- Higher card spending strengthens the case for a digital pound
- But banknotes play an important cultural role, too
Money doesn’t go as far as it used to. According to the Bank of England’s (BoE) inflation calculator, goods costing £1 in 1953 would cost £23.18 today. In a rather depressing reflection of the impact of high inflation, goods costing £1 in 2019 would already cost £1.22 now.
The way we use money is also changing. Unsurprisingly, cash use has been falling year on year for a decade now – and the pandemic only accelerated the trend. According to a report from the British Retail Consortium, cash use recovered slightly last year, probably driven in part by its usefulness as a budgeting tool. But despite the modest rebound, only 11 per cent of retail transactions were made using physical money last year. The report stated that for a "large proportion of the population, the pandemic has had a lasting impact on how much we transact in cash”.
Yet this overall pattern masks two important trends. Firstly, cash users form a loyal core who are unlikely to be tempted to move to other payment methods. According to the BoE, one in five people still consider it their preferred payment method, and 1.1mn people still use it for their everyday spending.
There is still huge support for cash among devoted card spenders, too. In a 2022 BoE survey, 88 per cent of respondents agreed that banknotes should be available for people who want to use them, while 78 per cent thought that it was important to have a physical form of money. This isn’t entirely selfless. Cash was rated the ‘most safe, convenient and trustworthy’ means of payment. Some 85 per cent of respondents also told the BoE that cash should be available in case technology fails or a card is not accepted.
But using physical money as a back-up won’t do much to halt the march of card payments. As the chart shows, use of contactless spending and online banking is set to increase further over the next 10 years. Because these kinds of digital transactions use money ‘created’ by commercial banks, this poses a problem for the BoE. Currently, notes and coins are the only way that consumers can access 'central bank' money. If cash use declines further, trust in the currency itself could ultimately start to slip away from the BoE. This is a powerful rationale for introducing a digital version of the notes and coins already issued by the central bank.
The use case for a digital pound is still not entirely clear, but it would be used to make and receive payments – and emphatically not designed as a speculative product like crypto tokens. Proponents think that it could open up a new frontier in transactions, allowing for ‘micropayments’ and cheaper cross-border payments. The idea is in its early stages, but the BoE stresses that: “If we introduced the digital pound, it would not replace cash. Instead, we would like it to work alongside cash as we know that people may like to have the option to use both.”
This is probably wise – especially if you consider that our attachment to banknotes stretches beyond practical considerations. The European Central Bank (ECB) recently opened a consultation into the design of new euro notes, which stressed that banknotes have a “cultural function”. Although it’s probably lost on most tourists, current notes apparently feature windows to symbolise “the European spirit of openness and cooperation”, and bridges to represent “communication” between the people of Europe and the world.
According to the ECB’s currency development division “banknotes tell a story and can be emotionally charged. People may, for instance, feel a connection to the persons, places or objects depicted on their banknote”. In the UK, the first King Charles bank notes will be issued for circulation in the middle of next year, and most people will probably feel a twinge of excitement when they see one. Contactless spending may increase its dominance next year – but that doesn’t mean we don’t want cash.
