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The Cashless Economy Paradox: A Renewed Reliance on Cash During COVID


01/16/2022


Despite initial predictions that the onslaught of the coronavirus would be the demise of physical money, people have turned to cash in this time of uncertainty. Historically, the amount of cash in circulation has increased during times of upheaval. Even though we are living in a digital era and debates about cashless societies have intensified, people have once again placed their trust in cold, hard cash. 
 
As Nick Colas, co-founder of Data Trek Research writes, “In all the buzz about how the pandemic economy favors virtual money over physical cash, it is worth noting that demand for the latter is at Y2K levels and higher than any other recession.” And if past experiences offer some insight, the cash accumulated during the pandemic should actually help rebuild post-COVID world economies.
 

Cash During Crises

During various periods of economic and political instability, people across the world have relied on cash for security. The bankruptcy of Lehman Brothers in 2008 and the ensuing financial crisis is one of the most recent and glaring examples. People saw the fragility of the banking system and were concerned about the safety of their money.
 
The proof is in the numbers. The European Central Bank reports that the value of euro banknotes in circulation increased by €83.3 billion between October 2008 and September 2009. This is compared to an increase of only €46.6 billion between October 2007 and the end of September 2008. Essentially, the 2008 financial crisis triggered an additional €37 billion to be put into circulation.
 
To explain this, Marc Terry, international managing director of CardTronics, says, “…clearly people like the certainty that having cash-in-hand offers during uncertain times. It is the one asset that people feel confident isn’t going to lose value.” These “uncertain times” are often followed by “economic boom times ” as the hoarded cash is then used when situations improved.
 
And yet, despite such demonstrations of people’s trust in cash, the ability to access and use banknotes has been threatened over the past decade.
 

The Attack on Cash

Even before today’s global health crisis, cash was already under siege by financial institutions and some policymakers. Campaigns against cash were launched by credit card companies and digital payment firms that profit from transaction fees when consumers use a credit card, pay with a digital wallet or send peer-to-peer payments.
 
When the pandemic began, unsubstantiated claims that banknotes could spread the virus prompted predictions that this would be the death of cash. Actual studies debunked this myth as they found that banknotes were no more likely to transmit the virus than any other payment surface such as credit cards, pin code terminals, touchscreens, etc.
 
But some merchants and consumers remained wary of cash. A survey from CouponFollow, an online deal platform, found that 49% of American consumers were concerned about using cash because of the coronavirus. Despite these reservations, 91% of survey participants said they always carry cash and 62% had used cash to pay for some of their shopping in 2020.
 

Today’s Unprecedented Demand for Cash

The pandemic has certainly not killed cash. Instead, it has sparked an increased demand for banknotes unseen since World War II. What is particularly noteworthy is that this phenomenon is not only happening in emerging markets where a higher percentage of people do not have bank accounts, but in rich countries as well.
 
In the first three months of the pandemic, banknotes in circulation in the euro area increased by €75 billion. Even more recently, euro banknote circulation jumped 12% in April 2021 which was more than double the growth rate of all of 2019.
 
On the other side of the Atlantic, America’s Federal Reserve Board had ordered 5.2 billion new banknotes in 2019 to replace old bills throughout the following year. However, as Americans rushed to ATMs at the beginning of the pandemic, the Fed had to order an additional 1 billion banknotes. Canada faced the same increased demand and the Bank of Canada estimated that an additional $8.4 billion lined the pockets of Canadian citizens because of the coronavirus.
 
Emerging markets also experienced this trend as people worried that their only option for buying food and basic necessities would be with physical cash. Russia, Mexico, Brazil and India have encountered particularly high demands for banknotes. In India, a country whose government has been actively pushing for a cashless economy since 2016, the currency in circulation reached a twenty-year high in March 2021 with a 16.8% increase over the previous year.
 
But if most people worldwide were ordered to stay at home, and stores and restaurants shuttered their doors, where did all the cash go?
 

Shoeboxes Full of Cash

The Economist quipped that fears of banknotes transmitting the virus did not stop people from taking out their money “and stashing cash under their mattresses.” According to the European Central Bank, “The 12.2 per cent jump in physical euros in circulation mainly stemmed from EU households hoarding more cash in response to the uncertainty and disruption of the pandemic, a defensive reflex experienced in several earlier crises.” This tendency to hoard banknotes during difficult times is driven by the perception of cash as a store of value.
 
Even though online payments grew during the pandemic as shops temporarily closed, the demand for cash increased as people wanted the reassurance of having money, or a store of value, within reach. And this money is waiting to be spent. 
 

Cash Can Help

Initial forecasts that the coronavirus would be the downfall of cash have been proven wrong. People have once again shown they trust the reliability of physical money when faced with uncertainty and this continuing confidence in cash might just be the ticket towards economic recovery.  
 
Since the pandemic began, governments have injected billions and trillions of dollars, euros, etc. into their economies in an effort to keep citizens and businesses afloat. As countries continue to add to their debts, there are valid concerns about the future of public finances. But if history is to once again repeat itself, the increased amount of cash put into circulation since 2020 should lead to a quick economic recovery, or even boom. Now that vaccinations have made significant progress and countries are starting to open up, people are eager to start spending that trusted cash they have hidden at home.