In discussions about whether we are moving closer to a world without cash, regulators often focus on data showing consumers are purchasing more of their goods and services digitally.
This trend has only accelerated since the coronavirus pandemic — not least because of fears that the virus could spread through the handling of cash.
The concern was so great that in February the People’s Bank of China began sterilising banknotes in regions affected by the virus.
In March, the US Fed confirmed it was quarantining bills arriving from Asia prior to recirculation.
Several other central banks around the world have been sterilising notes and many countries have been encouraging cashless payments.
For the record, there is no evidence that transmission of the virus via banknotes is any greater than transmission via other frequently touched objects, such as credit card terminals or PIN pads.
The official advice from the World Health Organisation has been to wash your hands when handling cash (some Australians have taken that advice a step further and have reportedly been disinfecting their plastic banknotes).
Fears that coronavirus could spread through the handling of cash prompted some central banks to sterilise banknotes. (Supplied: NSW Police)
But as coronavirus has made us more anxious about our health, it has also made us paranoid about our financial status.
In March, as many of us stockpiled toilet paper and baked beans, wealthier Australians who could afford to withdrew their cash.
This included a small number of customers making very large withdrawals — more than $100,000, and in some cases into the millions of dollars — according to the Reserve Bank’s latest financial stability review.
The cash run was detected at bank branches in late March and forced the RBA and commercial banks to store more cash in bank vaults.
The RBA reports that cash hoarding has since “abated”, but figures show Australians still have a fondness for cash.
Cheques dying out, but cash still a safety net
While more Australians are making payments and purchases via credit and debit cards, and cheques are on the way out, many still store cash.
The RBA’s 2019 Consumer Payments Survey said cheques were used so infrequently that it would “be appropriate at some point to wind up the cheque system”.
Personal cheques accounted for only 0.2 per cent of the payments made during the week of the RBA survey (a similar rate to that recorded in 2016), and all of the cheque payments made in the 2019 survey were made by respondents over 50.
But cash, while used less frequently than in the past, “is still widely held for precautionary purposes”, the RBA said.
Consumers aged 65-plus still made over half of their payments in cash in 2019.
Lower-income households also tend to pay in cash more often than households in higher-income groups.
And while cards are now used more often than cash for all payments over $5, cash still accounts for a significant share of small transactions: about 45 per cent of payments of $10 or less.
Survey respondents were asked if they held cash outside their wallet, and almost 40 per cent reported they did.
Of about $80 billion worth of cash in circulation daily, around 25 per cent of that is used by households, businesses and banks for everyday transactions, while most of the rest is being held longer term by Australians and foreigners.
If you take the numbers literally, it would be roughly $2,000 per household, but as the RBA senior manager Richard Finlay revealed during a Senate inquiry into the proposed cash ban last year: “It’s probably the case that most households have very little and a few households have a lot, and maybe people overseas hold Australian dollars”.
Cash is used less frequently than in the past but “is still widely held for precautionary purposes”, according to the Reserve Bank. (NSW Police)
Cash ban bill on hold amid fears about negative rates
Even before the coronavirus crisis, there was discussion about the possibility of Australia joining other nations in having negative interest rates.
This is a scenario where instead of receiving money on deposits, you could be paying to keep your money with the bank.
Despite the cash rate being at a record low of 0.25 per cent, RBA governor Phillip Lowe last week reiterated his long-held view that negative rates were “extraordinarily unlikely” given the costs outweighed the benefits.
But many Australians still fear such a scenario is possible, and outlined that in submissions to the Senate inquiry into the Federal Government’s proposed cash ban.
Just to recap, the Federal Government wants to introduce laws to ban cash payments of $10,000 and more and impose jail sentences of up to two years for people using cash for purchases above that limit.
Some federal politicians, and a large number of submissions to the inquiry, have argued that the proposed cash ban would create an Orwellian state that gave banks greater control over people’s money and authorities greater control over people’s behaviour during recessions.
It’s not a proposition that’s back by the Government, or the RBA, which labelled it “far fetched”.
Ultimately, despite a dissenting report from the Greens, the Senate inquiry also rejected that theory and gave the proposed cash ban bill the thumbs up.
The inquiry suggested some amendments to the proposed law, but agreed with the Government that the cash limit was a good way to help fight the black economy.
Assistant Treasurer Michael Sukkar told ABC News the Government was considering the Senate inquiry report recommendations while it dealt with the economic fallout of COVID-19.
Rather than speculate on the Government’s motives behind the cash ban, one could consider a broader question: Do governments and regulators want to move economies away from cash?
There is some evidence they do.
As I have written before, the International Monetary Fund has argued in various blog posts and discussion papers that its ideal world is one without cash.
It has explicitly noted central banks’ limitations in using monetary policy to control behaviour (get people spending) during economic downturns, if in a negative rates environment people pull out deposits and hoard cash.
But, beyond this, governments are also investigating the prospect of entirely digital economies.
Assistant Treasurer Michael Sukkar says the Government is considering the Senate inquiry report recommendations into the proposed cash ban. (ABC News: Andrew Kennedy)
Move to digital currencies globally
First, cash is hard to trace, making it harder for governments to stop illegal activities such as tax evasion, drug trafficking, and terrorism.
It is estimated about two thirds of $US100 notes are held outside the United States, which indicates they could be used for illegal transactions.
In Australia, the Government has given qualitative estimates that up to $50 billion annually could be lost to the black economy.
Second, large notes are disappearing all around the world.
In 2016, India’s government declared that 1,000 and 500 rupee notes would no longer be valid.
Two years later the European Central Bank ceased new issuance of the EUR 500 note.
And several European countries have already moved to ban cash purchases for large transactions.
Finally, as larger banknotes disappear, there is a shift to digital currencies worldwide.
After authorities initially grappled with how to regulate cryptocurrencies — especially after Facebook flagged plans to launch one called Libra — they are now likely to become mainstream within the next two years, according to a report from Deutsche Bank.
The push is no longer coming from the private sector, but by governments, which realise the greater role currency plays in who holds economic power.
Currency could be used as a soft or hard-power tool
China is already moving to replace cash with a central bank-issued digital currency, which economists say could shift the epicentre of global economic power.
A recent report by Deutsche Bank noted this, saying such a currency could be used as a soft or hard-power tool.
“In fact, if companies doing business in China are forced to adopt a digital yuan, it will certainly erode the dollar’s primacy in the global financial market,” the report said.
China is not the only populous nation considering a digital currency.
Last year an Indian government panel recommended imposing a jail term of up to 10 years and heavy fines for anyone dealing in private digital currencies, suggesting the country instead consider launching an official government-backed digital currency.
The central banks of England, Canada, Japan, Switzerland, Sweden and the eurozone also recently came together with the Bank for International Settlements to form a group which will explore central bank digital currencies (CBDCs).
The world’s current superpower, the United States, currently has its Senate considering a proposal to create a new dollar-backed digital currency that would allow the Government to send direct payments to citizen’s wallets held by the Federal Reserve, called FedWallets.
And, while Australia has not announced official plans to introduce a digital currency, the Reserve Bank recently revealed it had trialled a system in which commercial banks settled payments between each other using a CBDC.
The RBA also noted the advantages of such a system, such as reduced costs and faster payments.
In the meantime, the trend of purchasing goods and services digitally will likely increase, even after the coronavirus pandemic is resolved.
But it may also be the case that this crisis has made us all a little more paranoid about our livelihoods.
And when it comes to saving for a rainy day, many Australians still believe that cash is king.