Whether we still need cash is a vexed question: as yet I have little doubt that we do for transactional purposes.
But when I say transactional purposes I mean those undertaken in the normal course of meeting legitimate human need. And there is not a shadow of a doubt that vast amounts of cash is not used for this purpose. I mentioned this theme recently. Now it has come up again in a new paper by Peter Sands, for Harvard Kennedy Business School, the abstract of which is as follows:
Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes
Peter Sands
Assisted by Ben Weisman, Maja Sostaric, Alex Smith, Joel Smoot, Ofir Zigelman and Joel Mathur
Abstract
Illegal money flows pose a massive challenge to all societies, rich and poor. Tax evasion undercuts the financing of public services and distorts the economy. Financial crime fuels and facilitates criminal activities from drug trafficking and human smuggling to theft and fraud. Corruption corrodes public institutions and warps decision-making. Terrorist finance sustains organisations that spread death and fear. The scale of such illicit money flows is staggering. Depending on the country, tax evasion robs the public sector of anywhere between 6% and 70% of what tax authorities estimate they should be collecting. Global financial crime flows are estimated to amount to over US$2tr per year. Corruption amounts to another US$1tr. Most of the effort to combat such illicit financial flows focuses on the perpetrators, the underlying criminal activities or on detecting illicit transactions through the banking system. Yet despite huge investments in transaction surveillance systems, intelligence and interdiction, less than 1% of illicit financial flows are seized. In this paper we suggest a different approach, one that would complement existing policies and make them more effective. Our proposal is to eliminate high denomination, high value currency notes, such as the €500 note, the $100 bill, the CHF1,000 note and the £50 note. Such notes are the preferred payment mechanism of those pursuing illicit activities, given the anonymity and lack of transaction record they offer, and the relative ease with which they can be transported and moved. By eliminating high denomination, high value notes we would make life harder for those pursuing tax evasion, financial crime, terrorist finance and corruption. Without being able to use high denomination notes, those engaged in illicit activities — the “bad guys” of our title — would face higher costs and greater risks of detection. Eliminating high denomination notes would disrupt their “business models”.
Download the paper in PDF format
Peter Sands is, of course, the former chief executive of UK-based Standard Chartered bank and it would be easy to argue that this paper is a statement of what some might cal the bleeding obvious. The paper is, however, useful in bringing inter-disciplinary themes like tax, money laundering, drug related crime and the shadow economy together. It also adds some research. This table is telling:
The UK is ahead of the game here, but the £50 note still needs to go. The £20 I can see use for but it is amazing that 18% of all UK cash is a note I never see.
The argument seems irrefutable.
Will the G20 act then?
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Not to detract from the point which is sound, it’s possible that Japan as shown in the above table may be an outlier. When I lived there (2000-2004) commerce was very cash-focused and use of cards was extremely low. I often carried 10,000 yen notes (I never did see the relatively new 2,000 note).
Now three necessary caveats: (a) with so much deflation, the picture may have changed since then; (b) perhaps Japanese exchange is now more electronic; (c) I often broke the 10,000 at the earliest opportunity because it was too large for some purchases.
Let’s not forget who has been the biggest distributors of $100 bills for questionable purposes in recent years!
http://www.theguardian.com/world/2007/feb/08/usa.iraq1
Oh yes
Now there’s a’weapon of mass destruction’.
But has the Middle East Peace Envoy seen it?
Not mentioned is the €500. (There’s also a €200)
In Spain – where the purchase of a house often involved large amounts of cash this was invaluable. A lawyer could carry €100,000 in cash in his briefcase (indeed in his pocket) ready for the cash part of the transaction.
I believe a similar system was pursue in France too. Those €500 were never seen normally, simply used for cash transactions.
I was once paid with a €200 note. He was Swiss!
The €500 is mentioned
As is the €200
Both need to go
Nice to know your so against the banks you don’t want to allow comments musing that they will just run over more ordinary people with fee’s and negative interest rates with a cashless society. So when people are insulting you say they cant win the argument, but when others state things you feel cant refute you just don’t allow them(just like the royal family comment). But I suppose nobody needs savings do they, everyone needs to keep, keep spending and some on the left state bang on about sustainability lol.
Then when people will run out of money, the answer is tax more. It really does seem the slogan of inequality is just a ruse to drag better of people to closer or actually to the level of the poor not anything to do with helping the poor. Meanwhile if you claim benefits JCP advisors use to say their job was ‘getting you a job’ now its to get you off benefits, which is not the same thing but hey ignorance is bliss.
Sam
My problem is in following your logic
And when I can’t I delete comments
Richard
This story was mildly interesting until I saw that table – whoa! Who Knew?
