.
Around that time, coins were also being produced for the East India Company at the Madras mint. The Tamil the word for money is kaasu, [3] which may have been modified into 'cash'. Both words, 'kaasu' and 'cash', have the same meaning, unlike money box. The currency at the company's Bombay and Bengal administrative regions was the rupee. At Madras, however, the company's accounts were reckoned in pagodas, fractions, fanams, faluce and cash. This system was maintained until 1818 when the rupee was adopted as the unit of currency for the company's operations.
Paper money was first used in China during the Tang dynasty 500 years prior to it catching on in Europe. [4] During his visit to China in the 13th century, Marco Polo was amazed to find that people traded paper money for goods rather than valuable coins made of silver or gold. He wrote extensively about how the Great Kaan used a part of the Mulberry Tree to create the paper money as well as the process with which a seal was used to impress on the paper to authenticate it. Marco Polo also talks about the chance of forgery and states that someone caught forging money would be punished with death. [5] In the 17th century, European countries started to use paper money in part due to a shortage of precious metals, leading to less coins being produced and put into circulation. [6] At first, it was most popular in the colonies of European powers. In the 18th century, important paper issues were made in colonies such as Ceylon and the bordering colonies of Essequibo, Demerara and Berbice. John Law did pioneering work on banknotes with the Banque Royale. The relation between money supply and inflation was still imperfectly understood and the bank went under rendering its notes worthless, because they had been over-issued. The lessons learned were applied to the Bank of England, which played a crucial role in financing the Peninsular War against French troops, hamstrung by a metallic Franc de Germinal.
The ability to create paper money made nation-states responsible for the management of inflation, through control of the money supply. It also made a direct relation between the metal of the coin and its denomination superfluous. From 1816, coins generally became token money, though some large silver and gold coins remained standard coins until 1927.[ citation needed ] The World War I saw standard coins disappear to a very large extent. Afterward, standard gold coins, mainly British sovereigns, would still be used in colonies and less developed economies and silver Maria Theresa thalers dated 1780 would be struck as trade coins for countries in East Asia until 1946 and possibly later locally.
Cash has now become a very small part of the money supply. Its remaining role is to provide a form of currency storage and payment for those who do not wish to take part in other systems, and make small payments conveniently and promptly, though this latter role is being replaced more and more frequently by electronic payment systems. Research has found that the demand for cash decreases as debit card usage increases because merchants need to make less change for customer purchases. [7]
Cash is increasing in circulation. The amount of the United States dollar in circulation increased by 42% from 2007 to 2012. [8] The amount of pound sterling banknotes in circulation increased by 29% from 2008 to 2013. [9] The amount of euro in circulation increased by 34% from August 2008 to August 2013 (2% of the increase was due to the adoption of euro in Slovakia 2009 and in Estonia 2011). [10]
In economic theory (according Keynesian economics), the cash holding of cash (especially sight deposits) is roughly attributed to three motives: [11]
The transactions motive covers the business needs of economic subjects, the precautionary motive serves to hold money for liquidity purposes and to provide for crisis situations, [12] and the speculation motive, according to John Maynard Keynes, results from the uncertainty about future interest rate developments and relates to financial investments.
In addition to this purely economic importance, there are other aspects of cash use: [13] [14] [15]
In practice, there may be a combination of such motives, with the precautionary motive of preserving value and anonymous payment being decisive. Due to its unique characteristics, there is no perfect substitute for cash. Demonetisation or capital control can destabilize the economy if electronic means of payment are not readily available (e.g. 2016 Indian banknote demonetisation). [15]
Cash in circulation is characterized by strong seasonal fluctuations. Wage and salary payment dates, tax payment dates or holidays lead to statistically perceptible increases in cash in circulation, for which the credit institutions are preparing. Since cash holdings at banks do not earn interest and can also lead to security problems (bank robbery), banks usually only hold very small amounts of cash. They are therefore forced to involve the central bank in times of higher cash requirements. Therefore, the cash in circulation only remains unchanged if the banks hand over cash from their own cash holdings to their bank customers or take cash deposits from their customers into their own holdings.
