“Cash Is King” in US and Europe in Digital Age. Does Rebound in paper note Point to Recession?

Over the past few years, the world has been searching for ways to deepen digital transactions in the hope that they can be conducted more quickly and cheaply. According to statistics, nearly 90% of the world's central banks are developing central bank digital currency, and 60% have entered the proof-of-concept stage.

However, in a survey conducted in March, 53 per cent of US and 46 per cent of UK respondents said they used cash more often now than they did a year ago. Overall, 60% of respondents in both countries said using physical currency would reduce their spending.

That, in turn, has much to do with inflation in both countries, particularly in Britain, which is still running at around 10%, further amplifying the pain. The Bank of England's chief economist also put his cards on the table this week by saying that Britons need to accept being poorer.

Courtney Alev, associate director of product management at Credit Karma, which conducted the poll, said that while the world is returning to normal after the pandemic, prices have risen dramatically, and holding cash is one way to manage money to make wealth last longer.

Some respondents also said digital channels, from Apple Pay to contactless credit cards, could easily lead them to blow their budgets. Two-thirds of people in the poll said digital payments made them spend more than they had budgeted.

The smell of cash

Natalie Ceeney, chair of Cash Access UK, a non-profit organisation, said many of the theories about digital payments were designed to remove frictions from the market, but in reality many now wanted to bring them back.

She added that studies have shown that when digital payments are used in some instances, sales increase significantly. One reason is that people don't see it as a significant expense when they pay.

On the other hand, Kenneth Rogoff, an economist at Harvard University, points out that the rebound in cash use also hints at increased demand in the "underground economy". For example, he said, paying some fees in cash to avoid paying taxes.

He added that the underground economy should have grown during the pandemic and that the increased use of cash would reflect this. Rogoff also estimates that the underground economy accounts for about 10 percent of GDP in the United States and much higher in Europe.

The Bank of England revealed in October that the use of cash in the UK had continued to rise since the pandemic, with notes in circulation at record levels. Nationwide Building Society, a British bank, responded in January that British depositors had made more than 32 million withdrawals last year, a 19 percent increase on 2021.

This is clearly not very friendly to some fintech companies, especially in the payments sector. Some payment companies have introduced new features that help customers set limits to stay in the digital world. But how long cash recovers will probably depend on when inflation in the economy falls back to its target range.

Lisa Spantig, assistant professor of experimental economics at the University of Aachen in Germany, points out that while frictionless payments are generally good for society, consumers need some help, such as regulation. And digital payment providers typically benefit from higher spending, which, in times of high inflation, affects ordinary consumers.

And historically, cash is king is a constant lesson. During the Lehman crisis in 2008, eurozone paper currency use rose to an all-time high within three months. Cash use typically rises during major financial shocks or global catastrophes similar to COVID-19.

It may also be worth pondering whether the US and UK polls point to something more serious, such as a recession.