Why cash may never dieApril 10, 2013: 10:46 AM ET
There is 42% more cash in circulation in the U.S. than five years ago. Why this makes sense, even as we use plastic more frequently.
FORTUNE – It's been said that America is on the cusp of a cashless economy, with the growth of check cards, debit cards, prepaid cards, and more recently, online mobile phones as alternatives to carrying cash. Even Fortune said it in a 2012 cover story, The Death of Cash.
That may still happen, but certainly not today, according to a report released recently by the Federal Reserve Bank of San Francisco. There is 42% more cash in circulation in the U.S. today than five years ago.
The rise is worth noting, but the Fed's study doesn't say much about the way new technologies are changing the way consumers use cash. It does, however, say a lot about the way they view the greenback following the financial crisis.
Super-low interest rates in the U.S. and other major economies have created more cash in the economy, according to the report by Fed President John Williams, who earlier last week hinted that the central bank could ease its low interest rate policies as early as this summer. While keeping the cost of borrowing low has helped the economy grow, it has also seriously hurt savers, who earn little, if any, return on money they store in checking and short-term savings accounts.
Europe's ongoing debt crisis has also been a factor: The thought that Italy or Spain's economies could collapse any day has sent Europeans scrambling to convert some of their euros for U.S dollars. The Fed cites one study where the share of greenbacks held abroad rose from about 56% before the crisis five years ago to nearly 66% in 2012.
To be sure, more cash in the economy doesn't necessarily suggest consumers aren't swiping their plastic or going online to pay for clothes or a trip to the grocery store. Williams notes that overall the share of transactions using cash has fallen steadily in recent years. In his report, he took a look at bills $50 or lower typically used for everyday purchases. Whereas growth in the use of smaller bills historically rose in line with growth of the U.S. economy, that suddenly changed in the mid-1990s. The use of $5, $10, $20, $50 bills lagged behind economic growth.
It's unclear exactly why, but Williams suggests it could be that consumers started using other types of payments such as credit cards, check cards and the like to pay for smaller and medium-sized purchases.
What's most striking is that much of the recent growth in cash is made up of $100 bills. Now when was the last time you paid your tab with Benjamins? Williams suggests it may reflect that people worried about the health of the banks following the financial crisis and socked away their money to protect themselves from a financial collapse. In the six months following the fall of investment bank Lehman Brothers in 2008, holdings of $100 bills soared by 10% to $58 billion.
There might also be drug dealing and other shady businesses to consider. As former Treasury official Bruce Bartlett notes, studies and common sense would suggest that large bills are being used by drug dealers, tax evaders and the like.
Given all this, it's hard to see how cash would ever cease to exist. True there may eventually be less of it circulating in the real economy, as startups like Square develop new technologies supporting a virtual wallet. This will take some time, though, as a separate Fed report suggests that while consumers increasingly use their iPhones and such to check their balances, pay bills and deposit checks, they're less likely to use their phones to pay at retailers and restaurants.
In the end, so long as the world has criminals and economies going through tough times, there's indeed a level of comfort in cold hard cash – something we can actually see and touch.