Second in a series

Moving to a cashless society is all well and good. But even after we phase out those crumply bills and germy coins, the option of anonymous, untraceable payments must remain.

Otherwise, we, or our descendants, are going to be miserable.

Cash, although not extinct, is increasingly at the margins, making up less than one-third of consumer payments in 2010, according to the Federal Reserve Bank of Boston. Credit and debit cards accounted for close to half of transactions, while checks and electronic payments, such as online bill payments, each had about a 10% share.

Proponents of this ongoing shift to electronic payments point out that physical cash is inefficient and imposes unseen costs on the economy (think of armored trucks, for example). David Wolman, in his book "The End of Money," makes a powerful case that accelerating the shift to electronic payments would help the poorest among us, as he explained to me last year:

In the one infuriating passage in Wolman's otherwise wonderful book, he asserts that "ordinary consumers don't care about absolute anonymity." He then quotes a law professor who repeats the mantra of busybodies and moral scolds the world over: "The main people who are excited about a wholly anonymous payment system are people who are violating the law."

Felix Salmon, the influential Reuters blogger, also dismissed the value of anonymous payments in a 2011 blog post:

If I'm making a payment by swiping my phone, I don't really feel the need to be anonymous at all. In fact, if the payments system knows not only my identity but also my location when the payment is made, there are lots of ways that it can use that information in ways I could find extremely valuable. … Every time I walk into my local coffee shop, say, I can just pick up my regular order and walk out, and the payment will happen automatically. As will the free coffee I get after paying for ten at a regular price.

Granted, ordinary consumers probably don't yearn for, or even give a thought to, absolute anonymity when they're buying coffee or aspirin or toilet paper. In such prosaic situations they're more apt to put as much as they can on the credit card to rack up rewards. In doing so, they'll appreciate the sophisticated location and loyalty features Salmon describes. 

But what about when someone goes to the same pharmacy where she usually gets aspirin or mouthwash to buy a home pregnancy test kit? Wouldn't she want the option of leaving no transaction record that a spouse or parent might find?

What about someone who goes to a clinic specializing in confidential HIV tests?

The old saw that "only criminals or terrorists care about anonymity" (or "…about privacy," depending on the context) is a cheap smear of those of us who object to surveillance—a group, I'd wager, that includes most people, certainly most Americans.

It's not only that people sometimes make purchases they don't want the cops (or their nosy neighbors or judgmental in-laws or overbearing parents) to know about. A December Wall Street Journal article about a chilling government domestic surveillance program put it well:

The risk … is that innocent behavior gets misunderstood—say, a man buying chemicals (for a child's science fair) and a timer (for the sprinkler) sets off false alarms.

Along those lines, imagine a hapless hipster who orders "The Anarchist Cookbook," mistaking it for a collection of vegan recipes, and a bag of fertilizer for his organic co-op. Lights flash at the NSA: Imminent Threat!

I'd go further and say that even some "bad" transactions ought to remain secret and untraceable.

 "Some norms are formally adopted – perhaps as law – which society really expects many persons to break," Alan Westin wrote in his 1967 classic "Privacy and Freedom." Examples include "violating traffic laws, breaking sexual mores, cheating on expense accounts … or smoking in rest rooms when this is prohibited."

If it were known every time someone broke one of these taboos, Westin cautioned, most people

would be under organizational discipline or in jail, or could be manipulated by threats of such action. The firm expectation of having privacy for permissible deviations is a distinguishing characteristic of … a free society.

I suspect this expectation also keeps cherished traditions alive. Think of someone living in a strict religious community where pork is forbidden. Every once in a while, he likes to sneak into the next town and bite into a Slim Jim. No one's the wiser, no harm done.

Now, take away cash, or any other way for him to pay for this occasional indulgence without leaving a record that family members or neighbors might discover. Without the safety valve of furtive deviations, will he keep kosher (or halal, as the case may be) all the time as a result? Or will he be more likely to quit the faith, rather than live under unceasing scrutiny?

When I interviewed Wolman last year, he readily acknowledged the privacy risks of going cashless. But he dismissed as frivolous the concerns of, say, men who want to hide their charges at strip clubs or purchases of diamond necklaces for their mistresses.

Sure, those guys are jerks – but what would happen to the institution of marriage if spouses could no longer keep any transactions secret from each other? Does anyone really want to find out?

Fortunately, we can reap the undeniable benefits of electronic payments while protecting our privacy and our sanity – and I'll discuss this in my next post.

Marc Hochstein is the Executive Editor of American Banker. The views expressed are his own. Follow him on Twitter @MarcHochstein.