A Perplexing Persistence of Paper Money
Cash Hoarding: A Phenomenon that Refuses to Fade
Hidden Fortunes Persist: Cash Stashes Keep Increasing
In defiance of the apocalyptic prophecies proposing the imminent demise of hard cash, the humble banknote and coin maintain a strong presence in the Eurozone's economic landscape. The European Central Bank reported a circulation of a staggering 1.564 trillion euros in March 2023 – a figure surpassing that of spring 2022 by a hefty 30 billion euros and outshining the pre-pandemic level by an impressive 300 billion euros.
To many, this inexplicable increase in cash circulation appearing amidst a precipitous decline in cash transactions is akin to a real-life enigma. This baffling trend, referred to as the "banknote paradox," has been recorded in numerous nations over the years.
A Flooding of Euros: Insights from the Bundesbank
With cash representing only a quarter of total turnover in 2023, despite half of all payment transactions at German cash registers still being made in cash, the question arises: If the utility of cash is waning, why is there more of it circulating?
Johannes Gärtner, a payment expert at the consulting firm Strategy&, sheds light on the matter. He points out that the growth rate of cash has consistently surpassed the annual inflation rate until 2021. The problem, as Gärtner sees it, is that the steady diminution of cash usage in everyday life has not led to a proportional decline in cash circulating.
So, What's the Deal with Cash?
So, what could account for this conundrum? There are several theories that seek to explain this peculiar phenomenon.
- Uncertainty: Ralf Wintergerst, CEO of the Munich-based security technology manufacturer Giesecke+Devrient, posits that uncertainty is chiefly responsible for the trend towards cash hoarding. In a world full of unforeseen developments, people may opt to hold onto their cash as a form of safety net.
- Hoarding: A time of economic instability or growing inflation fears might foster hoarding behavior, as individuals stockpile cash as a store of value or to meet future needs.
- Shadow Economy: Cash continues to play a vital role in the grey area of illicit activities such as tax evasion or criminal transactions. An increase in cash circulation might indicate a higher degree of activity in the shadow economy.
- Digital Payment Resistance: Despite the pervasiveness of digital payments, there remain pockets of resistance to the tech-driven revolution. Compelled by concerns over privacy and security, some individuals might still opt for cold, hard cash for certain transactions.
- Reserve Currency Abroad: Cash might be an essential reserve currency in other regions, adding to the overall circulation within the Eurozone.
Cash: A Reliable Companion in Tumultuous Times
As the preference for cash wanes in the lives of law-abiding citizens, one might wonder if paper money will, in the future, cease to be a ubiquitous component of any wallet. However, the Bundesbank remains committed to the preservation of cash and its accompanying infrastructure, recognizing its unique advantages. Cash, unlike digital payment systems, does not demand electricity or electronic infrastructure.
In the face of crises, wars, natural disasters, or simply the inconvenience of power outages, cold, hard cash ensures that money can continue to flow. Wintergerst, CEO of Giesecke+Devrient, asserts that the central bank must uphold a sustainable, resilient payment infrastructure. Cash, with its off-the-grid nature, empowers this goal in a world that may be unpredictable.
_{[1] Euro Area Economic and Financial Developments, European Central Bank, 2023. [2] Cashless Economies: A Review, Financial Markets Group, London School of Economics, 2023. [3] Cash Recycling Systems: Energy Efficiency and Cost Analysis, International Journal of Energy Economics and Policy, 2021. [4] The Cashless Society: A Myth, The Wall Street Journal, 2021. [5] A Perspective on Cash Circulation, Bundesbank, 2023.}
- The surge in cash circulation, despite the decline in cash transactions, might be due to individuals increasingly choosing to invest in personal-finance options like cash as a form of safety net in uncertain times, such as a time of economic instability or growing inflation fears (hoarding).
- Another possible explanation for the persistence of paper money, even in the face of digital payment systems, could be the continued role of cash in the 'shadow economy,' as it remains an essential medium for illicit activities like tax evasion or criminal transactions.
