Cash Is Dead! Long Live Cash!

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(This essey was written by President and CEO John C. Williams of the Federal Reserve Bank of San Francisco)

It is often said that cash is king. But a quick glance at the register in stores and restaurants might make you think the king is on his deathbed. Increasingly, customers are finding other ways to pay for things, whether it’s credit, debit, or gift cards, or even mobile phones. At home, they use their computers to make payments from their bank or credit accounts, or turn to popular services such as PayPal. So it’s easy to find commentators who blithely declare that we are on the cusp of a cashless society in which everything is paid for with the swipe of a card or the tap of a phone. Cash, they tell us, is doomed to go the way of the dinosaurs.

Yet, to paraphrase Mark Twain, reports of the demise of cash are greatly exaggerated.

In fact, they are plain wrong. It’s undeniable, of course, that alternative payment methods are growing rapidly and significantly increasing their market share. But cash lives on. The quantity of currency in the economy keeps growing. As Figure 1 shows, since the start of the recession in December 2007 and throughout the recovery, the value of U. S. currency in circulation has risen dramatically. It is now fully 42% higher than it was five years ago.

What explains the rapid rise in currency holdings at the same time other methods of payment are displacing the greenback? And what is the future of cash? Are we truly becoming a society in which paper currency is obsolete? Or will the supply of currency continue to grow? It’s useful to approach these questions and explain recent trends in the use of cash by considering the key economic and social factors behind what’s happening in the payment market.

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