[Dave Birch] Harry Leinonen from the Bank of Finland was kind enough to point me to a paper that their research department published in 2002. The paper, called “Cash usage in Finland”, examines the circulation of cash and attempts to measure the amount of cash that is “unexplained”. By “unexplained” they mean “surplus to requirements as a circulating means of exchange”. There’s a lot of it. Finland has a high card penetration and usage, yet, surprisingly it also seems to have a lot of cash out there too.

The value of the largest denomination notes totalled over 50% of the value of notes in circulation at end 2000. The proportion of large value notes has been steadily increasing during the estimation period. In addition, hoarding is assumed to be at a low level.

Note that the value of the highest denomination euro notes accounts for 58% of the value of euros in circulation at the time of writing, so is broadly comparable. The Bank of Finland say, rather blandly, that the proportion of unexplained transactions that are used for illegal purposes cannot be determined. But it’s quite high.

I’m sure we find a better estimate. Let’s look at another Scandinavian country, Norway. After Iceland, Norway is the second most cashless country in the world (ie, it has the second highest proportion of non-cash retail transactions). Not only does it have a high card penetration but the number of card transactions per household, already high, is still going up. You couldn’t get more electronic. Yet according to a study from one of the Norwegian banks that I was told about, the amount of cash “in circulation” is still going up as well. This is apparently inexplicable.

It’s not, of course, and here’s why. The authors of the study go on to compare the situation in Finland with not only Norway but also Sweden, and they refer to another study that showed that over the study period (1999-2005) the amount of unexplained cash went from two-thirds of all cash in circulation up to four-fifths. How much of this used for illegal purposes? In Norway, where 71% of cash was unexplained, the estimate was 67%. In other words, almost all of it.

The truth is that in the most cashless economies, most of the remaining cash isn’t circulating anywhere: it is vanishing into the grey and black economies.

A discussion on the Linkedin “Innovation in Payments” group encouraged me to go back and find these figures and post them. Having done so, it’s difficult to avoid the conclusion that most (seriously: most) of the currency put into circulation by central banks is used for illegal purposes and, essentially, provides for a massive cross-subsidy from honest taxpayers to criminals, corrupt politicians and tax evaders. The seigniorage earned by the central banks is not sufficient compensation to allow this to continue.

In Norway, only 6% of household expenditure is in cash, but according to the Norwegian Central Bank’s 2009 report there is 55 billion NOK of cash (say $10 billion) out there amongst a population of 5 million. With $6 billion being used for illegal purposes, at 5% interest, that means that the Norwegian Central Bank is earning $300m per annum from criminals. Do they need the money that badly?

What’s more, it’s difficult to avoid the conclusion that the central banks know perfectly well what is going on. But I don’t understand why the law enforcement, taxation and other parts of government aren’t giving them more of a hard time about it. On this, there may be some developments to come. At a seminar I attended in London, David Lewis, who is Head of Anti-Money Laundering in the Financial Crime Unit at Her Majesty’s Treasury, said that “the situation with regard to high value notes will improve shortly”. I don’t know what he meant, and he didn’t elaborate, so perhaps there is going to be a pan-European effort to get high-value notes out of circulation. They should start by removing the €200 and €500 euro notes that should never have been issued in the first place.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

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