**_7_**

cash holdings (a stock), either relative to the money supply (Ml) or relative to GDP. Thele ratios, with the largest values underlined, are shown below for Europe, Japan, and the U.S. for 1993.

**Indicators of cash use, 1993**

||**_Cash/Mi_**|**_Cash/GDP_**|
|---|---|---|
|Europe|.14|.04|
|Japan|**.27**|**.08**|
|U.S.|.11|.02|

Cash holdings in Japan are effectively twice those in Europe or the U.S., suggesting a much greater use of cash for payments. But Europe is far from homogeneous. Within Europe, Switzerland, the Netherlands, and Belgium all have a higher currency/Mi ratio than Japan while Sweden, Norway, Denmark, the U.K., and Finland have a lower ratio than the U.S. This result is evident from Table 1 which 0hows the cash/Mi and cash/GDP ratios for 14 countries during 1993 as well as a decade earlier.

**_Changes in the use of cash over time._** Comparing the level of these ratios between 1983 and 1993, the ratio of cash to Ml fell-sometimes dramatically so-for all but one European country (Italy), rose slightly in Japan, and was constant in the U.S. Similar results were obtained for the ratio of cash to GDP over the same period: this ratio fell for all but one European country (Germany) while both Japan and the U.S. experienced a slight rise. The clear implication from changes in these two ratios is that cash use is falling in Europe.

An alternative way to illustrate the reduction in cash use is to compare the value of cash holdings per person (in constant U.S. dollars) with the number of non-cash transactions per peison. Across countries, a high number of non-cash transactions per person is associated with a low stock of cash per person (comparing Column 8 with 6 in Table 1). The estimated relationship across 14 developed countries annually over 1987-93 suggests that a 6.8% rise in non-cash transactions is associated with a 100% reduction in cash holdings (Humphrey, Pulley, and Vesala, 1996).

**_4_** _European data reflects the total U.S. dollar value of coin and currency (1993 exchange rate) for 11 countries divided by the total dollar value of Ml or GDP. It is equivalent to a weighted (not a simple) average of individual country ratios. Since cash balances can be held for prudential or speculative purposes (hoarding), in addition to pure transaction purposes, observed levels of cash holdings only approximate the level of cash use. Cross-country evidence sugges_ **_t_** _s hat hoarding is especially important in Switzerland, the Netherlands, and Germany but not important in Denmark, Finland, France, Norway, or the U.K. (Boeschoten, 1991 and 1992). As seen in Table 1, countries where hoarding is though_ **_t_** _o be important also have relatively large cash/MI and cash/GDP ratios distorting, somewhat, the implied differences incash use across countries._

**_6_** _The results for Germany and the U.S. must be taken with caution since it has been estimated that perhaps 35% of_ the _value of German currency and 60% of U.S. currency is held outside the_ country _(Boeschoten,_ 1992; _Porter and Judson, 1995). Only if these percentages have remained stable over 1983-93 is it possible to accurately infer domestic use of cash in either the cash/M I or cash/GDP ratios._