[Dave Birch] In a talk at SXSW 2013, Facebook’s Head of Identity Products, the super-clever (and super-nice) Sam Lessin, referred in passing to the concept of “peak cash” and wondered out loud if we had gone past that point yet. Well, I think I have the answer. It’s yes, and of course, no. (We are consultants, after all!). Or, to explain it another way, no and yes. No, we have not reached peak cash as the amount of cash “in circulation” is still going up. But yes, the peak use of cash to support commerce has passed.

Here’s what I mean. Reading an interesting story — “Boosting the Money Plane” — about a big robbery in Bloomberg Business Week (25th February 2013) I noted the statistic that cash-in-transit (CIT) is a $14 billion business in the USA. The Federal Reserve physically moves around $640 billion per annum! Given this enormous amount of pointless atom shifting, it is truly surprising to note that there are so few CIT robberies (less than one each week on average) although I suppose that is a reflection of the amount of money is spent on guards and guns and “smart water” and whatever else. But why is all this money being spent and all the cash being shifted around? To support the trade and commerce at the heart of the economy? Now that we have invented laser beams and transistors, shouldn’t we be using less of the stuff?

We don’t seem to be. To resolve the paradox you have to look at the data. As the President of the Federal Reserve Bank of San Francisco, John Williams, wrote in their annual report for 2012, the evidence is that, even though the amount of cash has continued to climb, the share of transactions using cash has fallen steadily in recent years. As the (smoothed) graph below shows, the value of low denomination bills (presumed to be a reasonable proxy measure for commerce) lags economic growth whereas the value of high denomination bills is way ahead of economic growth (the figures for Europe are similar).


The figures are unequivocal. Most US cash is in the form of $100 bills and it is presumed that most of it isn’t in the US. The rest of the world has taken US currency and stuffed it under the beds of drug dealers, in the suitcases of money launderers and the freezers of corrupt politicians (no, wait, that was in the US). This is a gigantic interest free loan from the world’s criminals to the US Treasury.

Most U.S. paper currency by volume (number of notes) is used in the United States, with the $1, $5, $10, and $20 notes making up the lion’s share of all transactions. But because the dollar is widely trusted abroad, most U.S. currency (by value) is held in foreign countries, primarily in $50 and $100 denominations. The Federal Reserve Board of Governors reports that the volume of cash in circulation has more than doubled (from 13.5 billion to 31.3 billion) in the past 20 years, and the value of that cash has more than tripled (from $268.2 billion to $1.03 trillion).

[From Meeting the Demand for Cash :: Nelson Oliver, Research Analyst, Dan Littman, Economist :: Spring 2012 :: 04.13.2012 :: Federal Reserve Bank of Cleveland]

There’s a trillion dollars in cash out there, yet cash accounts for only 0.2% of all transactions in the US by value. It is inconsequential in the support of the commerce. Once again we return to the apparent paradox of the growth of e-payments and the simultaneous growth of cash that is entirely inappropriately labelled “in circulation”.

The rapid growth of substitutes for cash, particularly debit and credit cards, has led economists to predict the advent of the “cashless society”. Yet cash holdings in most developed economies continue to grow and in the U.S., per capita currency holdings now amount to $3000.

[From The myth of the “cashless society”: How much of America’s currency is overseas? – Munich Personal RePEc Archive]

I strongly doubt that the average citizen of the US has anything like $3,000 in cash under their bed at any one time (although to be honest the median might be climbing following events in Cyprus). Spot the mistake in the following paragraph from the same report…

Even a cursory examination of the growth and magnitude of the U.S. currency supply in circulation with the public reveals that predictions of the advent of the “cashless society” are unfounded.

Yes, of course, I’m sure you spotted the same error. Once again, the idea that the currency is “in circulation” is utterly mistaken. As indeed is recognised later on in the text as the paper goes on to discuss various estimates for the amount of US currency overseas (In passing, it notes the extent to which US dollars circulate in Canada, something I had no idea about) and comes up with two broad hypotheses in an attempt to explain the figures. These are summarised thus.

The first posits that a large fraction of U.S. currency is held abroad, the second that large amounts of cash are employed to undertake transactions that individuals and firms prefer to hide from the government either to avoid taxes, regulations or punishment for illegal activities.

Like many other industry observers, I had assumed that the former explanation accorded more closely with reality since the quoted figures for US currency in circulation have consistently estimated that most of the “unexplained” cash is outside the US and unlikely to be repatriated (see above). My standard text on US payment systems, Scott Lofteness and Carol Benson’s excellent Payment Systems in the US says that economists put the figure at 60%. However, the new estimates put forward in Edgar’s paper would seem to indicate the latter: that is, the domestic underground economy is soaking up cash in the US just as it is in Europe. If correct, that makes for an interesting rethink on the government’s (lack of) strategy toward cash. If the cash is overseas, causing mayhem somewhere else, then foreigners are lending Uncle Sam money. If the cash is at home then it is a stealth tax on the honest and a subsidy to the dishonest.

According to a forthcoming study by the Institute for Business in the Global Context (IBGC) at The Fletcher School at Tufts University, cash is a major vector for tax evasion in the U.S., likely costing the government more than $75 billion in missing tax revenue. The Fletcher School’s research also indicated that U.S. households invest $31 billion worth of time annually accessing cash, while businesses lose $40 billion worth of cash to theft, counterfeit and accident.

[From Public-Private Dialogue on Cost of Cash Progresses in D.C. | MasterCard Social Media Newsroom]

What do these figures tell us? They tell us that all around the world, the principal function of cash in developed economies is no longer to support commerce, but to support crime.

The U.S. Bureau of Engraving and Printing produced 8.4 billion notes last year, including a record three billion hundred-dollar bills. Yet even while cash in circulation is growing, it is becoming increasingly marginalized for retail transactions.

[From The End of Cash? – Barrons.com]

Record numbers of $100 bills that you can’t even spend in most shops! If you have another explanation for the volume and distribution of cash, other than crime I mean, I’d be genuinely interested in hearing and sharing it.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers


  1. And by a similar process of reasoning, I could persuade you that the vast majority of financial crime happens digitally, and that at least cash can’t be rehypothecated ad infinitum

  2. Those notes are all nicely numbered to aid tracking of where the crime is. (Remember the nice barcodes on the Dutch Guilder to automate this when scanners were simpler?)

  3. Doesn’t all that digital crime money get rehabilitated using cash money laundering?

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