Friday, September 19, 2014

Why is cash so popular in for transactions in Germany?

In a world where more and more transactions are handled by credit or debit cards, why do people hold cash?  Cash is needed in some establishments that do not accept cards.  It also is difficult to trace, making it the payment mechanism of preference for those who wish to leave no record of their purchases.  However, cash carries significant downsides.  You can lose it or have it stolen.  It pays no interest.  Governments can debase its value by printing too much of it.  

It came as no surprise to me that half of Americans carry $20 or less in cash.  I expected this would be the case in most other high income countries.  I was wrong.  

It turns out that Germans still rely heavily on cash and this has been the case for some time.  They carry around an average of $123 in their wallets and conduct 80% of their transactions in cash.  This cannot be explained in terms of simple economic factors.  For instance lower interest rates would lead to increased cash holding, but interest rates in Germany and the US are pretty close to each other.   

Some sources argue that the German preference for cash reflects the hyperinflation of the 1920s.  But most of the people who lived through that event are no longer around.  (Also, if there was ever a time to minimize cash holdings, that was it.)  Another possibility is that debt avoidance is integrated into German culture; always paying in cash is a good way to avoid ballooning credit card bills.  

We may see a clash of culture with technology soon, as mobile payment systems become more widely available.  Will paying by phone be viewed as equivalent to paying in cash?

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