Explaining Unusual Cash Patterns in Canada in 2018

In an earlier post, one had pointed how cash usage had declined suddenly in Canada which was attributed to legalisation of cannabis.

Walter Engert, Ben S. C. Fung, Jozsef Molnar and Gradon Nicholls of Bank of Canada in this note do not agree. The decline of cash was in Toronto and not across other regions. Even in Toronto it was due to a specific event:

There was an unusually large decline of bank notes in circulation in October 2018. Some have argued that this was due to the legalization of cannabis in Canada in mid-October. We consider whether that explanation is consistent with the evidence and conclude that the unusual cash patterns observed in 2018 are more likely the result of an operational event specific to Toronto. Nevertheless, it would be useful to continue monitoring developments in cannabis consumption and its impact on the demand for cash.

In early August, two banks lost access to their bank notes in their Toronto RDC due to severe flooding in the city. As a result, these banks were unable to make their regular deposits of surplus notes. In addition, the Bank of Canada issued contingency notes to the affected banks so they could rebuild their inventories while their notes were quarantined due to the flood. Thus, there was a large increase in net note withdrawals from the Bank of  Canada in August, in Toronto only, across all denominations.

Then, in early October, the affected banks regained access to their notes and were able to resume depositing the notes they were holding in the RDC as well as their regular surplus notes. Consequently, there was a large drop of NIC across all denominations in October, recorded only at the Toronto RDP. Indeed, if we consider net cash withdrawals at the Toronto RDP excluding the two banks that were affected by the flooding, the sharp drop of NIC in October (and the increase in August) evident in the preceding charts disappears.



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