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Cash is a contingency and fall-back solution

Cash is a critical infrastructure and plays an essential role in emergencies. The cash cycle has demonstrated its robustness and resilience in times of natural and man-made disasters.

In October 2014, US President Obama’s credit card was declined at a restaurant as he was dining with his wife48. Luckily for the restaurant, the First Lady picked up the cheque. Payment transactions are denied for a number of reasons, as many cardholders have discovered: the card limit may have been reached; suspicious transactions have been detected and the issuer may have blocked the card; the card has expired; the magnetic stripe may have been demagnetised or the chip damaged; the retailer’s equipment may be out of service or simply out of paper; the telecoms network might be having problems, etc. There are also transactions for which some or all cards are not accepted.

As a result, cash is very often perceived as a fall-back solution when other payment options fail. The research paper Consumer Cash Usage: A Cross-Country Comparison with Payment Diary Survey Data49 measured consumers’ use of cash in Canada, Australia, Austria, France, Germany, the Netherlands and the US between 2009 and 2012. The report estimates that average cash balances vary from $51 in the Netherlands to $148 in Austria and this difference is essentially due to the greater use of cash in one country than another. These balances vary from 1.5 times the daily consumer expenditure in Australia to 4.8 times in Austria. This reflects the importance of precautionary holdings as consumers carry far more cash than they actually require.
Average cash balances
Card issuers also recognise the fundamental role of cash as a fall-back solution, as most cards provide for emergency cash advances.

Cash also plays a key contingency role for national payments systems in case of natural disasters or financial crises. The cash cycle demonstrated its resilience in natural disasters such as Hurricane Katrina in 2005, the 2011 earthquake and tsunami in Japan, and Typhoon Bopha which hit the Philippines in 2012. Unsurprisingly, the US FEMA – Federal Emergency Management Agency – now recommends to include cash in an emergency supply kit50. Cash also plays a role in the event of technology failures. In 1999, as the millennium approached, demand for banknotes increased significantly as consumers feared bank information systems could be affected by the Y2K computer bug.

For many experts, including the World Bank, the impact of weather-related events will likely increase in the future under the combined pressure of global warming and the expansion of many cities in hazard-prone areas51.

More recently, the collapse of Lehman Brothers and the ensuing global financial crisis also led to a significant increase in demand for currency. In Australia, the Reserve Bank estimates that demand for currency increased by AUD 5 billion or 12% in late 200852 although, unlike in many countries, the solvency of Australian banks was not in jeopardy. The Reserve Bank believes the rise was essentially due to an increase in precautionary holdings. The euro zone also registered a strong increase in the number of notes in circulation in the first half of October 2008, equivalent to a value of €35-40 billion53.
The impact of Y2K and the global financial crisis on US currency
According to Dario Negueruela, Chief Cashier of the Banco de Espana54, “Central banks, particularly after the ordeal of the crisis, have an important responsibility today as key managers in crisis situations. It is no longer sufficient to say that they are doing their work well; rather the important thing is to be in a position to respond to emergency situations and to anticipate unforeseeable events or exceptional demands.” Quality management and cost savings are no longer enough. Business continuity exercises study the systems that enable an institution or company to continue to perform its activities when an unexpected event occurs that affects the institution itself.
52 Currency Demand during the Global Financial Crisis: Evidence from Australia - Tom Cusbert and Thomas Rohling - Research Discussion Paper 2013-01 - Reserve Bank of Australia
53 European Central Bank Annual Report 2008
54 Cash and the Financial Crisis, by Dario Negueruela, Director of the Cash and Issue Department. Banco de Espana - 09.09.2014