The ratio of the cash in circulation in relation to the gross domestic product (cash to GDP ratio) is a good indicator of cash usage and payment behavior in an economy. In countries like the United States, increased use of debit and credit cards is increasing the amount of cash in circulation at a slower rate than in countries with a high amount of cash payments. In 2018, it ranged from 1.3% (in Sweden) to more than 21% (in Japan), 10.5% in Switzerland and 10.7% in the eurozone. [16]
Since around 2018, exacerbated by the COVID-19 pandemic, cash in circulation in the eurozone has increased significantly while the share of cash payments (i.e. transactions) has decreased, known as the paradox of banknotes. Analyzes show that private households are increasingly keeping cash as a precaution against crises and that negative interest rates also play a role. [17] This effect is also observed in many other currency areas, e.g. in the United States and Japan. [18]
Theoretically, it is possible to track cash usage by capturing the unique serial numbers on the banknotes during transactions. To do this, the serial numbers would have to be recorded personally for all withdrawals from automated teller machines (ATM) and for each payment transaction at a retail checkout, including change. In practice, such comprehensive tracking requires a high level of technical effort and generates immense amounts of data. It would combine the disadvantages of payment methods, the somewhat cumbersome nature of cash from the offline world and the lack of anonymity of electronic money from the online world. In addition, in most countries, personal tracking of payment transactions is not permitted for the reasons of information privacy.
There are the following exceptions in cash applications:
Since 2016, the People's Bank of China has requested the recording of banknotes issued and deposited at ATMs and bank counters, arguing that counterfeit money will be prosecuted. [23] However, the serial number is not a reliable indicator, because counterfeit banknotes mostly use serial numbers from real banknotes in circulation. In addition, damaged or scribbled banknotes may cause reading errors. With Directive ECB/2010/14, the European Central Bank (ECB) therefore requires to check the authenticity of deposited and withdrawn banknotes at bank counters and ATMs using tested devices and to trace the origin of suspected counterfeit banknotes to the account holder and physically seize it. [24]
Cashless society can be defined as one in which all financial transactions are handled through "digital" forms (debit and credit cards) in preference to cash (physical banknotes and coins). Cashless societies have been a part of history from the very beginning of human existence. Barter and other methods of exchange were used to conduct a wide variety of trade transactions during this time period. [25]
Since the 1980s, the use of banknotes has increasingly been displaced by credit and debit cards, electronic money transfers and mobile payments, but much slower than expected. The cashless society has been predicted for more than forty years, [26] but cash remains the most widely used payment instrument in the world and on all continents. [27] : 14 In 17 out of 24 studied countries, cash represents more than 50% of all payment transactions, with Austria at 85%, Germany at 80%, France at 68%. The United Kingdom at 42%, Australia at 37%, United States at 32%, Sweden at 20%, and South Korea at 14% are among the countries with lower cash usage. [27] : 27
By the 2010s, cash was no longer the preferred method of payment in the United States. [28] In 2016, the United States User Consumer Survey Study reported that three out of four of the participants preferred a debit or credit card payment instead of cash. [29] Some nations have contributed to this trend, by regulating what type of transactions can be conducted with cash and setting limits on the amount of cash that can be used in a single transaction. [30]
Cash is still the primary means of payment (and store of value) for unbanked people with a low income and helps avoiding debt traps due to uncontrolled spending of money. It supports anonymity and avoids tracking for economic or political reasons. [31] In addition, cash is the only means for contingency planning in order to mitigate risks in case of natural disasters or failures of the technical infrastructure like a large-scale power blackout or shutdown of the communication network. [32] Therefore, central banks and governments are increasingly driving the sufficient availability of cash. The US Federal Reserve has provided guidelines for the continuity of cash services, [33] and the Swedish government is concerned about the consequences in abandoning cash and is considering to pass a law requiring all banks to handle cash. [34]
Digital currency is a generic term for various approaches to support secure transactions of the public or using a distributed ledger, like blockchain, as a new technology for decentralized asset management. The blockchain 1.0 era has enabled the application of virtual digital currencies in the marketplace, such as money transfer and payment systems. [35] It considers establishing an electronic version of the national currency which is backed by the central bank as the issuer. Virtual currency is a digital representation of value that is neither issued by a central bank or a public authority, such as Bitcoin. [36] Facebook's concept for the diem is based on a token to be backed by financial assets such as a basket of national currencies.
