Why we use more cash than ever

Last week, I returned from a two-week trip to Europe where I didn’t spend any money at all. Or at least not any cash.

To be clear, I visited Finland, Sweden and Denmark without using any paper money (or coins). I never used any euros or krona or krone. And not only that, I never saw anyone spending money, period. Meaning I didn’t see anyone fumbling around in their pockets for bills, or heaven forbid change. (Not even that drunk guy at the 7-Eleven in Copenhagen.) Everyone used cards and phones.

It really hit me, and so I decided to explore this notion of an increasingly cash-free world. Will money completely disappear? If so, how far along are we? And how is COVID-19 and the rise of crypto shaping this shift? Now I understand the concept of a cashless society isn’t especially new and that cash is hardly dead. Having said that, there are some decidedly new elements here.

First consider how our thinking about money and cash has changed over recent history. I remember neighbors paying me cash to shovel snow as a kid. After that I remember getting a paycheck in 1974 from my first job as a dishwasher at the Sir Walter Raleigh Inn Steakhouse in Bethesda, Maryland. Then there was the changeover from checks to direct deposit at Fortune Magazine sometime in the 1980s.

In short, I haven't been in cash since I was a kid. And of course today I pay the young guy in Maine who cuts my grass — and sells me eggs — by Venmo (PYPL). To be sure, in some instances, cash is still king, (some places in NYC still accept only cash). Some people can’t afford or don’t want bank accounts. Some merchants bridle at credit card fees. And bad guys prefer cash. But the trend is going the other way.

So is cash really dead? It depends on what you mean by “it's dead,” says Kenneth Rogoff, a professor of economics at Harvard and the author of "The Curse of Cash." “It’s certainly less and less used at the corner grocery. Cash used to dominate small transactions and that's increasingly not true. Debit cards, especially— and smartphones, credit cards — are pushing cash increasingly out of small transactions.”

It also appears the decline of cash is accelerating. This from a JP Morgan report in October titled "Payments are eating the world." (Yes, the Andreessen trope again.) “In 2010, the fastest way to move money on the same day from New York to London was to catch a flight from JFK to Heathrow and deliver it yourself. Now, you can initiate a secure, real-time payment that’s sent and received into your account in seconds at virtually no cost and in any currency."

Cellphone adoption has sped things up too, the report notes: “In 2016, there were 3.67 billion smartphone subscriptions. That figure has now doubled — and by 2026, 91% of the global population will have a smartphone.”

Yes, debit cards have become a force. “Last year debit had a 28% share of all payment used,” says Jeremy Balkin, global head of innovation & corporate development, payments at JPMorgan, and co-author of the above report. “That’s higher than credit, cash, and any other form. Quite remarkable.”

Now layer on COVID. Like so many facets of our lives, the pandemic is altering our relationship with money. Home-bound shoppers created a huge wave of cashless transactions at a time when even handling money was thought to be unsafe. Bloomberg reports that “COVID-19 shifted $5 trillion in global retail sales from offline to online”—a good chunk of which was cash, or, “47% in the euro area” for instance. The chart from McKinsey (below) hints at that.

So the amount of currency the U.S. mint is printing must be going down, right? Not exactly. Before we get into that, it’s important to understand the difference between (1) how much the Bureau of Engraving and Printing (or BEP as it’s known by the cognoscenti) is printing and (2) how much currency is in circulation, which has continued to grow substantially. So while BEP printed 1.7 billion $1 bills in 2013 and expects to print only 1 billion this year, there were still 13 billion $1 bills in circulation in 2020 versus 7.7 billion in 2000. (NB: There were 47.3 million more people living in the U.S. in 2020, versus 2000.)

Now let’s look at the big picture. In 2000, the BEP printed 9 billion total bills worth $67 billion. This year it expects to produce between 6.8 billion and 9.6 billion bills worth between $310 billion and $356 billion. So around the same amount or perhaps fewer bills than 2000, but worth some five times more. How to explain that?

Very simply: A massive surge in the printing of Benjamins, aka $100 bills. The math: In 2000 there were 3.8 billion $100 bills in circulation but as of 2020 there were 16.4 billion, worth respectively, (duh), $380 billion and $1.6 trillion. And BEP plans on printing another 2.4 to 2.2 billion $100 bills this year. The total amount of all U.S bills in circulation is around 2.2 trillion, so you can see that the value of $100 bills now dwarfs other currencies.

