At least 50% of hard sterling is bound up in the ‘shadow economy’ of black-market deals and illicit work, according to the Bank of England (BoE).
In its latest Quarterly Bulletin – which focuses on the evolution of cash – the national bank found that, despite the emergence of electronic payment methods and other financial technologies, the amount of paper cash in circulation has trebled over the past two decades to a massive £60bn.
Evidence suggests that “no more than half of BoE notes in circulation are likely to be held for use within the domestic economy for legitimate purposes”.
That includes cash held in the ‘transactional cycle’ – for example, contained in ATMs, consumers’ purses or wallets and retail tills – which is estimated to account for around a quarter of all notes in circulation.
BoE data also suggests that, at present, £3-5bn of the total hard-cash haul may be “hoarded” domestically “to provide comfort against potential emergencies”. In other words, stuffed under mattresses, or in cellars, lofts or filing cabinets; locations not widely renowned for their ability to generate interest.
Most of the remainder, though, is likely to be held for use in the shadow economy – although the BoE points out that tourists and bureaux de change typically hold large amounts of cash for use in transactions, and some may be hoarding sterling as a store of value overseas.
However, the bank’s evidence further indicates that the overall size of the shadow economy has been stable or shrinking in recent years, so transactional use of cash in that realm is unlikely to be responsible for an underlying growth in demand for banknotes.
Penned by Tom Fish and Roy Whymark of the BoE’s Notes Directorate, the Bulletin stresses that “The Bank does not seek to promote any one payment mechanism over another, but in supporting its mission, aims to protect and enhance the stability of the financial system.”
It adds that several alternative payment methods, such as online and mobile banking and the 2008 introduction of the Faster Payments Service, have opened up consumers’ and businesses’ options for making “spontaneous payments”.
But in that very arena, “cash has been more resilient: it remains the most commonly used payment method, accounting for 52% of spontaneous transactions in 2014”.
“Over the next few years,” the Bulletin forecasts, “consumers are likely to use cash for a smaller proportion of the payments they make. Even so, overall demand is likely to remain resilient. Cash is not likely to die out any time soon.
“As such, the bank continues to invest in banknotes. Within the next few years, the bank will be launching new banknotes for the £5, £10 and £20 denominations. The new notes will be made of polymer – a cleaner and more durable material – and will incorporate leading-edge security features that will strengthen their resilience against the threat of counterfeiting.”