Tuesday, June 27, 2017

Why Cold, Hard Cash Remains King

Love for paper money is simply stronger than the ease of credit cards and apps.


By Leonid Bershidsky
The Bloomberg View
June 27, 2017

We don't have to like the way technology is changing the world. Given the technological disruption that's happening everywhere, it's reasonable to expect a little Luddite pushback. The growing share of cash in advanced economies might fall in that category.

Economists rarely admit they don't understand something related to their area of expertise. But Daniel Gros, director of the Center for European Policy Studies, a Brussels think tank, did so in a fresh paper for the European Parliament. He called the increasing cash-to-economic output ratios a "mystery." Isn't cash supposed to be going obsolete with all the modern payment methods, from debit and credit cards to the latest fintech apps? Well, it's not, except in Sweden and Denmark, where conscious efforts are being made to create cashless societies. Here is Gros's chart showing the increasing share of cash:



There are a couple potential explanations here. Since the use of cash in payments isn't growing -- cashless transactions increased globally to $617 billion last year from $60 billion in 2010 -- it might be logical to assume banknotes are used as a savings medium in the era of near-zero interest rates. But, according to Gros, no correlation between rates and the cash-to-gross domestic product ratio has been found. Gros pointed out that in the euro area, 500-euro bills make up a decreasing share of the cash in circulation and the share of 50-euro bills is rapidly increasing; that's too small a denomination to keep large savings in. And in any case, keeping big amounts of money in cash is unsafe, inconvenient and subject to crippling regulation when one wants to spend it, not to mention abrupt moves such as India's clumsy demonetization last year.

More cash could also be associated with a growing shadow economy. But the informal sector is shrinking everywhere, and the share of cash relative to GDP has increased the most in Japan, where the shadow economy is small, only about 10 percent of GDP.

One could also argue that a lot of dollars and euros are used outside their domestic circulation areas. But that wouldn't explain cash growth in Hungary or the Czech Republic -- no one uses the forint or the koruna outside their home countries.

I have argued that if governments want to eliminate cash -- and, theoretically, they'd all like to, if only to shrink the black market and complicate terrorist funding -- they should also promote the spread of cryptocurrencies such as Bitcoin. These are anonymous enough but still somewhat easier to trace than cash, striking a good balance between letting people trade privately, without supervision, and making criminal activity riskier and more difficult. That, however, was the argument of a habitual early adopter of every kind of new technology. Most people aren't like that, and I know I'm also changing as I grow older.

I miss the more durable, heavier, lower-tech objects of 20 or 30 years ago. The best car I've ever owned was a Land Rover Defender, which had barely any electronics in it. Three years ago, my family gave away all the books that filled our apartment and switched to e-books -- but now my younger daughter shows a clear preference for dead-tree books, and I find a guilty pleasure in handling them when I read to her. Clearly, Amazon is on to something with its expanding chain of brick-and-mortar bookstores. They are different from traditional ones in that they stock and display books according to their performance in the company's online store, but Amazon appears to cherish the physical interaction with customers, who, in turn, miss the tactile aspect of real-world browsing.

It's easier to use a service like Apple Pay or a plastic card than traditional money. But there's an old, pre-digital magic to cash. There's something of a ritual to counting out bills or to folding them to put in a wallet. There's also a physical reaction: A 2012 study found that people salivate at the sight of cash because we're conditioned to feel its attraction. Using cash also increases one's emotional investment in a purchase. I remember hesitating in a Kathmandu shop that sold traditional tangka paintings: The price seemed too high. So the seller urged me to pay with a credit card. "Easy money, plastic money," he said. The tangka over my desk at home reminds me of the episode every time I look at it.

In Germany, where I live, a majority of transactions are still conducted in cash. "One shouldn't forget that trust in a currency begins with cash," Carl-Ludwig Thiele, a member of the board at at Germany's central bank, said in a speech earlier this year. He meant the pre-digital, material quality of cash money. The euro banknotes are a highly visible symbol of the united Europe project, one that gives rise to strong emotions.

I have no proof that people are hoarding more cash because of an attachment to the retreating physical world, to the kind of ancient convenience that doesn't require a charged battery or internet access. But other reasonable explanations have been rejected. It's intriguing to think that human nature might be rebelling against the technological revolution in this quiet but fundamental way. Perhaps, as technology becomes more invasive and aggressive, it will mount more such counterattacks.


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