As we all know, the economic crisis in which we find ourselves has greatly boosted household savings, due to the fear generated. Faced with future complications, families have preferred to save the capital they have, thus maximizing savings and minimizing their expenses and investments.
Well, in the last few days, we have been able to observe a very curious fact, and that is that the demand for cash has increased in large proportions during the hardest months of the pandemic. The Bank of England has called this phenomenon “the cash paradox”.
The BoE has endorsed this increase in cash between March and July, as it had to increase its banknotes in circulation by more than 11 billion euros.
As we can see in the graph, the evolution of cash in circulation had a slight upward trend, and we can even say that it was maintained in the months prior to COVID-19, and from here on, its demand increased from 1,100,000,000,000 to 1,300,000,000,000.
Experts inform us that banknotes are the form of money most families choose as a store of value.
But one thing still doesn’t make sense, and that is that if customers are truly moving away from cash, with a growing preference for digital payments, how is it that cash has increased so sharply?
The only explanation for this surprising fact is the uncertainty of what will happen in the near future.
Households have opted to keep more of their savings in banknotes in case any unforeseen events occur, in order to have a minimum safety cushion to meet their basic needs.
“People are spending less in cash, but the total value of banknotes in circulation has increased as households seem to opt to hold more cash. These trends have persisted for several years, but have been magnified by the pandemic,” the BdE report argues.
