Why Digital Money Hasn’t Killed Cash
The New Yorker: Business｜2016-4-28
The paradox of the coming “cashless economy” is that it uses and stores ever more paper money. Credit Photograph by Mark Wilson / Getty
Never has it been easier to spend your money, if you should happen to have some. The press of a button, the swipe of a card, or the wave of a phone, and it’s done. Transferring it to Panama is no problem if you are not too persnickety about the legalities. Asking for it from friends (once a fraught transaction) is just a virtual trip to PayPal or Venmo. If you are in business for yourself, Square or Stripe will set you up with a card reader in a day, so that you, too, can take credit just like Amazon. Bankers talk about promiscuous person-to-person transactions with the gusto of free-love gurus.
And then there is cash. The electronic pirouettes of digital money make mere cash look all the more grubby and earthbound. Apple and Samsung tell you that you don’t need to carry it. ABC, CBS and the Wall Street Journal tell you that it is covered in germs and—literally—will make you ill. As if to revive a failing product, the Treasury is swooping in with a sensational rebranding, finally clearing the genocidal Andrew Jackson off the front of the twenty and replacing him with the irreproachable Harriet Tubman. For the card-and-phone-swiping consumer, however, the question arises: Will there be much need for cash by the time the Tubman bills are printed?
There will. For here is the paradox of the coming “cashless economy”: it uses and stores, mostly in the form of hundred-dollar bills, ever more cash. In the last two decades, the total amount of U.S. currency in circulation has more than tripled, to about $1.4 trillion. About seventy billion dollars, or five per cent, of that cash sits in bank vaults, neatly accounted for. The rest is not so easy to track, despite the data revolution in economics. We do know that the typical American carries about thirty dollars in her wallet, with a few more bucks scattered in the couch cushions. One in twenty Americans has a stash at home of more than twelve hundred dollars, and everyone else averages a hundred and seventy-four dollars.
Unfortunately, that’s where the tabulation ends. The cash savings that Americans admit to government surveyors add up to a small fraction—less than a tenth—of the four thousand dollars in bills that’s currentlyin circulation for every man, woman, and child in the U.S. So where is the remainder?
The best hint we have comes from looking carefully at the mix of bills floating through the economy. Getting cash—as in, actual greenbacks—to banks is one of the simpler parts of the Federal Reserve’s job. Basically, banks ask for the mix of notes their customers want. And over the past two decades what their customers have wanted has largely been ones, twenties, and, most of all, hundred-dollar bills.
That last part is important. In the last two decades, the number of ones and twenties in circulation has risen a bit more slowly than the rest of the economy. The number of dollar bills, for instance, rose from about six billion to eleven billion, a rate of growth (after adjusting for inflation) a little lower than the economy as a whole. That makes sense; more of our business is done with credit and debit cards, but there are still plenty of small daily cash transactions.
At the same time, however, the number of hundreds that banks have been asking for has skyrocketed. Hundred-dollar bills in circulation have gone up fourfold. Few hundreds are actually found in consumer wallets; instead of passing quickly from hand to hand, they tend to be held as a reliable store of value. But by whom?
Probably the answer heard most frequently is that there is a growing demand for large U.S. bills abroad. Carried discreetly through the world’s airports, U.S. dollars are a reliable medium of exchange that can be used for transmuting, say, half a million dollars in profits from Afghan wars into real estate in Dubai. Recent work by the Federal Reserve economist Ruth Judson, who analyzed just how much money is shipped abroad in bulk by the Fed (if you are imagining big pallets of bills, you’ve got the right idea), estimates that fifty per cent of bills in circulation are held abroad—and that share has almost certainly been increasing. In the midst of the Russian financial crisis, wealthy Russians converted much of their money into fifty billion dollars’ worth of dollar and ruble bills.
Yet the warlords-and-oligarchs explanation, while a factor, doesn’t fully account for the scale of the demand for hundreds. Judson’s estimate for the U.S. dollars held abroad is on the high side; another analysis of the same data puts it at more like twenty-five per cent. The University of Wisconsin economist Edgar Feige calls this the “currency enigma”: the money used in everyday transactions is only a small portion of the total currency that’s nominally in circulation. The Japanese, as Feige details, hold even more hidden cash than Americans—and, unlike dollars, very few of those yen bills are stockpiled in Russia or the Middle East. Even in Sweden, a country that has been held up as the model for the cashless future, close to a thousand dollars’ worth of krona are sloshing around the economy for every Swede.
In the United States, some of that hidden money comes from actually illegal activities, like drug sales. A bigger share, though, comes from the buildup of wealth in an unreported economy of generally legal activities that are often hidden from the tax authorities. “When doctors and dentists used to take cash,” Feige told me, “they’d store up a hundred thousand dollars in the basement, then take it to Mexico and buy a house.” Feige said he suspects that now, too, the bulk of the money is in these kinds of large hauls from cash businesses. But no one knows for sure how much of these savings comes from tax-avoiding businesses (restaurants and contractors, for instance), how much from off-the-books wages, and how much from ordinary savings quietly pulled out of banks by people who feel safer storing it in the back of a closet.
Few of us are totally lacking in anecdotal data. We are just reluctant to talk about it. When I bought my first apartment, a dozen years ago, my mother gifted me with a bundle of cash. (“Mattress money,” the mortgage broker called it, giving the impression that this was not at all uncommon.) To many people, cash still represents security, safety, certainty.
The generation of Americans now entering middle age grew up with children’s bank accounts and learned early to put money in the bank and let it earn interest. Don’t let inflation eat it up, we were told. But now interest rates on ordinary bank deposits are near zero. Economists now even discuss how to bring them below zero—something a few Swiss banks have already done—to encourage (or, arguably, force) spending and investment. If you are looking for a comfortable home for your savings, the hundred-dollar bill doesn’t look so bad.
The traditional definition of money says that it is a medium of exchange, a unit of accounting, and a store of value. It might seem logical that as cash becomes displaced as a medium of exchange—and that is assuredly happening—it would also become less important as a store of value. And yet, if anything, the increasing demand for hundred-dollar bills—still with their image of the famously frugal Benjamin Franklin—indicates the opposite.