Bearer money is money that can be passed physically from person to person. The important point about it is that it does not have and cannot have any knowledge of who owns it. Whoever carries it is considered its owner. 

Bearer money can and does move from place to place, and can even travel out of the country. Historically this was a particular problem with coins whose value in use was close to the value of their precious metal content. The coins could simply exit the country, and if many did, it caused a money supply problem. In effect, a balance of trade problem eventually became a coin shortage problem. 

Bearer money is also the criminal’s natural choice. Its ownership is never known and it can pass from one hand to another invisibly. From our perspective, money laundering is the act of disguising the transfer of criminally earned bearer money into account money

The Cost of Bearer Money

Paper notes and coins can be lost or destroyed, and paper notes wear out quite quickly. For dollar notes, the lifetimes are: $1 —  about 5.8 years, $5 —  about 5.5 years, $10 —  about 4.5 years, $20 —  about 7.9 years, $50 —   about 8.5 years and $100 —  about 5.5 years. 

The constant printing activity costs about 5 cents (for $1 and $2 bills), about 10 cents (for $5, $10, $20 and $50 bills) and 12.3 cents for $100 bills. It doesn’t sound particularly expensive, but for every $1 bill it costs ¢1 to keep it in circulation for a year, and as there are 11.7 billion such notes, we’re looking at over $110 million per annum just for $1 bills. 

Paper notes are relatively cheap to make; coins are not. In the US, the price varies slightly with the market price of copper and nickel. In 2014 it cost $1.66 to make a dollar’s worth of pennies, $1.62 to make a dollar’s worth of nickels, 40 cents for a dollar’s worth of dimes, 36 cents to make a dollar’s worth of quarters, and 10 cents to make a dollar coin. The penny and nickel have for many years cost more than their face value to make. 

Ignoring half-dollar coins, the annual US coin production is roughly 16 billion coins, with about 56% pennies, 10% nickels, 19% dimes, 15% quarters and 0.06% dollars for a value of $1.7 billion, at a cost of about $134 million. Coins can last up to thirty years, so it would make great sense for the dollar coin to replace the dollar bill, but the public prefers the note. 

The cost then of circulating paper money and coins is significant, and governments would be happy to do away with it. In the US this is made impossible by the fact that about 7.7% of US citizens are unbanked and thus cannot use the digital payment services that banks provide. (Incidentally, a much larger percentage of indigenous US citizens are unbanked). 

Cash has a dominant role in small-value transactions and is the natural alternative when other payment options are not available. 

Currency Debasement

Currency debasement manifests in coinage through techniques such as clipping the coin edges or reforging the coins with less precious metal content. In the case of paper money, debasement occurs by forgery or money printing. When a currency is debased the money supply increases. If the amount of economic activity within the economy remains the same then price rises soon follow. 

If the level of debasement is small, the impact of rising prices will be slow. You can think of it like this: If the government increases taxes on everyone by 3%, most likely citizens will be annoyed and may reflect their disapproval at the ballot box. Instead, the government can simply print 3% more money and can harvest the same amount of money for itself without attracting much attention. Conveniently, the impact in rising prices may not become apparent for 12 to 18 months. And if the economy is growing by 3% then even better, because the increase in the money supply will not necessarily be visible at all. 

Crypto Bearer Money?

Simply because bearer money does not know who owns it and cryptocurrency does, by virtue of the private key, no cryptocurrency can ever become bearer money. Consequently, no matter how successful cryptocurrencies become, they will never replace all fiat money.