The death of cash will bring lasting change. Not all of it good

Has Covid-19 delivered a fatal wound to our use of cash? And if so, what are the effects?

The general rule about economic shocks is that they speed up trends that were already happening, and this one has certainly speeded up the switch out of cash payments towards card and phones. This is happening right across the world, though at a different pace. In the UK the proportion of cashless businesses has shot up from 8 per cent to 31 per cent during the lockdown. 

In the US the shift has been somewhat slower. Ahead of the impact of coronavirus, cash was still the most popular form of payment, though this year may turn out to be a tipping point.

In Europe the picture varies. At one end is Germany, where cash is still the preferred method of payment, but a McKinsey study  suggests that even there cash use will fall below 50 per cent of transactions by 2022.

And at the other end is Sweden. Sweden is fascinating because it has so often the world’s social leader – it gives us a glimpse of how the rest of us will behave a few years’ hence. And there cash has virtually disappeared. Stefan Ingves, the governor of the Riksbank, said that some young Swedes “have no idea” what real money looks like anymore.

“If the lights go out,” he warned, “we need to have enough physical cash in this country, way, way out in the woods, so that we can revert to using physical cash if there’s a serious problem.”

There are clearly many advantages of the move away from cash. Quite aside from the health issue, it is expensive to move the stuff around, empty parking meters, fill up the cash machines, and pay for the inevitable security large amounts of cash require. It is time-consuming to fish around for notes, hand them over, and get change. And inevitably cash can be used for under-the-radar transactions, either to avoid tax or to trade in something illegal.

But there are also huge disadvantages,  aside from the threat of the communications crash noted by Stefan Ingves. People who for whatever reason don’t have bank accounts may find themselves unable to get access to services. 

Not everyone has a smartphone; many older people choose not to because they can only work one with buttons. Phone batteries go dead. And as for curbing illegal activities, apparently drug dealers have adapted to the cashless society and actually find it safer not to have to handle large amounts of folding notes.

So what will happen?

If you look at cash through the ages, there have been long periods when not much seems to happen, then there is a sudden leap forward: physical coins worth the metal in them, the invention of paper money by the Chinese, the gold standard and the move away altogether from gold, credit cards, bank cards, phone payments and so on. 

The important distinction is between the three classic functions of money – unit of account, medium of exchange, store of value – which don’t change, and the way in which we make transactions, which do. We are in the middle of one of those leaps forward now.

What will probably happen is that the Swedish model will become the norm, but we will all stop some way short of the extreme position Sweden is now. Most people will use some kind of electronic transfer for most transactions. 

But not only will it take more than a decade for that to happen: in terms of cash usage Germany now is where Sweden was in 2003. Even in 10 or 20 years’ time Sweden will still be using some cash. So too will the rest of the world. In the US cash will remain particularly important for social reasons: the desire for privacy is ranked higher than in Western Europe and cash is a private, traceless transaction. More people will prefer to preserve their anonymity, and US society will accept, even applaud, that.

For there is a curious paradox. Covid-19 has cut the proportion of payments made in cash but like any crisis, it has increased people’s desire to hold it. This year saw the sharpest rise in demand for dollars in America since the fears of the Y2K bug in 2000. 

In the week starting 11 March this year dollars in circulation rose from $1,809bn to $1,843bn. The numbers have gone on climbing. According to the Federal Reserve , as of 9 September dollars are up to $1,980bn.

I am not so sure about sterling, currently profoundly unfashionable for all the reasons we know about, but there is certainly life in the almighty dollar yet.