The Covid-19 Crisis: Cashless Societies Impede Economic Recovery
The sudden, violent outbreak of the global COVID-19 pandemic thrust the cashless debate once again to the forefront of economic discourse around the world. Was now the moment to start doing away with cash for good? Would economic recovery be facilitated through the introduction of digital-only payment systems?
The “unprecedented demand” for cashless payments certainly convinced the cashless lobby that cashless economies would be the best way out of the resulting economic crisis. Dan Schulman, the CEO of PayPal, has asserted that digital payments have gone from “being a nice-to-have capability to a must-have essential service.”
The reality is, however, somewhat more complicated. In November 2020, the Bank of England released a report stating that although consumer spending has fallen, the total value of banknotes in circulation in the United Kingdom has increased, as people were “withdrawing some extra cash as a precautionary response to heightened uncertainty.” This is a trend that has been noted in several countries, and reflects similar behaviors during the 2008 financial crisis.
Such studies have proven that consumers in many countries have retained trust in liquid cash in a time of economic unpredictability. Surely our economic systems must therefore show more confidence in cash as a tool to reinvigorate struggling economies?
The Rise in Cash Demand Explained
Contrary to what one might think, the demand for cash accelerated sharply throughout 2020. Significant cash withdrawals were observed in the days leading up to the lockdown, in what has been described as a ‘dash for cash’. However, consumers were paying more in contactless mode, for fear of contamination with the virus on the coins or bills, in spite of the risk of banknote transmission remaining very low. Faced with an uncertain future, this resulted in an increase in precautionary savings, in its most liquid form. Imagine money saved under the mattress.
These trends have held true across the globe. In Kenya, for example, the value of cash in circulation outside the banking system increased to Sh231.37 billion at the beginning of 2021. “Because of the pandemic, most Kenyans are continuously being forced to save or redirect their spending mainly because of the containment measures,” Ken Gichinga, the chief economist at Mentoria Economics said. This point further highlights the importance of cash as a store of value, critical to confidence in economies across the globe.
One reason that storing money in such a manner might be beneficial to advocates is that it cannot be levied by negative interest rates. The Bank of England, for example, has made no secret of its desire to stimulate the UK economy by lowering interest rates into the negative, allowing for more flexibility in the event of another crisis.
In Australia, the same anxieties about economic stability have led individuals to act in the same way, with demand for banknotes “extraordinarily high” in 2020, despite the marked decline of cash in day-to-day transactional activities. Some people have ended up hoarding large amounts of cash, leaving banks wondering where it has all gone.
This widespread increase in the demand for cash in a period where cash transactions are in decline is known as the “cash paradox”; “by the end of 2020, the value of banknotes in circulation in the euro-area reached €1,435 billion, representing an annual yearly increase of €142 billion or 11%.” The magnitude of this increase in spite of widespread efforts to encourage digital payments has been surprising. Cash, it would seem, is a sleeping giant waiting to be employed to revitalize the global economy.
Cash is the Key to Recovery
According to a Bloomberg article published in March 2021, consumers in the world’s largest economies “amassed $2.9 trillion in extra savings during Covid-related lockdowns, a vast cash hoard that creates the potential for a powerful recovery from the pandemic recession.” In the U.S., President Biden’s $1.9 trillion COVID-19 relief bill includes cash handouts to millions of Americans. Coupled with cash savings, that amounts to a significant potential source for a swift economic recovery.
“Cash helps boost people out of poverty by helping them fend off daily troubles; by greasing the wheels of life and giving them a cushion against risks. Helping them afford the essentials provides breathing room to think about the next step in life.” - Noah Smith, Bloomberg.
Moreover, according to research by JPMorgan Chase, consumption levels in rich countries will rebound to near pre-pandemic levels, resulting in strong economic recovery across the globe. This goes hand-in-hand with the fact that, according to the Economist, households across 21 rich countries “saved $6trn. That implies “excess saving” of about $3trn—a tenth of annual consumer spending in those countries… In America excess savings may soon exceed 10% of GDP.”
It is highly likely, according to some economists, that all this cash that has been hoarded during the pandemic will be spent when the crisis ends. University of Pennsylvania Professor Jeremy Siegel, for example, envisions a huge increase in consumer spending that will reboot the economy and lead to inflation.
The question is, as outlined by the Economist, whether consumers will treat this excess cash as income or wealth. Gertjan Vlieghe, a member of the Bank of England’s monetary policy committee, stated in a recent speech that this remains highly uncertain, with consumers in general having a higher propensity to spend additional income rather than wealth. So where does cash fit in?
