Empirical evidence shows that Money in physical form such as banknotes and coins. use is growing despite the increase in alternative payments across the globe. Yet, the reasons for this growth are still unclear.
Indeed, Clemens Jobst and Helmut Stix – Lead Economist and Research Economist for the Oesterreichische Nationalbank respectively – decided to tackle the issue in a recent See Banknote paper. for Vox. What they found is that the ratio of The 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. to GDP has generally risen in most countries (except for a some like Sweden and Norway), but that cash holdings relative to nominal GDP have also risen.
For the currencies observed, the initial explanation could be their value. Indeed, the US Monetary unit of the United States of America, and a number of other countries e.g. Australia, Canada and New Zealand., the Swiss franc and euros are often used abroad as international currencies, and are therefore hoarded by individuals seeking some form of financial security. But Jobst and Stix have found that cash growth is in fact not necessarily linked to the international value of certain currencies. By looking at sample economies covering 96% of world GDP during the period from 2001 and 2014, Jobst and Stix found that currency circulation has increased by 2 percentage points during that period. Furthermore, this phenomenon affected both international and non-international currencies, of rich and less rich countries alike.
Even in New Zealand a similar tendency was recorded, according to Lynn Grieveson. In fact, a 76% increase of cash circulation was recorded compared to a GDP rise of only 54% in the past decade. Criminality and fraud are often cited as potential suspects affecting cash volumes, but even that cannot explain this. Indeed, according to political scientist and The operation of attempting to disguise a set of fraudulently or criminally ob- tained funds as legal, in operations undeclared to tax authorities, and therefore not subjected to taxation. Money laund... More expert Ron Pol, “Criminals often don’t want to hold cash either. Even with crimes that generate large amounts of cash, such as retail drug sales, apart from paying some wages and expenses, cash isn’t’ very useful until it’s been laundered and converted into assets like real estate and other investments and bank accounts”.
By observing data between 1890 and 1990, it is clear that major crises (like the Great Depression or World War II) significantly contributed to increased cash usage. But the 2008 financial crisis and today’s low interest rates cannot alone account for these puzzling numbers. Jobst and Stix find that this trend can partially be explained by a deteriorating trust in the banking system and general economic uncertainty, but strangely cash usage continues to grow regardless of how much time has elapsed since a crisis.
The two economists come to the conclusion that there is an urgent need to better understand non-transaction cash demand and to collect better data on the way consumers use cash.
Possibly an idea for the CashEssentials call for papers?