Denominations & the Cash Paradox

Recent work on the cash paradox focuses on the denominations involved. In a study of eight currencies over 30 years, Gerhard Rosl and Franz Seitz see a correlation between the type of crisis and the demand for certain denominations.

As a reminder, the cash paradox is the situation, seen during the COVID crisis, of increasing demand for cash at a time when cashless payments increased in frequency at the point of sale.

Rosl and Seitz find that during times of technical crisis (as during Y2K), there was an increase in the demand for small denominations because of a fear of insufficient instruments to conduct transactions. During the financial crisis of 2008, the demand was for high denominations as a store of value in a financially turbulent period. There was little consumer concern about having cash for daily transactions.

During the natural disaster crisis of COVID, there was again a demand for high denominations as a store of value for “precautionary motives and the crisis-induced flight to physical cash due to psychological reasons.” Small denominations were not needed for transactions as these were being conducted online or on a cashless basis.

It would be interesting to see if this analysis holds up as we move backward in time. I expect that it would.