The jury is still out on the fastest road to economic recovery following such a devastating and unexpected global crisis. But it is unquestionably not the time to hasten calls for a move towards cashless digital systems with so much hard cash in circulation waiting to be spent to rejuvenate vulnerable economies.
The “unprecedented demand” for cashless payments certainly convinced the cashless lobby that cashless economies would be the best way out of the resulting economic crisis. Dan Schulman, the CEO of PayPal, has asserted that digital payments have gone from “being a nice-to-have capability to a must-have essential service.”
The reality is, however, somewhat more complicated. In November 2020, the Bank of England released a report stating that although consumer spending has fallen, the total value of banknotes in circulation in the United Kingdom has increased, as people were “withdrawing some extra cash as a precautionary response to heightened uncertainty.” This is a trend that has been noted in several countries, and reflects similar behaviors during the 2008 financial crisis.
Such studies have proven that consumers in many countries have retained trust in liquid cash in a time of economic unpredictability. Surely our economic systems must therefore show more confidence in cash as a tool to reinvigorate struggling economies?
The Rise in Cash Demand Explained
Contrary to what one might think, the demand for cash accelerated sharply throughout 2020. Significant cash withdrawals were observed in the days leading up to the lockdown, in what has been described as a ‘dash for cash’. However, consumers were paying more in contactless mode, for fear of contamination with the virus on the coins or bills, in spite of the risk of banknote transmission remaining very low. Faced with an uncertain future, this resulted in an increase in precautionary savings, in its most liquid form. Imagine money saved under the mattress.
These trends have held true across the globe. In Kenya, for example, the value of cash in circulation outside the banking system increased to Sh231.37 billion at the beginning of 2021. “Because of the pandemic, most Kenyans are continuously being forced to save or redirect their spending mainly because of the containment measures,” Ken Gichinga, the chief economist at Mentoria Economics said. This point further highlights the importance of cash as a store of value, critical to confidence in economies across the globe.
One reason that storing money in such a manner might be beneficial to advocates is that it cannot be levied by negative interest rates. The Bank of England, for example, has made no secret of its desire to stimulate the UK economy by lowering interest rates into the negative, allowing for more flexibility in the event of another crisis.
In Australia, the same anxieties about economic stability have led individuals to act in the same way, with demand for banknotes “extraordinarily high” in 2020, despite the marked decline of cash in day-to-day transactional activities. Some people have ended up hoarding large amounts of cash, leaving banks wondering where it has all gone.
This widespread increase in the demand for cash in a period where cash transactions are in decline is known as the “cash paradox”; “by the end of 2020, the value of banknotes in circulation in the euro-area reached €1,435 billion, representing an annual yearly increase of €142 billion or 11%.” The magnitude of this increase in spite of widespread efforts to encourage digital payments has been surprising. Cash, it would seem, is a sleeping giant waiting to be employed to revitalize the global economy.
Cash is the Key to Recovery
According to a Bloomberg article published in March 2021, consumers in the world’s largest economies “amassed $2.9 trillion in extra savings during Covid-related lockdowns, a vast cash hoard that creates the potential for a powerful recovery from the pandemic recession.” In the U.S., President Biden’s $1.9 trillion COVID-19 relief bill includes cash handouts to millions of Americans. Coupled with cash savings, that amounts to a significant potential source for a swift economic recovery.
“Cash helps boost people out of poverty by helping them fend off daily troubles; by greasing the wheels of life and giving them a cushion against risks. Helping them afford the essentials provides breathing room to think about the next step in life.” - Noah Smith, Bloomberg.
Moreover, according to research by JPMorgan Chase, consumption levels in rich countries will rebound to near pre-pandemic levels, resulting in strong economic recovery across the globe. This goes hand-in-hand with the fact that, according to the Economist, households across 21 rich countries “saved $6trn. That implies “excess saving” of about $3trn—a tenth of annual consumer spending in those countries… In America excess savings may soon exceed 10% of GDP.”
It is highly likely, according to some economists, that all this cash that has been hoarded during the pandemic will be spent when the crisis ends. University of Pennsylvania Professor Jeremy Siegel, for example, envisions a huge increase in consumer spending that will reboot the economy and lead to inflation.
The question is, as outlined by the Economist, whether consumers will treat this excess cash as income or wealth. Gertjan Vlieghe, a member of the Bank of England’s monetary policy committee, stated in a recent speech that this remains highly uncertain, with consumers in general having a higher propensity to spend additional income rather than wealth. So where does cash fit in?
The jury is still out on the fastest road to economic recovery following such a devastating and unexpected global crisis. But it is unquestionably not the time to hasten calls for a move towards cashless digital systems with so much hard cash in circulation waiting to be spent to rejuvenate vulnerable economies.
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