Rogoff says there are a number of reasons for this insatiable demand for $100 bills. “One is that interest rates are really low. Holding cash isn’t really different from holding treasury bills,” he points out. “I’ve argued that a large part of cash holdings are explained mostly by tax evasion but also of course by illicit activity like drug dealing, arms dealing, you name it. But it’s mostly tax evasion.”

Darrell Duffie, a professor of economics at Stanford's Graduate School of Business who focuses on financial innovation, concurs. “Those hundreds are going to international and national stockpiles of illegal stores of paper money,” he says. “If you’re a criminal or you have some other reason to avoid being on the grid, then you’re going to stack your money up in hundred dollar bills."

“It’s great for the government in the sense a lot of this money sits around for a long, long time and nobody claims it against the U.S. government. The U.S. has more of this than any other country by far. On the other hand it supports criminal behavior. It’s a tradeoff. The government tolerates it because paper money is a pretty popular, anonymous instrument.” So maybe that guy flying from JFK to Heathrow with the satchel of money doesn’t really care if it’s not the fastest way.

Speaking of money going overseas, just how many of these $100 bills are leaving our shores? More than half it appears (see chart below.)

Of course, no one knows how many $100 bills are in some Belgian bank that's holding hundreds in lieu of some ultra-low yielding Euro bond, versus in the vault of some narco-arms-dealing terrorist. But it is the case that the U.S. Treasury is supplying both.

(A million dollars in $100 bills, in case you’re wondering, weighs about 22 pounds, they say. A double stack would be about 21.5 inches high by 12.28 inches by 2.61 inches. You could carry it in a big briefcase, or as I suggested, a satchel.)

Another point to dig into here is the degree to which the cash and non-cash worlds are increasingly becoming, like so many things today, bifurcated, in this case along economic lines. Meaning, poor, technology-deprived populations use cash much more than wealthy, technological-rich groups.

A somewhat opaque report from Merchant Machine, a British payment information website, ranks “The Countries Most Reliant on Cash In 2021" as: Romania, Egypt, Kazakhstan, Bulgaria, Ukraine, Morocco, Philippines, Peru, Hungary, and Vietnam. Not exactly the developed world, and all except Hungary below the world average in GDP per capita of around $11,000 per annum.

There are, predictably, cash advocates. Check out Cash Matters — A pro cash movement that “is proud to work closely” with (and perhaps funded by) what appears to be European ATM, printing and transaction trade groups, as well as “JA til kontanter” a Norwegian group (“Yes to Cash” in English.) (Here we go with the Nordic countries again.) This organization exists “with the goal of defending cash in Norway's payments landscape by getting as many members as the SV Party,” the latter that country’s Socialist Left Party, which “is opposed to European Union membership, and supports republicanism in Norway.”

No matter what you think of that, it’s not all bunk. Or as the site notes: “Smart and online technologies are changing the way we pay, however, cash is still the most attractive means of payment for a huge majority of people worldwide.” The site then goes on to “look at 10 key reasons for the relevance of cash.” Saying: “Cash ensures stable currency systems. It is not only the most secure means of payment and resilient in terms of crisis, it also reflects a nation’s identity as banknotes and coins are often a nation’s calling card, valued by people beyond their monetary worth.”

So you can look at it in one of two ways (or both), that cash is only used by poor people and they need to change and it will be good for them and it’s a great business opportunity. Or that we should be mindful and careful that these people have access to money, and be wary of the change that might leave them behind.

A 'less cash' society decade

Now let’s quickly look at the role crypto plays. Clearly it’s an accelerant but to what degree is unclear. Two of the countries on the biggest cash user list above, Egypt and Morocco, are also two of eight countries that have banned crypto. On the other hand, some other developing countries may soon be using crypto as legal tender as El Salvador does.

You see a few companies accepting crypto, but as Darrin Peller, a stock analyst at Wolfe Research who covers payment companies Visa and Mastercard, says: “Using crypto to go to the store to buy a shirt is fixing a problem that doesn't exist. Is there a problem using money today to buy a shirt at a store? Why use bitcoin for it, or other blockchain technology if everything works well for the consumer now? Number two, the technology behind crypto, blockchain on a per transaction basis isn’t as efficient. It’s more expensive, slower, uses more computing power, and has a lot of issues relative to what we have today in domestic processing. That might change over time but it’s a problem to fix. And another problem is the volatility of crypto.”