In 2012, Bank of Canada was considering introducing digital currency. [37] [38] Meanwhile, it rates digital currency a fairly complicated decision and is analyzing the pros and cons and working to determine under which conditions it may make sense to, one day, issue a digital currency. As a threat, a central bank digital currency could increase the risk of a run on the banking system. [39]
Also in 2012, Sveriges Riksbank, the central bank of Sweden, was reported to analyze technological advances with regard to electronic money and payment methods for digital currency as an alternative to cash. [40] In 2019, it is investigating whether Swedish krona need to be made available in electronic form, the so-called e-krona, and if so, how it would affect Swedish legislation and the Riksbank's task. It has started procuring a technical supplier to develop and test solutions for a potential future e-krona. No decisions have yet been taken on issuing an e-krona. [41]
An analysis by the Deutsche Bundesbank in 2017 found that a cash payment in retail costs an average of 24 euro cents, while payments with a girocard cost 30 cents (or often 0.3 to 0.4% of sales plus a transaction fee) and with a credit card charge one euro which is included in the sales price. [42] This is why retailers often refuse to accept card payments below a minimum amount. Depending on the account model, there are also booking costs for the account holder with an average of 35 euro cents charged for each(!) account posting. Because of this convenient source of income, commercial banks and credit card companies favor cashless payments.
In the case of cashless payment transactions, in addition to the documentation of the payment itself, the personal details of the payer are usually linked to the data of the payee according to the Know Your Customer (KYC) principle. This enables the payment process to be precisely traced for the payer and the payee. The constant increase in digitization leads to a more detailed recording of cashless payment transactions and their evaluation for advertising and marketing campaigns. Since this digital documentation is usually more centralized than before, the potential for abuse increases. On the other hand, the cash transactions are anonymous, unless purchasing profiles are recorded with the help of loyalty programs based on customer cards, and keep the payment landscape competitive. [43]
In August 2023, Chancellor of Austria Karl Nehammer came out in support for enshrining cash in the Austrian constitution. This came after the Freedom Party of Austria campaigned on the idea. [44] [45] [46] [47]
In 2023, The Swiss government supported moves to have a constitutional protection for cash. This came after a popular initiative asked for it. [48] [49] [50] [51] [52]
In June 2023, The Slovakian parliament voted with the support of 111 of 150 MPs to put the right to use Cash in the Constitution of Slovakia. The amendment was proposed by the Sme Rodina party. [53]
A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a system of money in common use within a specific environment over time, especially for people in a nation state. Under this definition, the British Pound sterling (£), euros (€), Japanese yen (¥), and U.S. dollars (US$) are examples of (government-issued) fiat currencies. Currencies may act as stores of value and be traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are either chosen by users or decreed by governments, and each type has limited boundaries of acceptance; i.e., legal tender laws may require a particular unit of account for payments to government agencies.
The krona is the currency of the Kingdom of Sweden. It is one of the currencies of the European Union. Both the ISO code "SEK" and currency sign "kr" are in common use for the krona; the former precedes or follows the value, the latter usually follows it but, especially in the past, it sometimes preceded the value. In English, the currency is sometimes referred to as the Swedish crown, as krona means "crown" in Swedish. The Swedish krona was the ninth-most traded currency in the world by value in April 2016.
The markka, also known as the Finnish mark, was the currency of Finland from 1860 until 28 February 2002, when it ceased to be legal tender. The markka was divided into 100 pennies, abbreviated as "p". At the point of conversion, the rate was fixed at €1 = 5.94573 mk.
The renminbi, also known as Chinese Yuan is the official currency of the People's Republic of China. The renminbi is issued by the People's Bank of China, the monetary authority of China. It is the world's fifth most traded currency as of April 2022.
Seigniorage, also spelled seignorage or seigneurage, is the difference between the value of money and the cost to produce and distribute it. The term can be applied in two ways:
The Australian dollar is the official currency and legal tender of Australia, including all of its external territories, and three independent sovereign Pacific Island states: Kiribati, Nauru, and Tuvalu. In April 2022, it was the sixth most-traded currency in the foreign exchange market and as of Q4 2023 the seventh most-held reserve currency in global reserves.
