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Resilient notes and coins - Money for everything

Despite many usurpers, cash is still king

Oct 3rd 2015

CASH has many enemies. Banks have added contactless technology to their credit

and debit cards; apps like Uber use pre-stored details for transactions and

services such as Venmo allow people to make transfers to one another using only

mobile phones. Peter Bofinger of the German Council of Economic Experts says

cash should be phased out to save the money spent printing and distributing it,

and to eliminate the annoying queues generated by shoppers who insist on using

it. Lawmen dislike it, since it is an enticingly anonymous store of value for

criminals. Now even central bankers are getting in on the act: the chief

economist of the Bank of England has proposed eliminating cash as part of a

plan to permit negative interest rates. (Storing bank notes under the mattress

is an easy way of thwarting a bank intent on charging negative rates.) Yet for

all its detractors, cash is puzzlingly resilient.

Economists had long assumed that as nations grow richer and their financial

infrastructure becomes more elaborate, the amount of cash in circulation would

first grow rapidly and then begin to slow, as alternatives gained traction.

Eventually, an absolute decline seemed likely, as cards and apps supplanted

notes and coins.

Thus the value of cash in circulation in China grew fourfold between 2000 and

2014 as the economy soared. In Sweden, meanwhile, demand for the physical sort

of krona has fallen steadily for the past decade. In 2005 there were 10,700

kronor ($1,430) in circulation for every Swede; by 2014 that had fallen to

8,000. This has had interesting anecdotal effects: would-be robbers have been

turned away by cashless banks; churches now offer card-readers to tech-savvy

parishioners. Denmark, another early deserter of cash, has seen weak demand for

banknotes.

But even among rich countries, Sweden and Denmark remain outliers. Elsewhere,

demand for cash continues to rise steadily (see chart). Curiously, the rich

country clinging the most enthusiastically to cash appears to be South Korea.

Despite Koreans fondness for plastic and a declining number of cashpoints, won

in circulation have risen by 15% a year since 2009, or more than triple the

rate of the previous five years. This cash is not being spent in shops; nor is

it likely that the shadow economy has grown enormously.

Instead, Koreans seem to be hoarding cash. Very low interest rates have reduced

the opportunity cost of snubbing banks. And in 2013 the government reduced the

amount of interest Koreans could earn before becoming liable for tax. To avoid

the resulting paperwork and scrutiny, many wealthy Koreans began storing their

excess earnings in cash. The Bank of Korea saw many high-denomination notes

disappear from view; sales of private safes tripled between 2010 and 2014.

Koreans are not the only hoarders. Recent British surveys suggest that locals

keep 3 billion-5 billion ($4.5 billion-7.5 billion) in their piggybanks,

representing up to 10% of the sterling in circulation. That points to a more

nuanced explanation for the persistence of cash. It may well be ceding ground

to contactless cards and the like for low-value transactions, but

high-denomination notes are still in favour. In America, $100 notes now account

for almost 80% of the value of banknotes, up from 60% two decades ago. In

Britain, 20 and 50 notes (the two highest denominations) make up a growing

share of the cash in circulation. As a means of exchange, cash may be losing

its lustre, but as a store of value, it seems to have a future.