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.