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.]

SHCs are sick, as the kids say

Now, of course, when techno-determinist mirrorshaded hypester commentators (eg, me) say that the future of money might be somewhat different to the Bretton Woods II structure and that perhaps the decentralising nature of computer, communications and cryptographic (CCC) together mean that there might be currency issuers other than central banks (as, for example, I did in Wired magazine two decades ago), this might be dismissed by scenario planners and strategists as cypherpunk-addled babble.

It seems to me, however, that the reflections of sensible, knowledgable and powerful players is tending int the same direction. Mark Carney, governor of the Bank of England, recently gave a speech at Jackson Hole, Wyoming, in which he said that [Central Banking] a form of global digital currency could be “the answer to the destabilising dominance of the US dollar in today’s global monetary system”.

Wow.

Mr. Carney went on to talk about the idea of “synthetic hegemonic currency” (abbreviated to SHC by everyone else but abbreviated to SyHC by me so that I can pronounce it “sick”). An obvious example of such a currency would be an electronic version of the IMF’s Special Drawing Right (SDR). In fact the former boss of SDRs has already put forward such a proposal, asking for the IMF to “develop a procedure for issuing and using market SDRs following currency board rules and backed 100% by official SDRs or by an appropriate mix of sovereign debt of the five basket currencies”. This, of course, sounds a little like Facebucks (or “Libra” as they are more properly designated) and, indeed, it is.

So what would be the difference between holding Facebucks and holding eSDRs? Well, for one thing, Facebuck currency board basket will not include Yuan. In responses to questions from a German legislator, Facebook have said (Reuters, September 20th) that their basket will be:

  • One half US dollar,

  • Euro 18%,

  • Yen 14%,

  • Sterling 11% (although why anyone would be this in “stable” basket right now is beyond me), and

  • Singapore Dollar, 7%.

The composition of the SDR varies from time to time, but the current basket (last reviewed in 2015) is:

  • 41.75% US dollar,

  • 30.93% Euro,

  • Yen 8.33%,

  • Sterling 8.09%, and…

  • Yuan, 10.92$%.

So Libra vs. eSDR (or Libra vs. A Chinese digital currency) comes down to the Yuan. I think the Wall Street Journal (September 23rd) is right to characterise the fascinating future of digital currency as a “coming currency war” between digital money and the Dollar, saying that “The U.S. dollar has been the world’s dominant currency since the 1920s. But if national digital currencies allow for faster, cheaper money transfers across borders, viable alternatives to the U.S. dollar could emerge, embraced by nations and monetary officials concerned about the dollar’s outsize influence on the global economy”.

This is about so much more than permissioned vs. permissionless or proof of work vs. proof of state.

Legal tender does not mean what you think it means

Since the dawn of Bitcoin, the phrase “legal tender” has been appearing in my Twitter feed. This morning, for example, I was surprised to read that:

No, it isn’t. Bitcoin isn’t legal tender anywhere and it never will be any more than Avios will be (and I’ve bought more cups of coffee with Avios – one – than I’ve ever bought with Bitcoin). Sorry to be a spoilsport again, but to the very best of my knowledge, Bitcoin is not legal tender in any country. Nor, I would wager, will it ever be. Legal tender is an outdated and essentially meaningless concept, which is why I am baffled by the continued discussion of it.

Who knows what “legal tender” means anyway? Pretty much no-one, in my experience. I remember a story about a schoolboy who was chucked off a Welsh bus for trying to pay with a Scottish banknote. The bus company apologised, saying that “Scottish currency is legal tender” which, of course, it isn’t. Scottish banknotes are not legal tender in England or, for that matter, Wales. Only Bank of England notes are legal tender in England and Wales. On which topic, many thanks to @anshumancrypto for pointing me to this…

 

I hate to spoil the joke but Scottish banknotes are not legal tender anywhere, even in Scotland. In fact, Bank of England banknotes are not legal tender in Scotland either, because Scotland (which has a separate legal system) has no legal tender law although bizarrely (and thanks to Colin Platt for this via Twitter) Royal Mint coins are legal tender in Scotland in thanks to the Coinage Act 1971 (Section 2).

No legal tender notes! Oh my goodness, it must be chaos! 

