Why we've gone back to storing cash under the mattress

As the world shifts to paying for goods and services electronically, you'd expect the volume and value of paper currency in circulation to diminish. Surprisingly, though, bank notes are more in demand than ever. The combination of ultra-low interest rates around the world and pandemic-inspired hoarding are instigating not only a preference for cash but also for the highest-denomination bills.

In the UK, there's evidence that more people have been storing their wealth under the proverbial mattress. While the Bank of England has so far resisted driving its key policy rate below zero, central bank officials have stressed that negative rates are possible as part of the monetary toolbox. In any event, the interest rates available to Britons on their savings accounts are already the lowest on record, according to data compiled by Moneyfacts. And demand for the highest denomination note available in British pounds has been growing.

Hey big saver

The value of sterling banknotes in circulation increased to 78 billion pounds ($106 billion) by the end of the third quarter of last year, up from about 70 billion pounds when the UK economy first went into lockdown in March. The central bank reckons that spurt was driven by people hoarding notes as a safeguard against needing emergency forms of payment. But paper currency outstanding had already grown by almost 25 per cent from 56 billion pounds in 2014.

"People are spending less cash, but the total value of banknotes in circulation has increased as people appear to choose to hold more cash," the Bank of England said in November. "These trends have persisted for a number of years, but have been magnified by the pandemic."

At -0.75 per cent, Switzerland has the lowest official monetary policy rate in the world. And as those sub-zero rates filter further through the banking system, depositors faced with the prospect of being charged by their bank for keeping money in a savings account may decide instead to store their nest eggs in cash. From July, for example, customers will have to pay for the privilege of banking 250,000 Swiss francs ($280,000) or more with UBS Group AG, with charges on euro accounts starting at a similar threshold. Previously they would have been charged for amounts of more than two million francs.

Switzerland also offers one of the highest denomination notes available in any currency, and demand for it has soared. In value terms, the 1,000-franc ($1,120) bill accounts for about 60 per cent of the total of all Swiss currency in circulation, up from about 25 per cent at the start of the 1970s, according to a Swiss central bank report published in February 2020.

Moreover, the study estimates that hoarding has taken as much as 90 per cent of those notes out of circulation, compared with about a fifth of 100-franc notes. For the same amount of space, the higher value note stores ten times as much value.

"The high proportion of large denominations indicates that banknotes are used not only as a means of payment but also - to a considerable degree - as a store of value," the Swiss study says. "The persistently low level of interest rates is a major factor in the rise in demand for banknotes."

The rise in the number of high-value bank notes in the UK and Switzerland in recent years mirrors a similar trend in the US, where the volume of $100 bills outpaced that of $1 notes in 2017 and has continued to accelerate.

Money, money, money

"When interest rates are low, the opportunity cost of holding currency instead of putting money in the bank is lower, and people may tend to hold more currency," the Federal Reserve Bank of Chicago said in a 2018 report on the demand for $100 bills.

So if you're seeking to insulate your savings from the threat of negative interest rates, or hoarding money in case the banking system collapses, or keeping your wealth in paper currency away from the prying eyes of the authorities, you're not alone. For many people, cash is still king. Sure, there's a chance that fire or flood or burglary could trash your net worth. But at least you won't have to worry about a forgotten or stolen password putting your Bitcoin wealth tantalisingly out of reach. (Bloomberg)