Cash demand

A recent IMF paper suggests that ATM cash withdrawals are better indicators of the use of cash for payments than the traditional metric of currency in circulation. However, the reasoning is somewhat biased and includes unconvincing arguments.

A comprehensive review of economic research on cash usage and consumer holdings concludes cash is alive and well.

After record growth in 2020, global demand for banknotes has returned to a normal situation. More recently, rising inflation and increasing interest rates have been negatively impacting cash balances. More concerning is the decreasing transactional use of cash, which puts pressure on the cash infrastructure. The cash community should make the case that cash is part of a critical public infrastructure, the maintenance and development of which should be financed accordingly.

In 2021, global cash demand returned to a normal pre-covid distribution, which is quite remarkable after the exceptional growth in 2020. Looking forward, demand will be influenced negatively by rising interest rates and positively by geopolitical tensions. More than ever, a well-functioning cash infrastructure is essential to meet volatile demand.

Following exceptional growth in 2020, cash demand has returned to 'normal' growth in 2021. Looking forward, the rapidly rising interest will increase the opportunity cost of holding cash, while geopolitical tensions will increase the precautionary motive to keep cash.

Elsewhere on the Web provides weekly updates and links to articles related to cash and money, curated on the web. Last week, the focus was on how the Ukraine war triggered a run on cash in neighbouring countries.

A paper by Ashworth and Goodhart shows that the pandemic fuelled a remarkable surge in currency in circulation, with cash once again defying premature obituaries of its demise. In a major crisis people still want to retreat to the security and safety of holding bank notes, to provide reassurance.

Marc Schwartz, CEO of the Monnaie de Paris, the French Mint, and Yannis Messaoui have recently published a study, “The great paradox or why the reign of cash is far from over”. They discuss here the history of money and explain why cash is not in the process of extinction.

The exceptional growth of the volume of banknotes in circulation in 2020 illustrate global trust in banknotes. The shift of demand towards middle and high-denomination notes demonstrates the importance of the store of value function of cash, particularly in times of uncertainty.

A new ECB report concludes that the exceptional demand for banknotes during the pandemic is driven by an increase in precautionary holdings in times of uncertainty as well as by international demand, a phenomenon known as the cash paradox.

Cash in circulation grew by 5% in value in 2020. The growth is due exclusively to the increased demand for the 10,000 yen note, signaling as in many other countries the role of cash as a safe haven in times of crisis.

The dual role of currency both as a store of wealth and means of payment has never been more apparent, as the numbers that report cash on issue and cash use remain dramatically different.