The Canadian dollar is the currency of Canada. It is abbreviated with the dollar sign $. There is no standard disambiguating form, but the abbreviations Can$, CA$ and C$ are frequently used for distinction from other dollar-denominated currencies. It is divided into 100 cents (¢).
The króna or krona is the currency of Iceland.
The kroon was the official currency of Estonia for two periods in history: 1928–1940 and 1992–2011. Between 1 January and 14 January 2011, the kroon circulated together with the euro, after which the euro became the sole legal tender in Estonia. The kroon was subdivided into 100 cents.
A banknote – also called a bill, paper money, or simply a note – is a type of negotiable promissory note, made by a bank or other licensed authority, payable to the bearer on demand. Banknotes were originally issued by commercial banks, which were legally required to redeem the notes for legal tender when presented to the chief cashier of the originating bank. These commercial banknotes only traded at face value in the market served by the issuing bank. Commercial banknotes have primarily been replaced by national banknotes issued by central banks or monetary authorities.
The krone is the official currency of Denmark, Greenland, and the Faroe Islands, introduced on 1 January 1875. Both the ISO code "DKK" and currency sign "kr." are in common use; the former precedes the value, the latter in some contexts follows it. The currency is sometimes referred to as the Danish crown in English, since krone literally means crown. Krone coins have been minted in Denmark since the 17th century.
Legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered ("tendered") in payment of a debt extinguishes the debt. There is no obligation on the creditor to accept the tendered payment, but the act of tendering the payment in legal tender discharges the debt.
The South Korean won is the official currency of South Korea. A single won is divided into 100 jeon, the monetary subunit. The jeon is no longer used for everyday transactions, and it appears only in foreign exchange rates. The currency is issued by the Bank of Korea, based in the capital city of Seoul.
The Indian rupee is the official currency in India. The rupee is subdivided into 100 paise. The issuance of the currency is controlled by the Reserve Bank of India. The Reserve Bank manages currency in India and derives its role in currency management based on the Reserve Bank of India Act, 1934.
Digital currency is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet. Types of digital currencies include cryptocurrency, virtual currency and central bank digital currency. Digital currency may be recorded on a distributed database on the internet, a centralized electronic computer database owned by a company or bank, within digital files or even on a stored-value card.
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment.
In monetary economics, the currency in circulation in a country is the value of currency or cash that has ever been issued by the country’s monetary authority less the amount that has been removed. More broadly, money in circulation is the total money supply of a country, which can be defined in various ways, but always includes currency and also some types of bank deposits, such as deposits at call.
The five-hundred-euro note (500 €) is the highest-value euro banknote; it was produced between the introduction of the euro in 2002 until 2019. Since 27 April 2019, the banknote has no longer been issued by central banks in the euro area, but it continues to be legal tender and can be used as a means of payment. It is one of the highest-value circulating banknotes in the world, worth around 535 USD; 3 874 CNY; 83 598 JPY; 426 GBP, or 487 CHF as of April 2024. The note is used in the 26 countries which have the euro as their sole currency, with a population of about 343 million.
In a cashless society, financial transactions are not conducted with physical banknotes or coins, but instead with digital information. Cashless societies have existed from the time when human society came into existence, based on barter and other methods of exchange, and cashless transactions have also become possible in modern times using credit cards, debit cards, mobile payments, and digital currencies such as bitcoin.
A central bank digital currency is a digital currency issued by a central bank, rather than by a commercial bank. It is also a liability of the central bank and denominated in the sovereign currency, as is the case with physical banknotes and coins.
Reasons for the paradox observed globally before the pandemic were that while transaction demand for banknotes has been negatively affected by the increase in cashless payments, non-transaction demand for banknotes has increased reflecting low interest rates and precautionary demand.
Many digital payments can be tracked, potentially assisting an authoritarian crackdown.
If the power supply is cut it is no longer possible to make electronic payments. For reasons based purely in preparedness, we need notes and coins that work without electricity.