Wallets, like suits and high heels, have been gathering dust in the pandemic. Sales of billfolds fell by a fifth last year as shoppers shunned cash in favour of contactless transactions. Demand for digital payments has more than doubled the market value of platforms such as Adyen, PayPal and Square.
Yet paradoxically, demand for banknotes is increasing even as their use in retail transactions declines. In the year to February there was a 12 per cent rise in physical euros in circulation, a 13 per cent increase in sterling and a 17 per cent rise in dollars.
Much of that has been driven by fears of disruption, a familiar theme in previous crises. Ahead of the millennium, fears of computer glitches pushed up dollar issuance by more than a fifth. Such behaviour is reasonable enough. Even Sweden, regarded as the poster child of cashless societies, has advised people to stash some cash at home in case of cyber attacks or other emergencies.
In the financial crisis, high demand for cash was accompanied by a shift of financial deposits away from banks. That has not been the case in the pandemic. Household bank balances have grown faster than in the previous five years in nearly all industrialised countries, as spending opportunities were curbed.
Such trends might be expected to revert to pre-pandemic norms. But growing demand for cash predates the pandemic. Indeed the money in circulation has nearly doubled over the past 20 years, says Deutsche Bank. This is almost entirely due to large notes, such as the $100 note, the ¥10,000 note and the €50 note.
Central banks estimate that only about a quarter of sterling and euro notes are used for legitimate transactions. The remainder are held, at home and abroad, as a store of value and to fuel the shadow economy. Kenneth Rogoff, a Harvard economics professor, says that more than half the currency in most countries is used to hide transactions.
Scrapping big denomination notes might blunt the use of cash for illicit purposes. Sweden’s effort to crack down on the informal sector is one reason for the rapid decline in its use of cash. But a sustained rise in prices would erode cash’s role as a store of value and have a bigger effect. A move away from rock bottom interest rates will be the only real incentive to shift cash out from under the mattress.