Despite Increased Contactless Transactions Due to COVID-19... High-Denomination Cash Becoming Scarce Worldwide

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] Although non-face-to-face consumption has increased since the outbreak of the novel coronavirus infection (COVID-19), it has been found that the global demand for cash has rather increased. This means that the demand to secure cash in times of economic uncertainty remains strong.

According to the results of an inspection conducted by the Bank of Korea's Currency Issuance Department on eight countries on the 1st, the growth rate of currency demand (currency issuance balance) in each country increased by 2 to 3 times. A Bank of Korea official stated, "The increase in demand for high-denomination currency after COVID-19 is a phenomenon commonly observed not only in South Korea but also in the United States, Australia, and Europe." This survey covered the United States, European Union (EU), Canada, Japan, China, Australia, New Zealand, and Switzerland.

U.S. Currency Issuance Balance Growth Rate at 13%... Demand Concentrated on High-Denomination Bills

In the United States, the growth rate of the currency issuance balance, which was around 5% last year (March to August), jumped to an average of 13% during the same period this year. This is a higher increase than during the global financial crisis (11%). According to a survey conducted by the U.S. Federal Reserve (Fed) in May, the private sector's "increase rate of precautionary cash holdings" (88%) exceeded the "increase rate of transactional cash holdings" (17%) by more than five times compared to before COVID-19. In this survey, respondents who reported increasing cash holdings after COVID-19 showed that precautionary cash holdings increased by an average of 427% compared to the previous year (transactional cash increased by 71%). Precautionary cash refers to cash that is not carried at all but stored at home or office for safekeeping.

Currency demand was concentrated on high-denomination bills. In the European Union (EU), the 200-euro note showed the highest growth rate in currency issuance balance (91%), and in Japan, the 10,000-yen note accounted for 97% of the increase from May to August this year. In New Zealand, just a few days before the level 4 lockdown in March, the high-denomination 50-dollar bill was withdrawn from circulation in an amount close to the annual average demand. In South Korea, the growth rate of currency issuance balance, which had slowed down after peaking in early 2011, expanded again after March this year. The 50,000-won bill mainly led the increase in issuance, and the redemption rate from March to August was 20.9%, sharply down from 60.1% last year.

"Cash is Best in Crisis"... Preference for Cash as a Safe Asset

The Bank of Korea's survey results show that the reasons for the increase in currency demand in various countries are mainly threefold: ▲response to concerns about restricted access to cash ▲securing cash for financial institutions' operations ▲securing precautionary payment means due to increased uncertainty.

First, as concerns about restricted access to cash increased due to the spread of COVID-19 and lockdown measures, demand arose to secure cash inventory in advance. In countries such as the United States, Canada, and Russia, ATMs were closed to prevent the spread of COVID-19, which led to demand for stockpiling cash in advance.

Financial institutions increased their cash holdings to prepare for possible disruptions in cash supply and demand caused by lockdown orders, and the reduction in cash deposits from retail stores due to reduced economic activity made it difficult for financial institutions to secure cash, which was also a cause.

In response to the unstable economic situation, economic agents preferred cash as a safe asset and safe payment method, increasing precautionary currency demand. Due to concerns about economic recession and increased anxiety about the financial system, there was a tendency to use high-denomination bills as a store of value driven by a preference for safe assets. Similar behavior of stockpiling high-denomination bills was observed during past events such as Y2K and the global financial crisis.

A Bank of Korea official said, "This suggests that trust in cash is superior to non-cash payment methods in times of crisis, showing that cash can safely complete payments under any circumstances and serves as a means to store value stably." He added, "The Bank of Korea is also making every effort to secure and maintain issuance reserve funds in preparation for a significant increase in cash demand."

The Bank of Korea has increased the manufacturing order volume of the 50,000-won bill more than threefold compared to the previous year and unusually placed an additional order of 2 trillion won in May. A Bank of Korea official emphasized, "We are also closely monitoring the cash supply and demand situation in the market to ensure that the supplied currency is distributed appropriately and are taking all necessary measures."

This content was produced with the assistance of AI translation services.