The Future of Cash is the title of a discussion paper by Solomon Tarlin of the Supervision, Regulation, and Credit Department of the Federal Reserve Bank of Philadelphia, and published in September by the bank as part of its Consumer Finance Institute Discussion Paper Series.

The conclusion is that, while hard to predict, the decline of cash as a medium of exchange will continue and the important question is the speed and extent of the shift to digital currencies. Also noteworthy is that while cash is being used less in commerce, the amount of currency in circulation as a share of gross domestic product has been steady or even higher, perhaps because while people may not be spending cash, they are hoarding it.

The impetus for the report was an ordinance enacted by Philadelphia in March 2019 that required all businesses to accept cash, followed by similar regulations elsewhere.

The paper went on to examine some of the reasons for the changing landscape. From 2016 to 2019, cash payments made in the United States fell from 31% to 26%, despite the fact that automation has made cash easier to count and use, and the cost of accepting it is less than for credit cards. Yet cards have become more popular because of rewards programs, low interest rates, and consumer convenience.

Cash payments are now concentrated in smaller purchases. While the median debit card purchase is $25 and the median credit card purchase is $28, the median cash purchase comes down to just $10. So even though cash is used for 26% of all transactions, that is only 6% of total purchases. Also, younger and older consumers use cash more, compared with the middle-aged.

Another factor is the increase in online buying, from 7% of all spending in 2007 to more than 25% by 2017. A Federal Reserve System Payments Study in 2019 found that the growth rate of e-commerce using cards was 20.5% per year from 2015 to 2018. The growth of in-person card payments was just 5.8%.

As far as hoarding is concerned, while the average person keeps about $60 in cash on them, about one-fifth of the populace keeps more than what they carry. Those who do have an average of $1,100 in cash holdings. This is one reason the total cash in circulation has more than doubled between 2007 and 2018, causing the increase in the cash-to-GDP ratio of almost 50 percent. As long as there is such interest in keeping savings in cash, it will continue to have an important role in the economy, Tarlin says.

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