Not Dead Yet: Growth in Cash Outpaces GDP Growth in Many Countries

Despite all the talk about mobile payments, online payments, cryptocurrencies, and EMV chip cards, the alternatives to cash still haven’t killed their sworn enemy. In fact, between 2006 and 2016, the growth of currency in circulation matched or exceeded growth in gross domestic product in 40 of 42 nations examined by the Federal Reserve Bank of San Francisco.

“In the world of Apple Pay, Bitcoin, and Square, many believe that the days of cash are numbered,” says a Monday post titled “Reports of the Death of Cash Are Greatly Exaggerated” on the San Francisco Fed’s blog. “More payments are being made with a click, a tap, or a swipe, and it feels like we’re carrying fewer notes and coins than ever before.”

To test whether that’s really happening, the bank obtained data about currency in circulation (CIC) as a proxy for cash usage in each of the countries, which together represent 75% of the world’s GDP. CIC is the total amount of cash held by businesses, banks, and consumers. The researchers surmised that “CIC should grow at about the same pace as GDP, assuming other factors affecting demand for cash are not at play,” the post says.

What they found was surprising. Only in Sweden and Norway, where electronic-payment infrastructure is highly developed and governments have policies designed to reduce cash usage, did CIC fall short of GDP growth. (The data gathering ended before the so-called demonetization late last year in India, where the government drastically reduced CIC.) In some countries, including Mexico and South Korea, CIC outpaced GDP by 100 percentage points. In the U.S., CIC grew 87% over the 10 years while GDP grew 35%, for a difference of just over 52%.

The researchers posited two main reasons for cash’s resiliency despite the proliferation of electronic alternatives. One is rising incomes throughout much of the world, giving more people more money to spend and creating demand for cash to carry out transactions. The second is the prevalence of low interest rates, which reduce the economic penalty for not putting cash into interest-bearing accounts.

“Presumably, very low interest rates in many countries over the past decade has been one factor boosting the demand for cash, as well as uncertainty following the global financial crisis,” the post says.

David Tente, executive director for the U.S. and Latin America with the Sioux Falls, S.D.-based ATM Industry Association, isn’t surprised by the San Francisco Fed’s findings.

“This has been true for many years,” Tente says by email to Digital Transactions News. “We are a seeing a slight decrease in the percentage of cash withdrawn as a percent of GDP—but there is still steady growth using that parameter, as well. [Cash] is still 50% of all payments under $25, and the preferred method of payment.”

A separate recent study found that the rate of decline in another old form of payment, the paper check, has eased.