In economics, the paradox of banknotes or cash paradox is the observation that while the share of cash transactions has fallen over the past few decades due to alternative forms of payment such as credit cards and other electronic payment instruments,[1] the demand for physical currency, measured as the ratio of currency in circulation (CIC) to GDP, has been steadily increasing since the early 2000s.[1] This phenomenon contradicts the standard monetary model, wherein cash demand and use of cash in transactions are positively correlated [citation needed].
First coined in 2009 by then Chief Cashier of the Bank of England, Andrew Bailey,[2] the paradox of banknotes originates with the increase in the CIC/GDP ratio in the early 2000's after, decades long decline in cash demand beginning in the 1940's.[1] While first identified and described in the circulation of the British Pound Sterling, the phenomenon is wide spread among a variety of currencies; between 2001 and 2019, the CIC/GDP ratio increased in 98 out of the 128 countries available within the International Financial Statistics Database of the International Monetary Fund.[3][4]
The paradox of cash was further exacerbated and accelerated during the Covid-19 pandemic. An increased in demand for physical currency was present throughout 2020,[5] despite a decrease of cash transactions and changing consumer payment habits associated with the pandemic.[6] Out of the 128 countries within the IMF database, CIC increased by an average 18.7% in 2020,[7][4] even with a 3.1% decrease in global GDP during the same time period.[8]