This time last year there were approximately £70.5 billion in notes and coins “in circulation” in the UK. Now, there are approximately £74.5 billion in notes and coins “in circulation” in the UK. That’s a rise of 5.7% in a year when the economy grew by about 1.8% and the use of cash in retail transactions (retail spending grew 5.2%) was overtaken by the use of electronic payments. Cash is now only 48% of transactions, and the UK Payments Council say that this will fall by another third over the next decade.
Back to the same old question again then. What is this cash being used for?
Here’s a clue. A fifth of the currency “in circulation” is in the form of £50 notes, which you never see in polite society. As we have discussed before, only about a quarter of the Bank of England’s notes are used for transactional purposes so these £50 notes must be disproportionately concentrated in the non-transactional (i.e., largely criminal) uses. As everywhere else, high-value banknotes are a major cause for concern.
The EU Commission on Tuesday will pledge to investigate the suspiciously high number of the notes in circulation in the eurozone as part of a plan to choke-off financing for terrorists in the wake of November’s attacks in Paris.
Back to another obvious question then. Why not make crime, terrorism, drug dealing, money laundering and bribing corrupt politicians marginally less convenient and marginally more expensive by getting rid of those high-value banknotes? It is not only crazed electronic money maniacs who think this is right path to take, by the way. This kind of thinking is beginning to percolate up to the higher echelons of the financial establishment.
Mario Draghi, European Central Bank president, told the European Parliament on Monday that the matter was being studied by the central bank and that no decisions had been taken yet. “We want to make changes,” he said, adding that “we are determined not to make seigniorage a comfort for criminals.”
What does he mean by this? Well, the “seigniorage” is the money earned by the ECB on the note issue. They sell €500 notes that cost them 10 cents (or whatever) to make. The €499.90 profit has to be invested in safe securities (government bonds, basically) and the interest earned on those securities is divided up between the eurozone members according to some arcane formula. The upshot of it all is that the stack of €500 notes underneath the Mafia boss’ pillow are earning interest for national governments. The governments are, in a very real sense, living off of the proceeds of crime. A no brainer then! Since this is clearly morally and ethically wrong, central banks are presumably wholly against it. Well, sort of. But you can see the problem that Mario faces if he does the right thing and cans the €100, €200 and €500 notes…
If we are right, the Euro will weaken, primarily against the USD and the CHF. The USD is the most liquid currency and we would expect it to capture a large share of the drop in the demand for the Euro as a store of value. However, the CHF could also benefit, having the largest note denomination in G10 economies.
Ah, the CHF. Sooner or later the law-abiding nations of the world will have to institute sanctions against the Swiss for delivering convenience to the criminal and manna to the money launderers. I’ve just been in Switzerland and I never even saw a CHF note or coin: I used cards everywhere, and as far as I could see so did everyone else, except for the Arab gentleman who checked into the hotel in front of me and paid up front with three €500 notes. As I never see these in wild, I tried to grab a photograph of the check-in clerk running these through an anti-counterfeiting device that she had on the counter but she was too quick for me. The fact she had the device right there on the desk leads me to suspect that she sees more €500 notes than I do.
Swiss cash circulating is about five times that of Canada, and twice that of the euro area. At the same time, the rate of card use is among the lowest in western Europe — only a third of Sweden’s level and less than half that of the U.K.
The €500 isn’t the biggest note that desk clerk sees though. Switzerland has a CHF1,000. That’s right: a banknote worth $1,000. And you can spend it, too. Mind you, the Swiss have been cracking down: since January, you have had to show ID (how they verify the ID is beyond me) for cash transactions of $100,000 or more.
[then-Finance Minister Eveline Widmer-Schlumpf] spoke during a debate on an anti-money laundering law that came into force this year, establishing a ceiling of 100,000 francs on anonymous cash transactions. Charles Goodhart, a former Bank of England policy maker, said in December that the limit was so high that it could only be described as a joke.
Am I taking crazy pills? The Swiss National Bank, the European Central Bank and the Federal Reserve should not be competing to be the currency of choice for Mexican drug lords, Albanian people traffickers and Syrian terrorist groups. Surely there is a moral dimension to this: all three should agree to reduce the maximum value of the circulating medium of exchange to EUR 50, USD 50 and CHF 50 and if they are not prepared to do this then the heads of the respective central banks should be prosecuted for conspiracy to support money laundering. It is time to get tough with these guys.