A couple of interesting points (perhaps). The same story has appeared in The Guardian:
http://www.theguardian.com/business/2016/feb/08/high-denomination-bank-notes-should-be-scrapped#comment-68277951
Some of the commenters are (rightly or wrongly)fearing that scrapping high notes is the thin end of the wedge for eliminating cash completely and giving full control of all transactions over to the banking system. One observer noted that the GFC proves that they are unworthy of that privilege. Another (for example) mentioned Cyprus and the seizure of deposits. Some of these responses are a little overdone but I couldn’t yet argue that their fears are completely unfounded.
On the other hand, seeing that some nations have as much 6 or 17% (or more) of their GDP held in the form of cash and high notes provides considerable food for thought. Beyond the issues that are already mentioned (the ‘bad guys’) there is the matter of Liquidity Preferences. Those that are familiar with Keynes’ theory should have plenty to think about when they see that table.
I am not proposing the abolition of cash
But no one legitimately needs these notes
I have a sneaky feeling that even removing the large denomination notes will only put a small dent in the criminal activities for a very short time until they find alternative solutions. These are always allowed the implicit approval of the private banks which enable all such criminal money laundering activity one way or another.
Removing all deposit taking and credit creation from the private sector would be a much more reliable solution to the many problems with money abuse in all its all forms.
Those with a need for cash for legal purposes could be “monitored” much more effectively without the secrecy and opaqueness that is inherent in the private banking systems.
The liquidity preferences point is probably the more interesting of the two. Especially so in the case of Japan.
No but it will start with high value notes then eventually all. So why empower the powers that be by going along with it at all? Until multinationals pay their share I will be very cynical all this cashless talk is to improve things.
Sorry – but unrelated issues do not create an argument
You say you are not proposing the abolition of cash and yet the opening sentence of your blog post here very clearly contemplates it as a future possibility. Moreover the idea of a cashless society and the advantages it offers for central financial management is certainly receiving attention now in banking and international financial circles. One can clearly see the attraction and logic of it to such interests.
There were some strong objections to the idea in comments on another of your recent blog posts (on the coming recession) – comments to which you did not respond, but which seem to me cogent.
If we had a courageous state that always operated wisely in the interests of its citizens there might be no cause for alarm, but our chances of achieving that seem vanishingly small (as many of the things against which you campaign attest). So we need to be cautious and vigilant against granting the state and financial establishment we have tools that could be misused. It is exactly the same argument as that against state surveillance, powers of detention, censorship of expression, and the ability to wage war – all powers that could be used for either well or ill intentioned ends.
I said I was not proposing the abolition of cash
I am aware some do
I do not
I am proposing the abolition of large denomination notes
That’s not the same thing
I will hope and assume that your 2nd reply was intended for Sam. With the Liquidity Preferences suggestion it is worth remembering that Japan (for example) is no no stranger to deflation.
In the presence of deflation the storing of cash ceases to be an act of pure hoarding and becomes an investment, in effect, as the value (purchasing power) of the currency rises.
If interest rates are persistently zero, or near zero, and inflation is zero – or negative, hoarded cash becomes more viable for the individual saver. There may be more to all of this than bad guys alone.
It was for Sam
And yes, cash hoarding will make sense
But that is a reason why big notes must go
“a reason why big notes must go”
Agreed.
It’s not really the notes – it’s the private banks and the governments that regulate them that are at the heart of the problem!
8% of international trade is now estimated to be from the drug trade (it probably always has been in one form or another)
The lack of legal action (other than minor financial penalties) from banks caught red handed and admitting to laundering vast amounts of cash and other financial instruments is nothing short of staggering. These are crimes against humanity and the directors walk off into happy and wealthy retirement!
http://www.globalresearch.ca/money-laundering-and-the-drug-trade-the-role-of-the-banks/5334205
How are 500EUR+ notes being laundered? Surely it is easier to launder small denominations. The FT quotes most banks will not accept these high denominations. So how are these notes being spent?
They are not being laundered
They are used in a parallel economy of their own
Just to provide some context, when the £50 note was reintroduced in 1981 is was worth the equivalent of £200.
Therefore the government has already successfully reduced the highest value banknote from £200 down to £50.
An,as ever, utterly irrelevant contribution
Remember that drug money provided the *only* liquidity in the financial crisis. Money laundering and fraud are not a drain on the system – they are the system!
http://www.theguardian.com/global/2009/dec/13/drug-money-banks-saved-un-cfief-claims
Which does mean such a situation was desirable or should be replicated
Yet another good example of why the current financial system is totally corrupt and inconsistent in every way with a morally, socially and environmentally sustainable future!
