Cashless is accepted everywhere. Our phones have payment apps that work perfectly. A digital bank transfer lands the money within the hour, and systems such as PayPal , PayTM, and others allow us to settle any account in an instant.
The government would like us to assume that cash is on the way out.
Reality is different. Right across the developed world, there are more bank notes in circulation than ever before, says a recent article in a UK newspaper.
“Zero or negative interest rates have persuaded us to simply stash more and more of the stuff under the mattress. And sooner or later central banks are going to have to accept that is very bad for the economy,” says financial columnist Mathew Lynn
Philip Lowe, the Governor of the Bank of Australia, observed that far from dying out the amount of cash in circulation was hitting an all-time high.
There are “around $3,000 worth of banknotes on issue for every Australian”, he remarked. “I, for one, don’t have anywhere near that amount,” he added.
“Cash is more popular than ever right around the world. High Frequency Economics crunched the numbers, and found that in the United States there were $4,800 (£3,900) kicking around for every person, “says Lynn.
How much paper money per person? In the eurozone it is €3,100, which was a 30pc increase over a mere six years. In Japan, it has reached Y850,000 for every individual.
The Bank of England maintains that there are £1,000 in notes circulating for each citizen, and it keeps .
The Reserve Bank of India hasn’t disclosed how much of money is circulating per citizen.
(But we do know from authentic data that money Supply in India increased to 156484.76 INR Billion in September from 156414.63 INR Billion in August of 2019.
Money Supply in India averaged 27718.02 INR Billion from 1972 until 2019, reaching an all time high of 156484.76 INR Billion in September of 2019.)
Thr point is that most citizens don’t not have these huge amounts of cash in their houses. so lots of people must have several thousand in notes stored somewhere.
The Australian central bank has estimated that about 25pc of its dollars are used for day-to-day small transactions. Another 4pc to 8pc are used in the shadow economy, (what we call black market). And about 5pc to 10pc are simply lost. But between 30 to 50pc of all those notes are simply being stashed away.
We hear a lot about the death of cash. But in fact it is getting more popular, not for spending but for storing value.
During demonetisation in India, our hearts went out to all the ladies who had stashed away thousands of rupees for a rainy day. It was awful, that demonetisation would make their money useless unless they sent them to a bank immediately.
“Money needs to circulate to create demand for more goods and services. Usually that happens regardless of whether it is spent by the person it belongs to or not. If I put a thousand pounds into the bank, then the bank will lend it out to someone else and they will use it to buy some stuff. But if I stash that same money in bank notes underneath the floorboards then it is completely dead,” explains Lynn. “The money and the demand has been taken out of the economy. In the jargon of economists, it is disinflationary.”
In this light, Prime Minister Modi didn’t care a hoot about black money, he wanted to force everybody to unearth their hidden stash of money and put them in India’s banks.
But why are people all over the world hanging on to cash? Banks are to blame. Low interest rates, high fees to customers who actually bring their money to the banks are ample reasons.
It is the countries where interest rates are lowest, or indeed actually negative, that the demand for cash is hitting the most extreme levels.
The Japanese have had negative rates the longest, and also have the highest levels of cash hoarding. The eurozone, where negative rates are now common, is starting to catch up.
“True, it is hard to blame people for doing that. In a world where the bank actually charges you for keeping money in an account, either with fees or negative rates, why not simply hold it as printed money instead?,” asks Lynn.
People are turning to cash because the central banks are driving them to it. Near-zero interest rates have lots of weird side-effects. But one of the strangest is persuading us all to stash lots of money under the mattress, the floorboards, or in a secure storage facility, he says.
And if cash hoarding keeps on accelerating then policymakers will soon have to decide whether near zero rates aren’t doing more harm than good.