Yet, the consistent growth of notes in circulation at 4.6% per year (in terms of note value; and 2.5 % per annum in terms of number of notes) has undone many such predictions of a fall in demand.
Currency issued has grown by over 6% in the past year.
Notwithstanding perceptions of the ‘end of cash,’ the demand for cash has continued to grow, in line with the growth in the nominal economy.
In New Zealand, notes in circulation rose from 1.5% of GDP in 1990 to 2% in 2001 and have remained at that level.
This growth has been mirrored in many other countries in recent years. In UK, notes in circulation have grown by 6% per year since 1990, increasing from 2.4% of GDP in the mid-1990s to over 3.5% in 2013. The growth over the last 20 years arrested and partially reversed a long-term decline from almost 8% of GDP in 1960.
Surprising increase
Increased demand for cash is surprising given the growth of electronic payments.
New Zealand has a very high penetration rate for electronic payment, with 280 debit or credit card transactions per person in 2013, exceeded only by Iceland and Norway.
The share of electronic card transactions in the core retail industries has been increasing slowly over time. The mean share of the core retail spending (excluding GST) in the December 2013 quarter was 69%, compared with 59% in December 2002.
The average dollar size of transactions has been declining, suggesting greater use of cards for small transactions previously used for cash.
Banknotes have multiple uses. The transactional, means-of-payment use is just one of them. Indeed, this particular use may well be declining, given the rising tide of electronic payment. Some central bank estimates suggest that the proportion of cash in circulation used for day-to-day transactions is as low as 30%
Significant growth
In New Zealand, the expanded circulation of notes through ATMs appeared to drive a lift in $20 notes in the late 1990s, while a shift towards $50 note dissemination appears to underpin a significant growth in cash in the past year. ATM distribution supports multiple uses and does not by itself make it possible to distinguish motives.
That said, more rapid growth in larger denomination notes (20, 50 and 100 dollar notes), tends to support arguments that these store of value, overseas and possibly black economy purposes have been key drivers of note demand.
While commercial sector (banking and industry) issuance of currency was common in the 19th century, and continues in some countries today, generally it has been the preserve of the State and Central Banks since their institutional rise in the 20th century.
Recently, there has been a challenge to the form and provenance of money.
Bitcoins issue
Virtual currencies, of which the best known is Bitcoin, have been created as an alternative means of payment and store of value. It is a very low cost payment method with strong security features and usable for cross-border transactions, making it advantageous in some regards relative to more traditional payment mechanisms.
As compared with cash, however, crypto-currencies currently have a number of drawbacks. In a transactional sense, their use is limited by the number of businesses willing to accept them for payment.
Large swings in the value of a Bitcoin means its purchasing power fluctuates considerably, and the finite number of Bitcoins possible mean that their scarcity value tends to make them more like speculative investment commodities than transactional payment instruments.
While bitcoins or other crypto-currencies are unlikely to replace cash in the near future, technological change is relentless and there is nothing innate about cash-money that says it must continue forever.
Key attributes of trust (that money gives rise to settlement of the obligation) and anonymity (it is often efficient for the sale/purchase parties not to have to identify one another) must be met, but if these can be accomplished reliably and sustainably new technologies could supplant cash as we know it in years to come.
Central Banks need not be overwhelmed by such innovations but must monitor and develop their regulatory and currency operations roles to meet developments in technology, and the changing needs of the public.
Geoff Bascand is Deputy Governor and Head of Operations of the Reserve Bank of New Zealand, The above is an extract of his address at the Royal Numismatic Society in Wellington on July 5, 2014. For full text of his speech, please visit www.rbnz.govt.nz. Please read related report in this Section.
