The pandemic-fueled decline of cash
Cash is getting a bad reputation. It was already on the ropes but the pandemic accelerated a decline that's been underway.
Why it matters: Consumers used less cash in 2020. That along with a trend toward digital transactions in the smaller-dollar realm — the last stronghold of the legal cash economy — implies the cash in circulation is largely being used for under-the-table or illicit activities.
- This could strengthen the rationale for governments to develop their own digital currencies, which would be trackable and taxable.
What's happening: More consumers are going digital for obvious reasons — the convenience, the safety of not carrying around wads of cash, and after COVID, because of sanitary concerns, says Jody Jonsson, portfolio manager at Capital Group.
- And while the entirety of cash payments is impossible to track, we can see that digital payments have grown faster than overall consumption over the past decade, Kenneth Rogoff, professor of economics at Harvard, tells Axios.
By the numbers: For long-term trends, surveys by the Atlanta Fed determined that in 2019, paper currency was used in 26% of consumer payments by number, and 6% by value. That's down from 40%, and 14%, respectively, in 2012.
- And the 2019 Federal Reserve Payments Study also observed "continued expansion of smaller-value card payments."
- We have anecdotal data for 2020, like an Atlanta Fed survey that shows cash payments declined to 18.6% of transactions, from 25.8% in 2019.
- The share of consumers who said they use cash at least once a month dropped to 74.7% in 2020, from 82.4% in 2019, according to another Atlanta Fed survey.
The intrigue: Demand for $100 bills illustrates the increasingly underground use of cash, says Rogoff, who in 2016 authored the definitive tome about the dark side of paper money.
- The $100 bill accounts for more than 80% of U.S. bills in circulation, according to the Bank for International Settlements.
- Hundred dollar bills are rarely used in retail transactions, and are more commonly used for paying for goods and services off the books.
- And cryptocurrencies, anonymous and thus useful in criminal activity, are “$100 bills on steroids," Rogoff says.
What to watch: In an effort to combat tax evasion and criminal activity, countries around the world are studying the development of central bank digital currencies (CBDCs), which are existing government-backed currencies transformed into computer code, as Axios' Hope King has reported.
- Federal Reserve chair Jerome Powell said Thursday at a Senate hearing he's undecided on whether the benefits of CBDCs outweigh the costs.
Rogoff wagers it may take as long as a decade for the U.S. to have some sort of widely available CBDC.
- That's because the U.S. government is currently "winning the game," currency-wise — as evidenced by its ability to borrow seemingly endless amounts in the financial markets.
- "The dollar rules. They're not looking to do anything to shake that up," he says.
Yes, but: Other regions are moving forward.
- The European Central Bank on Wednesday announced it would begin developing a digital euro. And in April China became the first major world economy to actually create a digital currency.
Meanwhile, governments such as that of India and Sweden already tried to force a cashless economy, with varying degrees of success, by relying on electronic payments with private sector banks and fintechs.
Reality check: Going cashless can also impact inequality.
- Cashless policies on the part of businesses exclude the underbanked. But in rural areas and in emerging economies — where access to bank branches may be limited — digital banking can be a solution, not a problem.
The bottom line: The world isn't going to operate completely cashless any time soon. But the transition to less cash will undoubtedly continue.