Show me the money

In the UK, a committee of MPs has said that the Bank of England should be trying to track down £50bn of “missing” UK currency. This is about three-quarters of all UK banknotes in existence! So where is all of the missing cash? Is it all being used by money launderers or people bribing government officials to obtains COVID-related contracts or are there more benign explanations?

Cashgone

with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

It’s not only the UK that has lost track of its cash. In a many countries, for many years, the use of cash for purposes such as shopping has been steadily decreasing while the amount of cash “in circulation” has been steadily increasing. This is true in, for example, America and Australia as well as in the UK and Europe.

Down Plunder

Look at Australia as an example. The governor of the Reserve Bank of Australia (RBA), Philip Lowe, pointed out that “there are fourteen $100 notes in issue for every Australian, thirty $50s and seven $20s” before going on to ask where exactly the $3,000 per Aussie is, saying that “I, for one, don’t have anywhere near that amount”. Me neither, although I just checked and I do have A$25 in my travel wallet, so perhaps one explanation is that lots of visitors get some Aussie dollars out at the airport and then discover that they never need them because it’s an advanced nation where everywhere takes contactless and then forget to spend them before they leave. But that can’t account for anything but a tiny fraction of the billions “in circulation”.

IMG 2600

The main explanation given by the RBA is that some people choose to hold a share of their wealth in Australian banknotes. The RBA Research Discussion Paper 2018-12 “Where’s the Money‽” says that of the outstanding banknotes some 15–35 per cent are used to facilitate legitimate transactions (I’d actually be surprised if it was ten per cent by now) with the rest hoarded as a store of wealth or for other purposes. These other purposes are:

  • 10–20 percentage points to domestic hoarding (this now seems small to me, given the lack of transactional usage and the ban on cash transactions over $10,000) and up to 15 percentage points to international hoarding (which includes the A$25 in the draw in my study);
  • 4–8 per cent are used in the shadow economy. This seems low, given that more recent figures show that up to A$1 billion is held by drug dealers alone at any one time, and
  • and 5–10 per cent are lost.

Some good news for the RBA is that some of the missing banknotes turned up. A Mr. Simon Cross was pulled over in Queensland and when the police looked in his car they found $4.35 million in cash ($1.75 million in a suitcase and $2.61 million in a cardboard box). I don’t doubt, by the way, that Mr. Cross’ preference for cardboard boxes full of cash is legitimate and a wholly reasonable response to the low interest rates currently available on Australian savings accounts.

My point is that whether in the America or the United Kingdom or Australia, the use of cash for legitimate activities has been falling while the use of cash for drug dealing, money laundering, tax evasion, payments to corrupt officials and so on has been rising. Banknotes are, statistically, not being used to buy anything.

Cash is no longer primarily a means of exchange. Click To Tweet

The latest figures from the Bundesbank show that nine out of every ten euro banknotes issued in Germany are never used in payments but hoarded at home and abroad as a store of value. Not “rarely used”. Not “infrequently used”. Never used. The notes are not in circulation at all but are stuffed under mattresses where they are not even part of the shadow economy.

Cash Categorised

A few years ago I wrote about the Bank of England’s four-way categorisation of the demand for and I thought it might be interesting to integrate the RBAs research into this to help the committee of MPs to formulate policy. So let’s standardise on the categories of cash use and discuss them:

  1. Transactions. Here the trends are clear. Technology is a driver for change but that the impact is weak. In other words, new technology does reduce the amount of cash in circulation, but actually quite slowly (although the pandemic has accelerated the rate of decline throughout this year, of course).
  2. Hoards. These are stores of money legally acquired but held outside of the banking system. If the amount of cash that is being hoarded has been growing then that would tend to indicate that people have lost confidence in formal financial services or are happy to have loss, theft and inflation eat away their store of value while forgoing the safety and security of bank deposits irrespective of the value of the interest paid.
  3. Stashes. These are stores of money illegally acquired or held outside the banking system to facilitate criminal behaviour. My personal feeling is that in most countries stashes have grown at the expense of hoards.

    Prof. Charles Goodhart (London School of Economics) and Jonathan Ashworth (UK economist at Morgan Stanley), note that the ratio of currency to GDP in the UK has been rising and argue that the rapid growth in the shadow economy has been a key cause. Two rather obvious factors they highlight are the increase in VAT to 20% and the continuing rise in self-employment, both of which serve to reinforce the contribution of cash to the shadow economy.

  4. Exports. The amount of cash that is being exported is hard to calculate, although the Bank itself does comment that the £50 note is “primarily demanded by foreign exchange wholesalers abroad”. I suppose some of this may be transactional use for tourists and business people coming to the UK, and I suppose some of it may be hoarded, but surely the strong suspicion must be that at lot of these notes are going into stashes.

As you see, I distinguish between hoards and stashes. I have a strong suspicion that cash (in particular those $100 bills that the governor refers to) is a major component of stashes. In which case, the fate of the UK’s missing billions in £50 notes is not particularly mysterious. A couple of years ago, the UK Treasury said that these notes are “rarely used” for routine transactions and that there is a “perception” that they are used for money laundering, hidden economy activity, and tax evasion. This perception is pretty widespread, by the way, and not only amongst itinerant bloggers and crypto commentators . I remember when Peter Sands, the former head of Standard Chartered, said that the main use of the £50 was illicit and he’s about as much of a mainstream banker as you can get. In summary, therefore, I think think that central banks estimates of hoarding are generous and that it is the shadow economy fuelling the growth in cash “in circulation”.

The Gap

If the amount of cash being stashed has indeed been growing then central banks are facilitating an increasing tax gap that the rest of us are having to pay for. This why, given that no-one is using them for legitimate purposes, I thought it was odd when the Bank of England decided bring the £50 up to date and make it out of plastic. Robert Jenrick, then exchequer secretary to the Treasury, explained the decision at the time by saying that “people should have as much choice as possible when it comes to their money and we’re making sure that cash is here to stay”. Maybe the government was worried that tax evaders are an electoral force to be reckoned with. According to British tax authority estimates (see below) almost half of the tax gap is down to small businesses and they account for nearly three times as much of the missing tax as “criminals”. I’m not sure if all of these groups are voters, but they must in some measure account for the government’s reluctance to inconvenience those responsible for the lion’s share of missing taxes.

UK Tax Gap Customers 2017 Picture

Why do I keep going on about this? It’s because the people who benefit from the convenience of £50 notes (eg, tradesmen avoiding sales tax, crystal meth manufacturers avoiding social security taxes and so on) are benefitting at the expense of law-abiding tax-paying citizens (eg, me) and I have to fill in my tax form soon.

[An edited version of this post first appeared on Forbes, 7th December 2020.]

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