War on Cash: Cash Fights Back

Fifty years ago this month, the world’s first cash dispenser was installed in Enfield, North London. In a 13 June speech to commemorate this anniversary, Victoria Cleland, Chief Cashier and Director of Notes at the Bank of England, made some interesting remarks about the current and future trends in cash.

There has been a lot of focus recently on how cash transactions seem to be disappearing from societies. Online shopping of course is a major contributor to this perception, but most service industries now offer payments by card, including those services traditionally seen as preferring cash, like taxis. Go to a bar in New York, London or Berlin and you will find young people carrying no cash and paying for their drinks by card (the old codgers like me still pay by cash). You can even pay beggars in Stockholm by card now!

So it is interesting to note that Cleland’s speech highlighted the growth in demand for physical bank notes that, in fact, seems to be accelerating. She pointed out that:

“The value of Bank of England notes in circulation peaked in the run-up to Christmas 2016, reaching over £70bn for the first time – an increase of 10% on a year earlier. This is the fastest growth we’ve seen in a decade, and a giant leap compared to the £2.9bn when the ATM was born”.

Stock of notes circulation at end-February (value)

Nor does this seem to be a UK-only phenomena. Cleland noted that bank note demand growth is running from 5% to 10% in the USA, Canada, Australia and Eurozone, and that other countries are much higher. Scandinavia is on the opposite side of the trend. Sweden, where bank notes in the economy have actually declined over the last decade, remains the poster-child for a cashless society; we are watching that experiment very closely.

Clearly though, in the major economies, cash remains an important element. Globally, cash still accounts for 85% of transactions. But is there another side to this story?

In a deflation, the demand for cash increases as people seek to hoard the only asset that, far from depreciating, is actually Appreciating as values of land, property, stocks, bonds and commodities all fall. One dollar, pound or euro of cash will buy an ever-increasing amount of assets in a deflationary spiral. Cash becomes a scarce commodity in a deflation, increasing its value. Could it be that some of the strong demand for physical bank notes that the Bank of England is reporting is attributable to a changing societal mood? Perhaps. Assets priced in the honest currency of Gold are still well below their turn-of-the-century peaks, indicating that a silent deflation has been ongoing for over a decade and a half. But with nominal stocks at their highs, the real rush for bank note hoarding is still well ahead of us.

Nevertheless, Victoria Cleland hinted at it. She said:

“There is significant overseas demand for our banknotes, particularly the £50. Our research has shown our notes are used by tourists; overseas investors, those looking for a reserve currency as well as expats.”

Significant demand from overseas investors and those looking for a reserve currency is a clue that there are people out there who are increasingly valuing physical bank notes as an investment in itself. As the coming deflation in the USA and Europe develops, the idea of cold, hard cash being an asset will grip society and lead to runs on banks (again). The weak will fail; but many banks are now considered to be in a stronger position than they were in 2008/09 and so, the thinking goes, could withstand a bank run. That will be one stress-test worth watching.

A statement in the middle of the Chief Cashier and Director of Notes at the Bank of England’s speech caught our eye:

“Because cash has such a wide range of uses and is valued by different people at different times for different reasons, it does have a future, and a significant one”.

We couldn’t agree more.

You can read the speech here: