No room at the till – what a noteless economy implies

Starbucks has a prominent notice. Responsibly cashless. It might have read better (or more honestly) as profitably cashless. Avoiding the costs and dangers of handling and transporting cash and the associated bank charges – including the likelihood of cash not making it to the till in the first instance – is surely in the owner’s interest and justifiably so.  This is on the proviso that the sales lost would not be significant as affluent and tech-savvy customers tender their smartphones to pay. Others may have a different view. For example, the owner-manager of a small stand-alone enterprise in control of what goes in or out of the cash register may come to a different view.  For them cash is still king.

Starbucks and other cash refusers are probably within its rights to refuse legal tender. Only the notes and coins issued by the Reserve Bank qualify as legal tender in SA – money that cannot be refused in proposed settlement of a debt. However, it presumably can be rejected when offered in exchange for a good or service. SARS would probably prefer a cashless society for obvious income monitoring purposes. The Reserve Bank might, were it a private business, have mixed feelings about reducing the demand for a most valuable monopoly. It pays no interest on the notes it issues and earns interest on the assets that the note liabilities help fund. In 2004, the note issue funded 40% of the assets on the Reserve Bank’s balance sheet. That share is now down to 15%. It was 20% before Covid.

The above demonstrates how notes have lost ground to the digital equivalent – a transfer made and received via a banking account, a trend that becomes conspicuous after the Covid lockdowns. Since then, the transmission and cheque accounts at SA banks have grown strongly, from R790bn in early 2020 to nearly R1.1 trillion today, or by about a quarter. By contrast, the notes issued by the Reserve Bank since have increased only marginally – by R20bn – with most of the extra cash issued being held by the public. The banks have managed to reduce their holdings of non-interest bearing cash in their vaults and ATMs. Replacing notes with digits has been a cost-saving response. A central bank replacing paper notes with a digital alternative could be an alternative. But it would threaten the deposit base of the banks and their survival prospects. 

Money supply trends

Source: SA Reserve Bank and Investec Wealth & Investment, 19 July 2023

The banks however dramatically increased their demands for an alternative form of cash, namely deposits with the Reserve Bank. They now earn interest on these deposits. What used to be significant interest charged to the banks when they consistently borrowed cash from the Reserve Bank (to satisfy the cash reserve requirements that it sets), at the Repo rate, has now become interest to be earned on deposits held with the Reserve Bank. These deposits have grown by R100bn since 2020 while cash borrowed from the Reserve Bank has fallen away almost completely from an earlier average of about R50bn a month.

SA banks – demand for and supply of cash reserves since Covid-19

Source: SA Reserve Bank and Investec Wealth & Investment, 19 July 2023 

The Reserve Bank, following the Fed, regards the interest it pays on these deposits as fit for the purpose of preventing banks from converting excess cash into additional lending, which would lead to increased supplies of money in the form of additional bank deposits. It takes a willing bank lender and a willing bank borrower to power up the supply of cash supplied to the banking system by a central bank and turn them into extra deposits. The testing time for central banks in a banking world full of cash will come when increased demands for bank credit accompany the improved ability and willingness of the banks to turn excess cash into extra bank lending. Then interest rate settings may not control the demand by banks for cash reserves to sufficiently restrain the conversion of excess cash into additional bank lending, which in turn will lead to extra and possibly excess supplies of money. This should then lead to extra spending as money is exchanged for goods, services and other assets that will force prices higher. Clearly this is no longer a problem for South Africa or the US where the supply of money is in sharp retreat. 

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