The advent of the Covid-19 pandemic has witnessed a strong uptick in paper currency demand across advanced economies, even as contactless methods surged ahead of cash in payments. This article explores these two contrasting phenomena, which are in fact continuations of much longer-term trends. The use of cash, while still important for small in-person transactions, has been declining as a share of overall consumer payments for decades, thanks to a steady stream of innovations including credit cards, debit cards, electronic transfers, and smartphone payment apps. For example, in the United States, paper currency accounted for 26 percent of the number of consumer payments in 2019, but only 6 percent in value terms, down from 40 percent and 14 percent respectively in 2012. On the other hand, U.S . dollars in circulation have increased from $1.1 trillion in January of 2012 to $1.8 trillion in January 2020, exploding to $2.1 trillion in December 2020. The same pattern remains if one excludes foreign holdings (50–60 percent of the total) and is found in most other advanced economies as well. Some argue that soaring currency demand contests the view that the world is headed to cashless future, or even a “less-cash” society (see, e.g., BIS 2019).
Should strong demand for paper currency be considered an unalloyed benefit in the helicopter money era? Many treasuries and central banks around world seem to think so. After all, inflation appears to be dormant; the marginal cost of printing a 100 dollar bill to spend is on the order of 20 cents.
In this article, we reexamine this sanguine view of rapid paper currency growth, assessingit from the perspective of the consolidated government balance sheet. Along the lines of other recent studies, we find that the trend decline in interest rates has been a significant factor driving up demand for paper currency (along with high tax rates). Correspondingly, advanced country governments that raise funds by printing currency could do equally well by issuing public debt at extremely low interest rates. Indeed, in Europe and Japan, governments can borrow at negative interest rates, as far out as 30 years in the case of Germany. In such an environment, we argue, the true benefit to issuing paper currency in place of debt is quite small or even negative. This issue has been raised before (e.g., Gross 2016), but there are some subtleties. For example, if converting the entire paper currency supply to 10-year debt were to raise the debt/GDP ratio by, say 7 percent, what would be the effect on interest rates and the implications for total interest paid on preexisting government debt?
