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We analyze the repercussions of different kinds of uncertainty on cash demand, including uncertainty of the digital infrastructures, confidence crises of the financial system, natural disasters, political uncertainties, and inflationary crises. Based on a comprehensive literature survey, theoretical considerations and complemented by case studies, we derive a classification scheme how cash holdings typically evolve in each of these types of uncertainty by separating between demand for domestic and international cash as well as between transaction and store of value balances. Hereby, we focus on the stabilizing macroeconomic properties of cash and recommend guidelines for cash supply by central banks and the banking system. Finally, we exemplify our analysis with five case studies from the developing world, namely Venezuela, Zimbabwe, Afghanistan, Iraq, and Libya.
The authors focus on the stabilizing role of cash from a society-wide perspective. Starting with conceptual remarks on the importance of money for the economy in general, special attention is paid to the unique characteristics of cash. As these become apparent especially during crisis periods, a comparison of the Great Depression (1929 – 1933) and the Great Recession 2008/09 shows the devastating effects of a severe monetary contraction and how a fully elastic provision of cash can help to avoid such a situation.
The authors find interesting similarities to both crises in two separate case studies, one on the demonetization in India 2016 and the other on cash supply during various crises in Greece since 2008. The paper concludes that supply-driven cash withdrawals from circulation (either by demonetization or by capital controls) destabilize the economy if electronic payment substitutes are not instantly available.
However, as there is no perfect substitute for cash due to its unique properties, from the viewpoint of the society as a whole an efficient payment mix necessarily includes cash: It helps to stabilize the economy not only in times of crises in general, no matter which government is in place. The authors argue that it should be the undisputed task of central banks to ensure that cash remains in circulation in normal times and is provided in a fully elastic way in times of crisis.