Cash use for payments has been steadily decreasing in many countries, including Canada and Sweden. This might suggest an evolution toward a cashless society. But in Canada, cash in circulation relative to GDP has been stable for decades and has even increased in recent years. By contrast, the cash-to-GDP ratio in Sweden has been falling steadily. What has caused this difference? Are there lessons to be learned from comparing the Canadian and Swedish experiences?

We address these questions by focusing separately on small notes used for transactions and larger notes typically used as a means to store value. We find that Canada and Sweden show a similar long-term downward trend in small-denomination bank notes relative to GDP, reflecting declining cash use for transactions in both countries. These outcomes have been driven by the adoption of similar retail payment innovations in the two countries. At the same time, merchant acceptance of cash has been (to this point) nearly universal in Canada and in Sweden. So neither differences in payment innovations nor in merchant acceptance of cash can explain why cash-to-GDP has been declining rapidly in Sweden but not in Canada.  

But differences emerge between the two countries in the demand for larger-denomination bank notes. These seem to be the key to explaining their divergent cash-to-GDP trends. In Sweden, three influences have decreased the demand for larger bank notes over time. First, given the Swedish experience, people there might expect that in financial crises the actions of public authorities will secure bank deposits. This reduces the need for cash as a safe store of value. Second, cashless bank branches in Sweden have created frictions that inhibit access to larger bank notes. And third, Swedish legal tender rules that declare specific old bank note series invalid appear to have discouraged people from holding larger bank notes generally. In Canada, by contrast, there is some evidence that foreign demand for larger Canadian bank notes has increased somewhat in recent years. 

The analysis points to three broad lessons.

  1. Policy interventions and bank resolution frameworks (like “bail-in”) that protect deposits in financial crises reduce incentives to hold larger bank notes as a hedge against heightened risks. This also suggests a reduced need for central bank digital currency as a safe store-of-value in crisis (Engert, Fung and Hendry 2018).
  2. Cashless bank branches can inhibit access to cash, particularly if ATM networks do not satisfy consumer demand across a range of note denominations or provide adequate cash-deposit services, especially for merchants.
  3. Legal tender rules that periodically declare old bank note series invalid can have the unintended consequence of inhibiting the demand for cash more generally, an impact that is stronger the more frequent the declarations and the more difficult the process of exchanging old (invalid) notes for new notes.