Stashin' the Bread under the Bed: The Persistent Increase in Cash Circulation
Cash Hoarders on the Rise: Unreported Funds in Domestic Homes Keep Climbing - Stashed Billions Still Accumulating: Persistent Surge in Cash Holdings Persists
Pay no heed to those gloomy prophecies about cash fading away; while the significance of greenbacks and coppers in day-to-day transactions has been in a steady decline, the amount of cash in the eurozone's circulation keeps climbing. Central banks and experts suspect that there's a whopping three-digit billion euros worth of cash not being spent but stashed away.
Breakdown: Around 400 billion euros of cash tucked away in private homes
As per data from the German Federal Bank, about 42% of banknotes held in Germany are for "value storage," nearly double the figure from 2013. In straightforward terms, by the end of 2024, the German Federal Bank projected that 395 billion euros could be tucked away in German households, not evenly distributed, with many homes boasting no or just modest stashes.
"Cash Conundrum"
In March, according to figures from the European Central Bank, there were 1.564 trillion euros in circulation in the eurozone. This was around 30 billion more than in spring 2022 and a whopping 300 billion euros more than at the beginnings of the Corona pandemic, five years earlier. Although the growth rate has significantly slowed since 2022, the capital in circulation continues to swell instead of shrink. The German Federal Bank refers to this perplexing phenomenon as the "banknote paradox." It's been noticed "for many years, in many countries," says a spokeswoman in Frankfurt.
"Until as recently as 2021, the growth rate of banknotes in circulation was consistently many times the annual inflation rate," says Johannes Gärtner, a payment specialist at the consulting firm Strategy&.
The enigma is all the more puzzling because it's well understood that the number of people spending notes and coins is in a consistent decline. In 2023, according to the German Federal Bank, half of all transactions at Germany's cash registers were still conducted with cash, but these accounted for just a quarter of the total turnover.
E-Payments Takeover
As per a recent survey by Strategy&, involving 5,500 respondents in nine European countries and Turkey, the debit card has now overtaken cash as the most popular payment method, with only 23% preferring cash transactions. Many retailers also favor electronic payments, particularly contactless payments, which require no PIN input. "This can be up to seven times faster than cash transactions," says Bernd Ohlmann, spokesman for the Bavarian Retail Association.
"Uncertainty is the driving force"
However, why would more cash be in circulation if fewer people are using it daily? "The euro is being hoarded intensely," says Ralf Wintergerst, CEO of Munich's banknote and security technology manufacturer Giesecke+Devrient, which has a roster of around 150 central banks as clients. "The production of the euro is also used for transactions, but it is now also being tucked away." The firm has been discussing this issue with central banks for 20-30 years: "What's happening with the cash cycle, why, and for what purposes is cash being utilized?" Wintergerst explains the apparent trend towards cash hoarding: "The primary driver is uncertainty."
According to the German Federal Bank, the share of cash reserved for value preservation reached a record high of 43% during the COVID-19 pandemic, largely thanks to the prolonged lockdowns at the start of the crisis. "The increase in the circulation of banknotes during crises, not just during the COVID-19 pandemic, due to the uncertainty they bring, is a common observation," says a bank spokesperson.
Cash Still King for Crooks
Business consultant Gaertner offers two more factors likely intensifying the increase in cash circulation. "The growth in the money supply is not primarily due to classic transactions," says the financial guru. "Rather, it's a mix of 'hoarding,' the shadow economy, and its function as a reserve currency in foreign lands." The shadow economy encompasses activities unaffected by law and regulation, ranging from informal labor to illicit operations. For example, the A3 motorway in Bavaria is renowned for police discovering vast sums of cash during checks: in November, plainclothes officers found a million euros in a car belonging to a 34-year-old male, allegedly from criminal pursuits and transported in plastic bags.
In spite of cash's declining importance in the day-to-day lives of law-abiding residents, it isn't foreseen that only wrongdoers will be carrying notes and coins in their pockets—or plastic bags—in the future. The German Federal Bank is adamant about preserving cash and its infrastructure. After all, cash has distinct advantages, such as not requiring power or electronic infrastructure. "The central bank must ensure a stable, resilient payment infrastructure," says G+D CEO Wintergerst. "In times of war, crisis, or floods, it must still be possible to make payments. Cash is the solution."
- German Federal Bank
- Odds
- Mattress
- Germany
- Frankfurt
- Coronavirus
- Ralf Wintergerst
- Munich
- Bavaria
- ECB
- Spring
- Consulting firm
Explanatory:
- Cash as a Store of Value: During times of economic uncertainty, people often turn to cash as a store of value. This is driven by precautionary motives, where households may hold more cash due to concerns about financial instability and potential crises.
- Shadow Economy: Cash continues to be a popular medium of exchange in the shadow economy, which includes activities not officially recorded. This contributes to the increased circulation of cash, despite the decline in its use in formal transactions.
- Tourism and Cross-Border Transactions: The euro area is a popular tourist destination, resulting in increased demand for cash from visitors. Additionally, cross-border transactions, especially in regions with lower financial inclusion or where electronic payment systems are underdeveloped, can boost cash circulation.
- Insecurity about Digital Payments: Some individuals may remain hesitant about relying solely on digital payments due to security concerns or a lack of trust in digital systems. This can lead them to hoard more cash.
- Central Bank Policies: Central banks, like the European Central Bank (ECB), manage the money supply and set interest rates. Although the ECB's control over cash supply is indirect, focusing on broader money supply metrics like M2 (which includes deposits and other liquid assets), it can still influence the quantity of cash in circulation.
- Employment policy discussions may arise due to concerns regarding the large sums of cash being hoarded, as unemployment could potentially increase if people stop spending their cash and instead keep it as a store of value.
- Financially stable communities might be interested in addressing this issue, as the persistent increase in cash circulation could indicate a potential drain on local businesses if customers choose to store their money instead of spending it. Additionally, community policies might need to consider the impact of cash hoarding on the local economy and businesses.
