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Virtual money supplanting cash


The value of U.S. currency in circulation keeps growing — it’s 42 percent higher now than it was just five years ago — but one of the great ironies of the new millenium is that you’re seeing less of it.

Watch the activity at the check-out register of virtually any business. More often than not, it’s not cash changing hands but what seems like virtual money through swipes of debit, credit, prepaid and gift cards.

For example, Dion’s, the casual dining restaurant chain based in Albuquerque, has seen a recent shift from 49 percent cash payments and 51 percent card payments in 2007 to 37 percent cash and 63 percent card payments in 2012.

“In the ’70s and early ’80s we didn’t take credit cards,” said Dion’s founder Jon Patten. “Eventually, we decided to do so because quality and convenience are important to our customers. Today, most restaurants in our segment have over 50 percent credit (and other) card usage.”

Electronic payments surpassed mail-in payments at PNM, the giant electric utility, in late 2010, said spokeswoman Susan Sponar. Currently, 49 percent of PNM customers pay online while 39 percent mail their payments, mostly from their checking accounts.

The remaining 12 percent pay in person at one of PNM’s payment centers or a Western Union location. “About half pay with checks and the other half cash,” she said.

Cash was still king in the mid-1980s, when one study shows 86 percent of payments were made in cash. By 2011, cash payments had dropped to 55 percent.

If the payment trend continues, it would appear that we are headed toward a cashless society.

“Yet, to paraphrase Mark Twain, reports of the demise of cash are greatly exaggerated,” says John C. Williams, president and CEO of the Federal Reserve Bank of San Francisco, in a recent essay. “In fact, they are plain wrong.”

Cash is not going away anytime soon, although there’s no doubting the impact of changes in payment technologies.

The total money supply, which is currency circulated through the banking system, has ballooned from $1.54 trillion in 1980 to $10.4 trillion in 2013, with much of the growth occurring since the official start of the Great Recession in late 2007.

Due to the dramatic increase in money supply, coins and bills have shrunk from 26 percent of the total money supply in 1980 to 20 percent in 2010, according to Fed data.

The growth in money supply is primarily the result of businesses and households parking their cash in various types of short-term liquid assets such as savings accounts, certain types of certificates of deposit and various money market accounts and funds.

Storing cash in low-interest bank accounts and funds — as opposed to the host of potentially more lucrative mainstream investments — is considered to be a risk-averse defense mechanism against economic uncertainty. The cash is safe there, or so the rationale goes.

Then there’s the hoarding of cold, hard cash under mattresses, or in safes and safety deposit boxes. At the end of 2012, there was $3,500 in coins and bills out there for every man, woman and child in the country, Williams notes in his essay titled “Cash Is Dead! Long Live Cash!”

“If people aren’t using this cash to pay for things, then what are they doing with it?” he asks.

The low-interest rate environment, both here and in many other countries, has made banking optional for some businesses and households, he says. The difference between cash under the mattress and cash in a CD, for example, is pretty minimal.

Then there’s the U.S. dollar’s international appeal as a stable “store of value” that is easy to conceal and easy to move, Williams says. The $100 bill appears to be the monetary denomination of choice.

“As Europe’s (financial) crisis worsened in the spring of 2010, U.S. currency holdings rose sharply,” he says. “And they continued to rise as economic and political uncertainty about the future sent Europeans scrambling to convert some of their euros to dollars.”

In an observation that may surprise some people, Williams says, “According to one estimate, the share of U.S. currency held abroad rose from about 56 percent before the tumultuous events of the past five years to nearly 66 percent in 2012.”

For many American consumers, cash is appealing because it’s accepted pretty much anywhere and everywhere. Cash works when other payment methods might not, like during a power outage.

Then there’s another compelling advantage to using cash.

“It’s anonymous,” Williams says. “Using cash keeps transactions away from the eyes of tax collectors, law enforcement agencies and businesses that track the buying habits of individual Americans.”

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