Let’s face it, our financiers and merchant venturers have always been very good at flooding the world’s communities with cheap drugs and laundering the proceeds through their own private banks and corporations.
This particular form of global commerce goes back many centuries and is no secret in polite society – the question is whether it should be allowed to continue?
1) “But no one legitimately needs these notes” – that appears to be a position unsupported by the report which, while claiming the legitimate users and uses of the large denomination notes may be in the minority of transactions, still identifies a variety of valid reasons for having them.
Care to reconsider that statement?
2) Another area which causes me question, is the statement that primarily wealthy individuals are the ones who encounter the notes. While I can accept that as value store in their case (since they are high net worth individuals), I am curious about transactional usage in the other end of the scale. Given that more than 1,000,000 adults in the UK alone do not possess a bank account, that would presumably mean they operate a near cash only existence. I’m skeptical they are all tax dodging plumbers and deserve to be discomforted in this way.
3) Finally, the reports plan – “Our proposal is to eliminate high denomination, high value currency notes, such as the €500 note, the $100 bill, the CHF1,000 note and the £50 note” – seems flawed by their own arguments.
“The impact of eliminating the highest denomination notes would also depend on the denomination of the next best alternative in that currency. This is most clearly the case with the Euro, where below the €500 note there is also a €200 note and a €100 note, all of which would qualify as high denomination notes. Whilst it might be difficult to eliminate all three at once, the benefits of eliminating the €500 note would be significantly diminished if €200 issuance simply increased to compensate. Ideally, all high denomination notes would be progressively eliminated with restrictions on issuance and usage limiting substitution in the meantime. ”
Since they identify that (illegitimate) users will just migrate to the next best currency & denomination, eliminating the £50 seems fairly pointless unless equivalent value notes in other currencies are also eliminated at the same time – that would mean the €100 and the CHF 100 – yet they propose starting with the €500 (& €200) and the CHF 1,000.
Why bother only pursuing a subset, when they acknowledge usage will migrate ?
I do not recognise a good use for such notes
The report recognises your last point and comprehensively deals with it
Sorry, you are wasting my time
1) “I do not recognise a good use for such notes” – Yet their report does acknowledge several valid uses – are you claiming all the legitimate reasons they list are simply not applicable in your opinion?
2) I note you ignored this point?
3) I don’t see how they comprehensively deslt with it, they specifically porposed initally eliminated a subset of high denomination notes, while almost recognising that criminal usage would shift to alternatives if possible – my specific point is that the £50 note seems not worth eliminating as equal or higher alternatives would still exist
Please highlight where it was spefically stated that the equivalent valuations would be eliminated – i.e. CHF 100 and €100 ?
Restating your point is not an argument
I have answered (1): I do not agree with your point
I can’t recall (2)
They say phase notes out in turn and do not add more to compensate for loss of high denominations
So points addressed as far as I can be bothered to do so with someone who has no argument
What I do not understand is how eliminating physical currency would change illegal activity?
Criminals will always find something of value to trade be it gold or domestic goods.
Eliminating the £50 note will have no real effect other than inconveniencing law abiding citizens who either can not access banks or object to the excessive fees charged by banks, for electronic transactions, to small businesses. If you would like to better understand the advantage of physical currency, including larger bills, to small businesses I recommend you contact a local accountant that specializes in said businesses.
No one ever pretends that a change solves all problems
But if we know there is no need for these notes and they are heavily used in criminal transactions give me one good reason to keep them
Or are you saying we have to make crime as easy as possible?
The change will not stop crime. But it will make it harder and potentially easier to detect. That is the goal
Why not achieve that when it is so easy
Oh, and cancelling the notes would disrupt illicit wealth holdings. That too has to be good
0) Any particular reason for your discourteous and rude tone?
1) It’s not my point, it’s the report – they state there are legimate reasons for people to have them – you issue a blanket “I see none” – I’m trying to see how you dismiss all their stated reasons?
2) You don’t need to “recall” it – you could just have read it. Basically, more than 1M people in the UK alone operate a cash only existence without bank accounts – they can’t all be criminal, why potentially discomfort such a large number of people?
3) Yes, as I also quoted, the report mentions phasing out HD notes – but doesn’t specify how low those notes would be – if the £50 is deemed HD, then surely the CHF 100 also is – but it makes not mention of including those. Mainly because that would require eliminating the top 3 denominations for CHF notes – 1,000, 200 and 100, a likely publically unacceptable proposal
0) Because you did not present an argument, just a diatribe.
1) I said I think none stack – and all can be overcome
2) Banishing these notes will not change the position of those without bank accounts
3) I think you are misreading the direction of travel in the report
Now stop wasting my time: further repetition will be deleted