Why cash has been piling up during the pandemic

A YEAR AGO America’s Federal Reserve Board placed an order with the Treasury Department for 5.2bn new banknotes—part of an annual exercise in which old, damaged bills in circulation are replaced with crisp new ones. Alas, the order proved too small. In March, as coronavirus panic gripped financial markets, jittery Americans lined up to withdraw cash from their bank accounts. (One bank branch in Manhattan reportedly ran out of $100 bills amid the frenzy.) In an attempt to meet the growing demand, the Fed topped up its annual order by 1bn notes. The government’s printing presses are currently churning out more than 27m banknotes a day.

The scramble for cash is not over. According to the Fed’s latest figures, the value of dollars in circulation is growing about twice as fast as the historical average. Since February, it is up by more than 11%. Such hoarding is not an exclusively American phenomenon. In Canada cash in use has increased by more than 14% since February; in Britain and the euro area it is up by 10% and 8%, respectively (see chart). According to Jonathan Ashworth and Charles Goodhart, two economists, consumers are stockpiling cash in emerging markets, too. Brazil, India, Mexico and Russia have all seen unusually high demand for hard currency this year.

It is easy to imagine the pandemic causing demand for paper money to go down, not up. When the virus first emerged, the fear was that infected banknotes could help it spread. Shops discouraged customers from paying with cash, citing health concerns. China’s central bank began disinfecting and quarantining banknotes before recirculating them (in some parts of the country, cash from hospitals, wet markets and buses was destroyed). The Bank of Korea adopted similar measures, as did the Federal Reserve.

Such fears did not deter people from withdrawing their savings and stashing cash under their mattresses. But consumers are not entirely responsible for hoarding money. According to research by Deutsche Bank, a third of the increase in cash in circulation in Europe was caused by banks, stockpiling cash to handle big swings in demand.

Some evidence suggests that the recent growth in banknotes in circulation is the result of a decrease in bank deposits rather than an increase in cash withdrawals. According to John Paul Koning, a financial writer, European firms and consumers are not depositing as much cash into their bank accounts as they normally do, causing the number of euros in circulation to rise. Mr Koning has an intriguing theory as to why this might be so: he suspects that, with so many shops and restaurants closed as a result of the lockdown, crooks have fewer ways of laundering their ill-gotten money so must hold on to it.

Mr Koning reckons that a similar story may be playing out in America, Canada and elsewhere. Something for the Fed to consider when it places its order for 2021.

Correction (August 14th, 2020): An earlier version of this article mistakenly referred to John Paul Koning as a researcher at Pollitt & Co. Mr Koning no longer works for the firm. This has been corrected.