It’s hard for me to believe that paper money will someday be replaced by electronic currency. Paper money and coins have existed for centuries, so it’s hard to believe that digital cash will take over. Or is it?

Here are a few facts to consider:

1) There’s a much larger amount of electronic wealth than paper money. Let me explain this by looking at two aspects of banking:

a) Banks are not required to maintain large cash reserves in relation to their total deposits. Their cash reserves are normally less than 20% of their total liquid assets. Therefore, if you deposit $1,000.00 into a bank account, the bank would be obligated to keep no more than $200.00 in cash. So where does the rest go? Into investments, loans, etc. – banks make their money by lending it. If they didn’t lend it back out, they’d never make any profit. This non-cash 80% or more of your money is effectively transformed into electronic funds and it may never have any physical life if you use payroll direct deposit.

b) Credit cards, lines of credit, etc. represent a form of electronic currency which rarely are converted into cash. In fact, I’ve seen one argument that says that we effectively create currency, in the form of credit, whenever we use one of these debt instruments.

The conclusion that I am drawing here is that much of today’s money is already electronic.

2) There are more and more ways to pay electronically. Credit card purchases are a form of electronic currency that have existed for years. More and more businesses allow the use of debit cards (i.e. electronic payment using some form of deposit). Businesses use electronic funds transfer. Wire transfers are electronic. Finally, consider the growing financial mammoth that is PayPal: it’s not just for eBay! You can use PayPal to send and receive money from almost anyone.

Conclusion: it’s becoming increasingly easy to pay electronically.

3) The final frontier for elimination of paper money would be the remaining forms of cash payment. This includes things like: small businesses, particularly restaurants; pocket money e.g. allowances; underground or unregulated economy (think of yard sales); and charities. Many of these types of commerce are increasingly able to accept electronic payment.

Conclusion: electronic currency continues to preliforate into new channels.

4) However, the last bastion of a cash economy may be the most ubiquitous: the vending machine. Many, many items are now available by vending machine: soft drinks; potato chips and other snacks; toiletries; cigarettes; lottery tickets; toys; and other items that might not be mentioned in polite company. It’s hard to say, but the vast majority of vending machines are cash-only: either coins or paper money. This could take generations to phase out unless the markets or the governments force the change. Many vending machines lack the necessary electronic circuitry to eliminate the use of paper money or coins. This is a significant investment to replace. We would also need some form of cheap, easily produced payment card, plus the payment receiver and processor, to eliminate the paper. But there’s no doubt that it could be done.

It’s becoming increasingly likely that paper money will be completely replaced by electronic commerce. If there’s a will, there’s definitely a way.