“Cash” is Only a Physical Manifestation of a Number

I was asked a couple of days ago what I mean when I say that cash is only a physical manifestation of a number. It’s a good question.

First, we need to ask “what is a monetary instrument?” I just ran a poll on Twitter about gold to see how many people actually think that gold is a monetary instrument. So, let’s start with what gold really is.

Gold itself is not a monetary instrument. Gold is what we call a commodity. It is not a monetary instrument, because gold has no issuer. In order to have a monetary instrument, you need someone that issues the instrument, gives it a face value and promises to accept it as payment for something. Gold is a metal and is found on Earth naturally, but the planet Earth is not an issuer of monetary instruments, because the planet itself cannot say to us that it is willing to accept gold as payment for something. We’re going to need human beings here if we want to create and issue monetary instruments. The US government and the Australian government are issuers of monetary instruments. Gold itself isn’t issued by human beings, but human beings can create monetary instruments that contain gold.

For instance, the US government or Australian government could strike a coin that contains gold and give it a face value of One Dollar. The thing is, the gold itself is not the monetary instrument. The monetary instrument is the coin stamped by the government and the face value declared on the coin.

Let us suppose that the Australian government stamped a gold coin with a face value of $100. Let us also suppose that the gold in the coin was worth more, say, $200. Someone who is very interested in gold coins might give you $200 for the coin. However, it will only eliminate $100 in liabilities to the issuer. In other words, the commodity itself isn’t the monetary instrument. The government could also issue a paper note with a face value of One Dollar and then peg it to gold. But again, the gold itself is not the monetary instrument; the One Dollar is.

Look, it’s all quite simple: people need to get over this gold fetish. The US and Australian governments could grab a pile of dog crap and stamp a face value of $10 on it, but the dog crap itself isn’t the monetary instrument. If the governments ran out of dog crap, they could switch to cat crap and stamp a face value of $10 on it. The commodity itself is crap – It’s all about the number with the “$” symbol stamped on the crap and when the government taxes, it isn’t interested in getting the crap back. The government wants the number that is stamped on the crap back. So, when it shreds a $1 bill, the government is not destroying something irreplaceable, because it has the power to type the number “1” in bank accounts endlessly. If, afterwards, people want to carry around the number “1” that it typed in an account somewhere, it will simply print a $1 bill for them – something they are not allowed do themselves.

You could get out a piece of paper and write $1 on it. But when you go to the store and present it as payment, nobody will believe you. You could also walk into the store, pick up $100 worth of groceries and at check-out tell the clerk, “Oh, don’t worry, I have $100,000 in the bank”, but they’re not going to believe you. If you showed them your debit card and said the same thing, they still wouldn’t believe you. They’d ask you to swipe the card to prove it. Again, try to understand: a US Dollar is just a number with a fancy “$” that is issued exclusively by the US government. The same thing goes for the Australian government and an Australian Dollar. You will only find a US or an Australian Dollar in one of three distinct forms: either cash, numbers in a reserve account or numbers in a securities account. That’s it. So, since dollars are just numbers on a spreadsheet called “reserve accounts”, if you want to physically carry around those numbers, the government is going to have to issue a physical instrument for that purpose.

The dollar is a number and so, cash is nothing more than the physical manifestation of the number. It is what allows you to physically carry around a special number issued by the government that can buy stuff and people will trust that you have the special number that buys stuff.

Based on customer demand for cash, US banks, for instance, will order cash from the Federal Reserve (central bank) to meet that demand. When a bank orders cash, the Federal Reserve debits the bank’s reserve account by that amount and ships the cash to the bank. For example, if the bank needs $5 million in cash, the Fed will delete the number 5 million from the bank’s reserve account and ship $5 million in cash to the bank. In other words, the Fed is converting the number on a spreadsheet into a physical object so that you can actually carry it around. The cash arrives at your bank and the bank sticks the cash in its vault. When you withdraw $10 in cash from your account, the bank will hand you a $10 cash note, the amount of cash in the bank’s vault then drops by exactly $10, the numbers in your account also then drop by exactly 10 and you walk out into the streets carrying hard evidence that you can buy $10 worth of stuff. In other words, you are walking around town with an official withdrawal slip that has the number 10 on it. It tells everyone, “This guy here had $10 in a bank account, but he chose to carry it around with him instead. The government printed an official note with the number 10 on it, so that we would all believe the guy.” You have a paper voucher that allows you to buy stuff up to the limit of the number printed on it (the face value).

Lastly, I want you to notice that originally, the US Dollar was sitting on a spreadsheet called a “reserve account” at the Federal Reserve. When the bank ordered $5 million in cash, the Fed deleted the number 5 million from the bank’s reserve account and shipped $5 million in cash to the bank. In exactly the same manner, when you withdrew $10 and asked for it in cash, your bank deleted the number 10 from your bank account and gave you a $10 bill. Obviously, this is because you demanded to carry the number 10 around with you. So, the bank adjusts the numbers downward in your account to reflect your wishes. When you spend that $10 cash, someone else will eventually deposit the cash in their bank. At that time, the dollars in their bank’s vault will increase by exactly $10 and the numbers in their bank account will increase by exactly 10. So, can you guess what happens when that bank sends back the $10 in cash to the Fed? The $10 in cash is removed from the bank, the Fed goes into the bank’s reserve account and types the number “10”.

The physical cash has become just a number on a spreadsheet yet again.