Do you prefer the convenience of paying with a card or a phone but still keep a stash of cashMoney in physical form such as banknotes and coins. More at home “just in case.” Why do people store cash even when digital payments are everywhere? This question lies at the heart of the cash paradox: the counterintuitive rise in demand for cash despite the increasing use of digital paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More methods. At first glance, it seems puzzling. In many economies, the use of cash is declining at the point of sale. Yet, cash in circulationThe value (or number of units) of the banknotes and coins in circulation within an economy. Cash in circulation is included in the M1 monetary aggregate and comprises only the banknotes and coins in circulation outside the Monetary Financial Institutions (MFI), as stated in the consolidated balance sheet of the MFIs, which means that the cash issued and held by the MFIs has been subtracted (“cash reserves”). Cash in circulation does not include the balance of the central bank’s own banknot... More is growing.
One of the key factors behind this paradox is Gresham’s Law, an economic principle dating back to the 16th century, which states that “bad moneyFrom the Latin word moneta, nickname that was given by Romans to the goddess Juno because there was a minting workshop next to her temple. Money is any item that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular region, country or socio-economic context. Its onset dates back to the origins of humanity and its physical representation has taken on very varied forms until the appearance of metal coins. The banknote, a typical representati... More drives out good.” Historically, this meant that when two types of money with different intrinsic values but the same legal tenderMoney that is legally valid for the payment of debts and must be accepted for that purpose when offered. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered (“tendered”) in payment of a debt extinguishes the debt. There is no obligation on the creditor to accept the tendered payment, but the act of tendering the payment in legal tender discharges the debt. More status circulated, people would store the more valuable money and spend the less valuable.
Sir Thomas Gresham (1519–1579) was an English merchant, financier, and advisor to Queen Elizabeth I. Gresham’s innovation was not just in identifying that “bad money drives out good,” but in recognizing how government policies—like debasing coinage—could unintentionally disrupt an economy. During the 16th century, England faced a currencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More crisis after King Henry VIII reduced the silverWhite, shiny, and soft metal used to mint coins or medals. More content in coins to fund wars, a practice known as debasement. Gresham observed that people stored the older, purer coins and spent the new, debased ones, leading to a shortage of good money in circulation. His insight was groundbreaking because it highlighted the psychological and behavioral responses of people to changes in the value of money. Gresham’s work laid the foundation for modern monetary policy, emphasizing the importance of trust and stability in currency.
This principle has been observed across different eras and cultures:
The key insight is that when two types of money circulate but one is perceived as more valuable—whether due to metal content, stability, or trust—people will hoard the “good” money and spend the “bad” money, even if both are legally equivalent.
The cash paradox refers to the phenomenon where demand for physical cash persists or even grows despite the rapid rise of digital payments. This trend is documented globally and was particularly visible during the pandemic. The volume of banknotes in circulation saw exceptional growth in 2020, particularly for middle and high-denomination notes demonstrating the importance of the store of valueOne of the functions of money or more generally of any asset that can be saved and exchanged at a later time without loss of its purchasing power. See also Precautionary Holdings. More function of cash.
Gresham’s Law helps explain the cash paradox by framing cash as the “good money” and digital payments as the “bad money” in people’s minds, even though both are legally valid forms of payment.
Why Cash Is Seen as “Good Money”
Why Digital Money Is Seen as “Bad Money”
While Gresham’s Law provides a powerful explanation, the cash paradox is also influenced by other factors:
Gresham’s Law is not the sole explanation but is a key pieceIn plural, it is commonly used as synonym for units of banknotes and coins. More of the puzzle, helping explain why people hold cash as a store of value while using digital money for transactions.
Gresham’s Law helps explain the modern cash paradox by showing why people hoard cash—perceived as “good money”—while using digital payments—perceived as “bad money”—for transactions. Psychological factors like trust, ownership, and perceived security reinforce this behavior. Real-world examples from Germany, Japan, and high-inflation countries illustrate how cash remains a preferred store of value despite the rise of digital payments. As digital money evolves, including stablecoins and central bank digital currencies, the dynamics of Gresham’s Law continue to shape people’s preferences.