Cash remains king

Despite the increasing ease of electronic payments, cash remains popular in the UK, according to the Bank of England.


Money is anything that fulfils the three functions of money: i) a means of payment; ii) a unit of account; and iii) a store of wealth. Physical cash does all of these rather well and appears still to be popular with British people, even as they increasingly use electronic payment systems such as cards.

The Bank of England published an article in September 2015 which showed the enduring appeal of cash, the vast majority of which (94% of around £69 billion) is in the form of notes rather than coin. (There is also some £7 billion of notes issued by Scottish and Northern Irish banks, which are equivalent to Bank of England notes, though you may find the odd London taxi driver who is reluctant to take them). So there is about £1,000 in issue per person.

Use of cash for “spontaneous” transactions has been roughly flat, by value, while cheques are now in decline. Debit card-based payment has soared in the last decade and is likely to increase further as more people have contactless cards, which allow near-instant payment for purchases of up to £30 (ideal for coffee shops and pubs, unfortunately not yet available in the CJBS cafe).

Payments by type

Contactless cards appear to have so many advantages over cash that we might expect cash in circulation to be falling. But that’s not at all what has happened. Bank of England notes in circulation have risen in the last decade to a record high.

UK notes in circulation

Why so much physical cash, a trend seen in the US also and even more in the Eurozone?

The Bank estimates (and it can only be an estimate) that about half is held for making payments and for “hoarding” – saving in cupboards, jamjars and other supposedly safe places. The rest is held overseas and for the underground economy. Cash remains popular with many people because of its ease of use. Many people either don’t use cards or don’t trust them. But above all it is the anonymity of cash that gives it a special value.

Andy Haldane, the Bank of England’s Chief Economist, recently speculated about abolishing physical cash so that all money was in electronic bank account form. That would be very convenient in many ways – it would be impossible to lose cash, have it stolen or find it eaten by hamsters. But it would also be convenient for monetary policy; electronic money could be taxed, which is equivalent to imposing a negative interest rate, something that is otherwise very hard to do (because people can just take their cash out of a bank to avoid a negative rate).

Perhaps British people are anticipating Haldane’s thinking and holding lots of their money safely outside the banking system, just in case. To help them, the Bank’s new notes are made of polymer rather than paper, which will make them tougher, longer-lasting and more hamster-proof.

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