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The New Cash Paradox

Categories : Cash generates security, Cash has legal tender status, Cash is a public good
March 25, 2024
Tags : Cash, Cash paradox, Store of value, Trust
The end of the "cash era", announced by The Economist fifteen years ago, has not arrived. On the contrary, in a contactless but crisis-ridden world, cash is leaving wallets and taking refuge in mattresses.
Marc Schwartz

Chairman & CEO, Monnaie de Paris (The French Mint)

This post is also available in: Spanish

In 2007, The Economist published a feature entitled “The end of the cash era”. The cover featured a magnificent illustration of a dinosaur made of coins. The message could not have been clearer: “Cash, after thousands of years as one of humanity’s most versatile and enduring technologies, looks set to disappear slowly but surely over the next decade and a half.”

The Economist cover, February 15, 2007.

Yet the exact opposite has happened. According to the ECB, the value of cash in circulation in the eurozone has increased by 2.3, from €700 billion at the end of 2007 to €1,600 billion at the end of 2023. According to the Fed, the value of US dollars has almost tripled, from $820 billion to $2,333 billion. If we relate these figures of cash in circulation to GDP, the picture is similar: the ratio has almost tripled in Europe (from 5% to 13% of GDP), increased by 50% in the United States (9% of GDP compared with 6%) and by 77% in Japan (23% of GDP compared with 13%).

It is Raining Cash

A few exceptions exist to this trend, the most noteworthy being the Scandinavian countries and China. But there is no denying that the amount of cash in circulation has risen sharply over the last fifteen years. Simply put, the volume of cash available worldwide has never been as high as in 2023! The cashless society constantly predicted by the outspoken advocates of the digital age is still a long way off.

Undeniably, a slowdown occurred in 2023. In the United States, the volume of cash in circulation grew by just 1.6% last year, after peaking during the Covid years. The same is true of the eurozone, where there was a slight decline (-0.2%). But this trend is not a sign of a disenchantment with cash. This can be explained by a reversal in the macroeconomic determinants of demand for money: sluggish growth, high inflation, and high-interest rates, all of which make it less attractive to hold cash. But for how long?

A Safe Haven

The near-continuous increase in the stock of cash in circulation is paradoxical because we use less cash in everyday payments. The latest ECB survey shows that the proportion of point-of-sale payments made in cash fell from 79% to 59% in the eurozone between 2016 and 2022. However, the decline in the transactional use of physical money goes hand in hand with a renewed attraction for cash as a store of value and an anchor of stability in an uncertain world. Like gold, cash is a haven.

This phenomenon is now coupled with a new paradox: although we are using cash less to pay for everyday purchases, our confidence in cash remains very high and is even tending to increase. Just because cash use is declining doesn’t mean we want to see it disappear—quite the contrary.

Attachment to Cash

In France, according to the annual survey by Ifop Institute for Monnaie de Paris, 83% of respondents say they are “attached to cash,” a proportion that is rising compared to 2022 (79%). And France is not alone. The same is true in Spain and Germany, big fans of cash, but also in countries where, conversely, its use has declined sharply: 91% of Dutch people think it is essential to be able to pay in cash, as do 95% of Finns. Across the Atlantic, 93% of Americans surveyed by the Fed have “no intention of stopping using cash in the future,” and 90% of Canadians polled said they had no desire to move towards a cashless society.

The reason for this fierce attachment to cash can be summed up in one word: trust. Physical money, the only form of legal tender, is also the only public money form available to individuals. The guarantee offered by the signature of the State or the central bank retains the same symbolic force as in the days when the King of France minted money in his workshops on the Quai de Conti. Fiduciary money (from the Latin fides, confidence) has never been so aptly named!

This post is also available in: Spanish