Cash is applicable to economics and accounting.
What Is Cash?
For economics, it is the physical form of money . It is legal tender in the form of either banknotes or coins. It can be exchanged for goods, services and the payment on debt.
In accounting, it is an financial asset that is in the form of currency or currency equivalents. These typically include:
- bank accounts
- marketable securities such as government bonds
Cash is considered the simplest and most widely accepted form of money. The problem is that checks can bounce and credit cards can be declined. Cash requires no extra processing and settlement is instant.
Central Bank Money
Almost 80% of the currencies in the world operate under the central bank system. This means that we are dealing with central bank money.
There are two forms of this money:
- banknotes - the physical currency
- reserves - financial instruments that are backed by government securities and placed on the balance sheets of member banks.
These show up as liabilities on the central banks balance sheet.
The problem is that our society moved away from the use of physical cash. This is why monetary policy tends to be less effective. There is no way for the a central bank like the Federal Reserve to inject money directly into the economy.
Commercial Bank Money
Commercial bank money is really the money supply. This is what the average person uses since it is located in the bank account. We are dealing with ledger based money, something that is different than physical currency.
Cash is an asset on the balance sheet, except when it comes to a bank. For them, it is seen as a liability since, for depository institutions, it comes from deposits. The creation of credit ultimately ends up as a liability on a bank balance sheet somewhere. This means that cash is a debt owed by the banking system.
From the accounting perspective, the balance in a company's (or individual) bank account will be listed as an asset. For remittance purposes, these balances are not in physical form although the digital dollars can be converted to physical ones.
Technology
Over the last few decades, due to advancement in technology and FinTech, cash has diminished in use. This is not only true for transactions of individual but also settlement. Since currencies such as the US Dollar are essentially digital, this has become the new medium of exchange.
A big reason why is the speed which transactions can occur. There is also the safety where one is not having to tote around or secure large sums of physical money.
Smartphone technology also aided in the decline in the use of cash. As people gained access to payment applications, the need to carry around physical cash was removed.
Globalization
Another factor that has caused a massive change is the advancement of the global economy. Trade is the centerpiece of money since that is what facilitates it. There is no way a commercial transaction can occur without money (unless dealing with a barter system).
While money changed over the centuries, with many forms of cash being used, the monetary system has not. It is basically accounting combined with communications with a way to settle. This is true whether using cash directly, operating within the central banking system, or looking at the Eurodollar System.
Due to technology, accounting is basically a ledger whereas communications are digital networks. This is the essence of ledger based money.
We now have near instant communications. It is in alignment with the global economy since trade happens all over the world. With the Internet, we see round-the-clock activity, mostly occurring in a few seconds.
It is easy to see how physical cash is a detriment. Having to wait hours (or days/weeks) for settlement simply is impractical. Cash cannot keep up with either commerce nor finance.
Cryptocurrency
Some view cryptocurrency as the next generation in the evolution of money. Blockchain uses distributed ledger technology (DLT), fulfilling one of the components of a monetary system. It is also a digital network with, ideally, unrelated nodes located all over the planet.
There is no physical form of cryptocurrency meaning it doesn't fall into the historical cash category in terms of payments. This is ledger based money, akin to commercial banks and the Eurodollar System.
Many promoted Bitcoin, the first cryptocurrency, as a replacement for the US dollar. This means that it was going to fulfill the purpose of medium of exchange. The challenge here is volatility which is a detriment for an instrument of payment.
The solution might be stablecoins. These can be either asset backed or algorithmic. Either way, they are designed to be pegged in value, mostly to the dollar. This is done in an effort to achieve price stability. It also introduces a unit of account that most are familiar with.
From an accounting perspective, companies along with individuals could view stablecoin the same as cash on their balance sheets.