In times of financial uncertainty, cash is king

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The proliferation of credit and debit cards, Square, mobile payments, PayPal, and other technology means good old paper currency is dying, right?

Wrong.

The economic and financial upheaval of the past half-decade has made people in the United States and all over the world hungry for U.S. dollars — the paper kind.

On June 26, the amount of U.S. currency in circulation reached an all-time high of $1.19 trillion, according to the Federal Reserve.

What’s been driving this trend? Fear, probably.

Amid the recession and financial crisis from 2007 through 2009, the total amount of currency in circulation skyrocketed, even as the U.S. economy was shrinking. The currency level also had jumped at previous financially stressful moments, such as during the Y2K scare.

But as Fed research shows, while the total amount of currency is increasing, the use of smaller-denomination bills, $50 and below, is leveling out, probably because people are using other methods of payment for everyday transactions.

On the other hand, shunning banks and brokers, people in the United States and abroad are storing more of their money in the form of $100 bills.

John Williams, president of the San Francisco Fed, which oversees much of the central bank’s currency systems, has described the battle between electronic payment technology and the human desire for cash in worrisome times as a “tug of war.”

“From the point of the view of understanding what drives currency demand, historically we’ve tended to focus on alternative payments and technologies like credit cards and other payment systems,” Williams said. “The lesson of the last five years are that those trends can easily get swamped in the short run by swings and concerns about political stability and financial stability.”

There is no precise way to measure how much hard currency is within the United States, given how easily cash crosses borders. Economists think that a large share of the demand for U.S. paper currency has come from abroad, given global financial instability.

In the United States, banks hold some of the cash. But most is held by individuals — in safety deposit boxes, under mattresses, in wallets. Williams estimates that Americans held about $400 billion in cash at the end of 2012.

That’s about $1,300 per American.

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