" When was the last time you had a $A100 note in your pocket? When was the last time you withdrew one from an ATM?"
Steve Worthington, Professor at Swinburne University Business School
Across a range of currencies and despite the gradual erosion of cash transactions by electronic ones, demand for the highest denomination bank notes is growing. Yet they are relatively rarely used.
The issue is more than a curiosity. Not only are such notes associated with nefarious activities like bribery and money laundering and the black economy, as global interest rates turn negative, there are concerns of a larger scale switch to cash, negating the impact of negative rates.
In Australia, on the occasion of the 50th anniversary of the launch of decimal currency, the Reserve Bank of Australia (RBA) will be issuing the first of Australia's next generation of banknotes, the new $A5. It will be well used. Not so the $A100 bill.
The RBA's latest annual report says there were 1.3 billion banknotes worth $A65.5 billion on issue in Australia at the end of June 2015. The $A50 and the $A100 banknotes continue to account for the majority of banknotes on issue, each with 46 per cent of the value and a combined 67 per cent of the number of banknotes in circulation.
In February it was reported the RBA has been forced to lift its issuance of $A100 notes and in the six months prior, the number of $100 notes in circulation has grown at an average annual rate of 12.1 per cent, the highest since the global financial crisis.
Central bankers in the United Kingdom and Europe have noted similar trends while the stash of large denomination American dollars – “greenbacks" – has long exceeded usage.
The RBA says public demand for banknotes stem from their role both as a payment mechanism and a store of wealth. The value of banknotes in circulation increased 8 per cent in 2014/15, above the long-term growth rate of 6 per cent.
That growth in 2014/15 was driven by high-denomination banknotes, with the value of $A100 banknotes increasing by 11 per cent. Furthermore the RBA reports the “growth in demand for $A100 banknotes have increased substantially since 2012".
So when was the last time you had a $A100 note in your pocket? When was the last time you withdrew one from an ATM? If the answer to these questions is rarely, we must ask ourselves - where are all the $100 banknotes the RBA has issued?
The answer probably lies in the role of banknotes as a payment method and a store of wealth.
'Making it Harder for the Bad Guys' written by Peter Sands, an ex-CEO of Standard Chartered bank, looks at how banknotes are used as a payment method to facilitate tax evasion and as a store of wealth for the proceeds of criminal activity.
Sands makes a case for eliminating high denomination banknotes. The worldwide case for this has been made before and indeed some high denomination notes have been eliminated in recent years, such as the Canadian $C1000 note in 2000 and the Singaporean $S10,000 note in 2014. But just as with the Australian $A100 note, issuance volumes for the €500 note and the $US100 bill have continued to rise.
Looking firstly at tax evasion, Sands claims even in sophisticated economies with well-established tax collection capabilities, the difference between the calculated total tax yield and the actual receipts, known as the tax gap is significant.
The United Kingdom's Revenue and Customs for example, estimates a 'tax-gap' of £34 billion in 2013/14, amounting to 6.4 per cent of tax liabilities. The GST equivalent in the United Kingdom is Value Added Tax (VAT) and it is charged at 20 per cent.
When making a substantial payment many people ask, “would that be cheaper for cash?" If the answer is yes, high denomination notes may well be used as a payment mechanism.
Sands argues such tax evasion “corrodes social norms, contributing to an atmosphere where people think others cheat and are therefore tempted to do so themselves, creating an environment where illicit behaviour becomes habitual and condoned."
Cash is also an attractive store of wealth for the proceeds of criminal activities. It provides anonymity for both payer and payee, leaves no trace of transactions and is widely accepted.
Cash is of course physical and conducting large value transactions in cash means transferring large numbers of notes which can hence be heavy and bulky. Sands uses the example of what it would take to transport $US1 million in cash.
In $US20 bills, $US1 million in cash weighs approximately 50 kilograms and would fill four normal briefcases. In $US100 bills, the same amount would weigh roughly 10 kg and take only one briefcase.
This, he argues, is why high denomination notes are particularly attractive to those conducting illicit activities.
A July 2015 report by Europol (The law enforcement agency of the European Union) entitled Why is cash still king? answers the question bluntly: “cash remains the criminal's instrument of choice to facilitate money-laundering."
The report says “cash is an entirely legal facilitator which enables criminals to inject illegal proceeds into the legal economy with far fewer risks of detection than other systems."
As an indicator of the incremental value provided by larger denominations, Europol in 2015 reported criminals will pay a premium for the region's most valuable banknote, the €500 notes. Moreover, as banks respond to regulatory pressures to enhance transaction surveillance of cross-border transactions, the attraction of moving ill-gotten wealth by high denomination notes will increase.
Eliminating the €500 note also counters one of the challenges of zero and negative interest rates. If rates are negative (that is, depositors pay a rate rather than receive it) it makes sense to hold physical cash (rather than place it in a negative deposit).
The President of the European Central Bank (ECB) Mario Draghi also favours abolition of the €500 and the ECB has signalled it would like to cut the deposit rate below the current minus 0.3 per cent.
Abolishing the larger denomination notes would, it is argued, allow some further cut in the level of nominal interest rates because it would make the storage of cash considerably more expensive or difficult.
From an Australian perspective we might argue those who benefit most from $A100 banknotes are either tax evaders or engaged in criminal activities or both. Thus as well as issuing new $A5 notes from September 2016, maybe the RBA should be taking $A100 notes out of issuance and eventually out of circulation?
Steve Worthington is a Professor at Swinburne University Business School.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
15 Mar 2016
15 Mar 2016
15 Mar 2016