Cash is Back

How much cash have you got in your pocket at the moment? The answer, if you’re anything like me, is not very much. Thanks to credit and debit cards it’s possible to go for weeks without using cash these days.

But it turns out that doesn’t go for the UK population – at least not any more. According to Bank of England figures, the amount of cash at large in the UK economic system has risen to the highest level since 1984.

Sterling notes and coins as a percentage of GDP. Source: Bank of England/ONS

The amount of notes and coins in Britain is now 4.12% of GDP – £63.4bn in cash terms. That’s up quite sharply from the levels of around 3% it was sitting at throughout the 90s and for most of the 2000s. Though as you can see from the graph, it’s down considerably since the 60s and 70s – largely as a result of credit and debit cards and electronic transfers.

So what’s happened here? Cynics might suggest that this is a result of quantitative easing – the Bank of England’s policy of electronically creating money and pushing it into the system. But the increase probably doesn’t portend a future of pushing wheelbarrows around the streets.

After all, unlike during the Weimar hyperinflation, the Bank isn’t literally printing money. Instead it’s creating an electronic credit and then using that to buy up government debt in the markets. That should, in theory, trickle down to people, but it’s unlikely to encourage them to put it in cash rather than leaving it in their bank accounts.

No: what’s happening here is that people are electing to take money out of their bank accounts and not put it back in. In part it’s connected to interest rate levels: there’s academic evidence that when interest rates are low, people are less inclined to put cash in accounts so it can generate interest.

But, more compellingly as far as I’m concerned, it’s also probably due to a rise in distrust of the banking system: is your cash really any safer in your current account than under your mattress? Given the collapse across the banking system recently the answer is no longer obvious.

Either way, the truth is that far from becoming a cashless society, in the past few years we’ve started to use cash more than for almost three decades.

UPDATE 13:30 04/01/2013

I should have mentioned in my original blog that one factor which almost certainly contributes to the rise in cash as a percentage of GDP is the big fall in GDP itself during the recession (eg if GDP is smaller then it goes that anything measured as a percentage of GDP will be bigger, even if it remains the same). But while this contributes to the increase in cash-to-GDP levels, it by no means accounts for the bulk of the increase. Notes and coins in the UK rose sharply in this period, in comparison with GDP and in comparison with previous recessions.

3 thoughts on “Cash is Back”

  1. Cash is king, as soon as you use cheques/debit/credit cards and bank transfers there is a paper trail. I think there is a mistrust of officialdom. It is useless to steal the identity of of someone who uses cash only. It is interesting how the UK will have no bank note above £50. The value of it now to when it was introduced must be considerably diminished. There is €500 note.

  2. I don’t find distrust of banks as the reason for the growth in notes and coins a plausible explanation. Growth in the cash informal black economy seems more likely. Moreover, possibly immigration where migrants feel more comfortable using cash than debit cards etc could be an additional factor.

  3. Distrust of banks seems improbable on the face of it as the upturn in cash holding began, according to the graph, almost 20 years ago. It may have some bearing on the acceleration after 2008 but something else is clearly going on.

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