Worldwide cash in circulation has increased significantly since the pandemic started. We have looked at the main western markets – US, UK and Europe – to shed some light on the phenomenon.
After having a read through, you will see why big increases in demand for cash usually signal a turn in the economic cycle and have led to booms.
Growth in demand for banknotes increased slightly in late March. This is likely to be due to people withdrawing some extra cash as a precautionary response to heightened uncertainty. The trend of increasing cash demand continued when non-essential shops, and pubs and restaurants began to gradually reopen across Europe.
The UK is not alone in experiencing a sharp increase in the value of cash in circulation during the Covid pandemic. In both the US and the euro area, total currency in circulation in September 2020 was more than 10% higher than a year earlier, with a similar pattern in Canada and many other countries.
The first key driver was the big fall in consumption at the start of the pandemic. The temporary closure of shops and restaurants, and the implementation of social distancing rules during the Covid pandemic, led to significant declines in household spending. This meant that people were holding onto their spare cash for longer.
The decline in household spending also led to a decrease in debit and credit card and cash use: total household expenditure fell by almost 30% in April 2020, according to Visa, while the value and volume of contactless card transactions also fell in April, by 40% and 44% respectively.
Human behaviour suggests that when events happen that impact the economy negatively, people tend to stash more cash at home in uncertain times or when they feel they cannot trust banks and interest is generally low.
When covid hit it triggered a change in behaviour and banknotes started being held — among retailers, financial institutions, ATMs, or the public — and weren’t returned as usual and here is why:
There are many variables that could influence both how cash is used especially for transactions or as a store of value and where it is used.
In interviews with a sample of large retailers in June 2020, BoE found that the majority of retailers expect cash usage levels to recover, but to remain below pre-Covid levels in the medium to long term. Retailers suggest that the payment methods offered to customers will be driven by customer demand.
Finally, times of economic hardship were historically accompanied with rises of currency in circulation. The upside to this is that when all that cash builds up, it tends to look for a place to go, leading to economic growth and recovery.