Where is all the cash going?

According to the latest Bank of England statistical release, the amount of notes and coin in circulation is growing at about 4% a year.  This has been pretty much the average growth rate over the past few years, although there was a large spike in late 2009 to over 8%.

At around that time, Andrew Bailey, who was then the Bank of England Chief Cashier, made a speech about the paradox that whilst cash usage as a proportion of overall transactions continues to fall there is still a growing demand for notes.  His view was that concerns about the stability of banks, coupled with low interest rates (which means that the opportunity cost of holding banknotes is low), was driving people to use banknotes as a store of value – ie stuffing it under the mattress.

So what has happened over the three years since Mr Bailey’s speech?  The growth rates of notes and coins has fallen back to the average 4%, but this is still substantial growth given that cash usage isn’t rising.  According to Payments Council data, there are about 15 billion spontaneous cash payments over £1 every year, and about 600 million regular cash payments (for rent etc), and that these rates have been pretty static over the past few years.

Over the same period, ATM usage has continued to rise – there are now over 66,000 cash machines in the UK, and there were over three billion transactions through the LINK network that connects these ATMs.  Traffic through the network was up about 1.5% in 2012, with average withdrawal amounts remaining steady; on average we withdraw about £65 a time at the start of the year, rising to about £68 in the run up to Christmas.

So – the Bank of England continues to print ever more banknotes, and as a nation we are taking more money out of cash machines, but we aren’t using that cash to make more payments, even allowing for inflation.  There are two obvious routes for this additional cash – as a store of value (the Bank of Mattress), or to the shadow economy, which according to a study last year accounted for about £64 billion in lost revenue to the taxman in the UK.  As I mentioned in a previous blog, the UK tax authorities are cracking down on this, but looking at the way that cash is disappearing it looks like they have an uphill struggle.