As much as we believe in the long-term arc of technological disruption, we are also respectful about how long these processes can take. Old habits die hard, even if newer, better solutions are available.
Our example today: cash usage in America. Every year the Federal Reserve publishes a summary of total US physical cash in circulation. Those numbers are just out (link at the end of this section), and here is what they say:
#1: Transactional cash in circulation continues to grow.
- Total $1 through $20 bills in circulation grew by 2.6% last year to a new record of $238.8 billion. Since this growth approximates the sum of population growth (0.7%) and inflation (2.0%), it would appear that transactional cash usage remained constant last year.
- The growth rate of transactional cash in circulation has been moderating since 2011, when it peaked for the 2000 – present experience. We exclude the 1999/2000 timeframe because the Fed stocked the banking system with extra cash ahead of Y2K.
Aside from that, 2011 was the high water mark for growth in transactional cash at 6.9%. The last three years’ growth has been: 2015 (5.0%), 2016 (3.2%), and 2017 (3.6%).
#2: “Store of value” cash – primarily $100 bills – is growing much faster than transactional cash. There are only $89 billion worth of $50 bills in circulation, so we will put those aside for this conversation. The data on $100s:
- In 2018 the total amount of $100 bills in circulation grew by 7.3%. The dollar amounts here are impressive: $1,343.5 billion. That is almost enough for every person on planet Earth to have two $100 bills in their pocket.
- Last year’s growth in $100 bills in circulation is part of a long-term trend. The compounded annual growth rate here since 2000 is 7.3%. Peak growth in circulation occurred in 2011 (+11.1%) and 2012 (10.3%). It has not been below 5% since the Financial Crisis.
- By the Fed’s reckoning, most $100 bills circulate outside the US.
- This growth in high-denomination bills extends to the euro as well. The compounded annual growth rate of 100 euro notes outstanding since 2009 is 8.3%. And while the ECB has stopped printing 500 euro notes, they have fully offset the impact of that by printing more 200 euro notes and dramatically increasing 100 euro note production.
- In our view, the popularity of high denomination notes has nothing to do with low interest rates, one explanation we frequently see. Rather, $100 bills/high denomination euro notes are simply compact ways to store wealth, legally or illegally obtained, in a form that is acceptable for payment outside the US/Europe. Whether rates are 1% or 5% makes no difference to this application.
- The bottom line: there is a total of almost $2 trillion in high denomination paper currency in circulation between the $100 bill ($1.3 trillion) and euro notes (590 billion euros, $630 billion).
#3: The data shows two different end markets for currency with two very different sets of fundamentals:
- Growth in demand for transactional cash, the competitor to tech-enabled payment systems, is slowing. Tipping points are hard to call, but 2018’s increase in circulating $1s – $20s was the slowest since 2009 (1.6%).
Bottom line: it may take 5-10 years to see American transactional cash in circulation start to decline, but last year’s data shows growth rates only on par with population + inflation. Tech-enabled “cash” has started to make a dent.
- “Store of value” cash is something entirely different. First, it is a global market rather than country-specific (US) or regional (Europe). Second, there are good policy reasons why the Federal Reserve and European Central Bank want their physical currencies to be an extra-territorial store of value. Of course there are seigniorage profits – selling a piece of paper that costs a few pennies to produce for $100/100-200 euros. But then there is the fact that a $100 bill is “money” anywhere in the world, something that supports the dollar’s reserve currency status.
Bottom line: unlike transactional cash, there is no scalable tech-based solution for “store of value” cash as of yet. Crypto currencies are tiny in comparison to $2 trillion of $100 notes/euro high-denomination in circulation, and volatile to boot. And none have the utility of walking around with a stack of $100 bills.
Final thought: we laugh whenever we hear someone proclaim “the death of cash”, and now you know why. The data simply doesn’t support the claim, and it’s not even close. Now, when it comes to transactional cash, the numbers clearly show that online payment systems have tremendous growth potential. We’re years away from “Peak cash”. “Store of value” cash is different, and much further away from its tipping point. The last piece of paper currency will likely be a $100 bill, and that sunset appears very far off indeed.
US currency in circulation: https://www.federalreserve.gov/paymentsystems/coin_currcircvolume.htm
Euro currency in circulation: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/banknotes+coins/circulation/html/index.en.html