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The challenges facing currency usage: will the traditional transaction medium be able to resist competition from the new technologies?

  • Mathias Drehmann
  • Charles Goodhart
  • Malte Krueger

The euro's introduction highlights several shortcomings of cash and coins, and some advantages of paying with plastic, but is hard currency an endangered species, threatened by technologically more advanced means of payments, electronic transfers, e-money and the like? If the last twenty years are any guide, the answer is no. We find that modern payment technologies have little impact on currency usage. To understand this lack of effect, we distinguish between demands for large- and small-denomination banknotes. Competition from existing electronic retail payments' products focuses mostly on small to medium-sized purchases where small bills (less than the �50) are most common. By contrast, there are few signs, nor much likelihood, of past or current electronic products displacing holdings of large bills without government intervention. Large bills, which account for over half the stock of outstanding currency in many OECD nations, are mainly held for hoarding and bad behaviour motives ranging from hard crime to paying the plumber under the table; for such purposes the anonymity of cash is, and is likely to remain, superior. As concerns policy implications, we note that, although issuing large denomination bills facilitates 'bad behaviour', withdrawing big bills is unlikely for political reasons. Governments could try to induce e-money usage as a means of discouraging bad behaviour, but we argue that any attempt to force a complete shift to electronic transfer, and to try to ban, or to prevent, the domestic use of cash would be appallingly illiberal. Copyright (c) CEPR, CES, MSH, 2002.

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Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 17 (2002)
Issue (Month): 34 (04)
Pages: 193-228

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Handle: RePEc:bla:ecpoli:v:17:y:2002:i:34:p:193-228
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