There’s a kind of halfway between crypto and fiat currency, (as old-school money is called), which is known as central bank digital currency (or CBDC), which countries see as a way to co-opt the trend to digital currency as well as combat tax evasion and criminal activity. Right now as many as 87 countries are exploring a central bank digital currency.

“That scenario is basically the government saying ‘I don’t want us to lose control of our monetary system to crypto, which is a decentralized system so I'm going to offer a centralized alternative stabilized by my own currency,’” says Peller.

“No question it’s a response to crypto,” Rogoff adds. “Governments realize they need to regulate. In the case of bitcoin, they’ll probably ban its use in transactions. They find it difficult politically to do that until they’ve provided an alternative.”

Duffie of Stanford says the tradeoffs are really big with CBDCs. “On the positive side, with the decline of paper money, the government wants to be a part of the payment system and this is the substitute. They want payments to be easier and more inclusive for people without bank accounts. The downsides are also pretty big. When was the last time the government did a massive piece of technical infrastructure really well? The other downside is huge: Americans are concerned when a government agency has all their private data in a giant database.”

As I said this has been going on for quite some time. Barron’s did a cover story titled “The End of Cash?” by Alexander Eule, in December 2012, which hits the mark. The big takeaway was that Visa (V) and Mastercard (MA) were then in the catbird seat. The article noted one analyst who had a price target of $611 on Mastercard and $172 on Visa. How did the stocks do? Well. Very well. Mastercard now trades for $376 a share, but the stock split 10 for one in January 2014, (or $3,760 taking accounting for the split.) As for Visa it now trades for $223, but it split four for one in March 2015 (which would be $892 split adjusted).

That was then and this is now though. The stocks of both Visa and Mastercard underperformed last year and some, including billionaire Chamath Palihapitiya, say the glory days for these companies have passed. Of course not everyone agrees, but Palihapitiya argues that the companies are a "completely contrived duopoly that doesn't need to exist,” citing Amazon’s recent ban of Visa credit cards in the UK, because of what Amazon indicates are high transaction fees. It’ll be interesting to see how V and MA trade over the next five years.

For those who will miss real cash, fear not. The U.S. Mint makes all kinds of currency and collectibles: paper sheets of bills (all sold out, perhaps after former Treasury Secretary Steven Mnuchin’s wife Louise Linton upped their profile) as well as "The Lucky Money Collection" featuring “distinctive artwork that celebrates Chinese symbolism and numerology.”

(There are also coins and medals of Barbara Bush, Barack Obama, and Donald Trump, as well as Negro Leagues Baseball players — just out this past Thursday! — Kennedy Half Dollars, Peace Silver Dollars, Native American $1 Coins, the American Innovation $1 Coin Program, and the American Women Quarters Program. Truly something for everyone.)

Where is this all headed? Probably not to a cashless society (at least not for a few decades), but a “less cash” society decade, as Shelle Santana of the Harvard Business School wrote not long ago. We still need cash. For instance, USA Today reports, some 25% of Americans are either unbanked or underbanked, (they use financial products and services outside the banking system). “That means about 25% of all Americans would be unable — or limitedly able — to participate in a cashless system,” the USA Today article noted.

“I don't think it’ll ever disappear. I think it’ll go down to a very small percentage after many, many years,” Peller says. “I think there will be the ability to have digital transactions over 90% in the next decade.”

“I think we’ll have some form of paper currency with us for a long time but it will become increasingly vestigial,” Rogoff says. “As it gets harder to launder paper currency, demand for it will drop. If you’ve got $5 million in hundred dollar bills — people offered that for a house for example — and want to keep it under the radar screen, you have to be able to gradually spend it down.”

Criminals of all stripes use many types of money and payments, but it’s interesting the bad guys now seem to use both the oldest, (i.e. cash), and the newest (crypto) forms as their preferred vehicles these days. The common denominator of course is both are difficult to track. Curbing their behavior would require more regulatory oversight, and many Americans are often uncomfortable with that.

There’s a trade-off, and a cost, to everything, right?

(A previous version of this story stated that the BEP expects to print only 1 million $1 bills this year. In fact it expects to print 1 billion. The article has been corrected.)

This article was featured in a Saturday edition of the Morning Brief on January 8, 2022. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer

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