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Cash Isn’t Dead Yet

Summary:
On of the important features of my proposal for eliminating the zero lower bound is that it does not require eliminating paper currency. (See “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide.”) But it does require a change in paper currency policy that will go down more easily with the public if the share of transactions done in cash is relatively small. So it is worth paying attention to what is happening to the cash vs. card or phone breakdown of transactions. Telis Demos’s January 31, 2020 Wall Street Journal article “Cash May Not Be King, but It’s Still Royalty” gives a useful update on that. All the quotations below

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Cash Isn't Dead Yet

On of the important features of my proposal for eliminating the zero lower bound is that it does not require eliminating paper currency. (See “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide.”) But it does require a change in paper currency policy that will go down more easily with the public if the share of transactions done in cash is relatively small. So it is worth paying attention to what is happening to the cash vs. card or phone breakdown of transactions. Telis Demos’s January 31, 2020 Wall Street Journal article “Cash May Not Be King, but It’s Still Royalty” gives a useful update on that. All the quotations below are from that article.

The first key point is that paying by app or directly with one’s smartphone is getting more convenient:

The digital revolution in banking is one of the major investment themes of the young century, pushing big share-price and valuation gains for financial-technology upstarts like PayPal Holdings and Square, as well as network giants like Mastercard and Visa. Younger consumers have embraced cash-transfer apps like Venmo and, to an extent, cryptocurrencies. Some retailers have tried to ditch cash and take all payments in digital or card form.

Personally, I have found Venmo to be very easy to use. And as far as I can tell, there weren’t any fees for common transactions unless you are in a hurry to get funds from Venmo into your regular bank account immediately.

Since new methods of payment are mostly built on top of the existing system of banks and cards, one thing inhibiting the full adoption of new payments methods are people who are unbanked, who are often poor folks we should be especially concerned about:

A number of voices have arisen to oppose an all-digital future. They range from people advocating on behalf of lower-income consumers, who tend to use cash more, to companies in the cash business.

There have been some political efforts to make cash use easier that the current trend would otherwise leave it:

In January, New York’s City Council voted to ban cashless stores and restaurants. Philadelphia and San Francisco have made similar moves. In the U.K., banks increased subsidies for some cash machines after a spike in concern about “ATM deserts.” Amazon’s first New York Amazon Go store, designed to use seamless mobile payments, started accepting cash last year.

Despite these efforts to make cash use easier, the cash share of transactions is declining:

For all that, there is little question electronic payments in the U.S., ranging from debit cards to mobile apps, are gaining ground.

In the most recent Federal Reserve survey of U.S. consumer payments, covering 2018, for the first time cash wasn’t the most common form of payment. It was surpassed by debit cards. Even a slim majority of payments in the survey under $10, long cash’s stronghold, were made by other methods.

Of course, total transactions is going up:

Yet digital’s gain isn’t necessarily coming at the expense of cash. The overall pie still appears to be growing.

Despite total transactions increasing, Russia and Sweden have the total amount of cash going down:

Only two countries, Russia and Sweden, had a net substitution of cards for cash from 2007 to 2016, with cash in circulation shrinking as card payments grew

Given its innovative tech companies and people used to fast technological change, one possible leader in the transition away from cash might be China:

… the fact that cash will be around for some time to come isn’t an invitation to ditch digital-payment bets. That’s especially true for companies with exposure to China, where digital payments have leapfrogged cards and checks.

Overall, the picture is mixed. The share of cash transactions is declining, but at a deliberate pace.

Miles Kimball
Miles Kimball is Professor of Economics and Survey Research at the University of Michigan. Politically, Miles is an independent who grew up in an apolitical family. He holds many strong opinions—open to revision in response to cogent arguments—that do not line up neatly with either the Republican or Democratic Party.

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