Actually, it isn’t. I’ve been to Scotland several times and I’ve often seen Scots buying things in shops using banknotes, cards and mobile phones. So not having legal tender laws does not seem to be much of  a barrier to trade. This shows how uninteresting the issue of “legal tender” really is in the modern age and for decades I’ve tended to assume that any article, tweet or LinkedIn comment that talks about making a digital currency legal tender is written by someone who doesn’t really understand either topic.

I do mean decades, by the way. If I cast my mind back to 2006, I can remember writing one of my first ever blog posts about the Snap Cafe in Georgetown, Washington D.C. This particular establishment had attracted my attention because it had decided to stop accepting cash. This is commonplace for forward-looking eateries today, but then it was a revolutionary act. As I reported at the time, the owner said that it had saved her time and money, meant she didn’t have to go to the bank any more and (most importantly, I suspect) didn’t have to trust staff she didn’t know. That point about trust is a recurrent theme in surveys of retailers and cashlessness: even if they perceive cash to be cheaper than electronic payments, cash has a tendency to evaporate. There was discussion around that time as to whether it was legal to do this, since Federal Reserve Notes (ie, greenbacks) are legal tender in the U.S.A. So, people said (incorrectly) that the cafe owner could not refuse them, and some outraged comment asking whether it was legal to ban cash from an establishment ensued.

Some time later I remember an interesting clarification of the subject of legal tender in a useful paper on Payments and the concept of legal tender by Nick McBride, Legal Counsel, Reserve Bank of New Zealand. The paper described something else that happened many years ago when the coins in New Zealand changed. The new coins were introduced on 1st July 2006. For a period of three months, the old coins were circulating in parallel with the new, but some retailers put up signs saying that they wouldn’t accept the old coins. This, presumably, was because they didn’t want the hassle of having to bag them all up and take them to the bank to swap for new coins. So… could retailers refuse to take the old coins in payment even though they were legal tender?

The answer in both cases was that retailers can refuse to accept legal tender.

Wait, what? So what’s the point of legal tender then?

Well, the point of it is that you cannot force a retailer to accept legal tender (or indeed any other form of tender). If, however, you buy something from them and there is no contractual barrier to the use of any form of tender, and you offer legal tender in payment, and they refuse it, then they cannot enforce the debt in court. That’s what legal tender means: it’s about discharging debts. If you incur a debt you can discharge it with legal tender, but you cannot be forced to incur the debt in the first place, if you see what I mean.

Another linked story from many years ago was in Techdirt. Apple were refusing to accept cash for iPhones and insisting on credit cards. They had a link to the relevant U.S. Treasury page to explain the score to outraged citizens. In the U.S. there is no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Similarly, in the U.K. where only coins valued 1 pound Sterling and 2 pounds Sterling are legal tender in unlimited amounts you cannot force Apple or anyone else to accept them. They are free to enforce any conditions they like (within the boundaries of the law) with customers. When you buy a coffee from the coffee shop, you are entering in to a private contract. (Our good friend Leo van Hove made a very good presentation about this, called When Will Electronic Money Be Legal Tender? at Consult Hyperion’s 7th annual Forum).

A couple of years later, the European Commission (remember that) put forward its recommendation on legal tender (22nd March 2010). It was, as I recall a banker saying, “strange and undesirable”. So, what is the European perspective? Well, the key points were:

  • Euro notes and coins are legal tender and retailers can only refuse them for reasons of “good faith” (for example, the retailer has no change).
  • Retailers should only refuse high-denomination banknotes in “good faith” (for example, if the value of the note is disproportionate to the purchase)
  • No surcharges should be imposed on cash payments.
  • Banknotes stained by the Intelligent Banknote Neutralisation System (IBNS) remain legal tender but should be returned to national central banks (as they likely come from a robbery).
  • Retailers must accept 1 and 2 eurocent coins in payment.

Sensible policies for a better Eurozone, you might think, but you’d be wrong. The essence of these recommendations was that shops will be forced to accept €100, €200 and €500 euro notes and 1- and 2-euro cent coins. Why? Well, because in many countries the shops don’t want them. In some countries (eg, The Netherlands and Finland) the retailers and the public seem to have, in a decentralised fashion, decided to abandon the 1- and 2-cent coins. They are nothing but a hassle and do nothing to assist commerce. At the other end of the scale, retailers in many countries will not accept high-value notes, partly because they don’t want to make change and partly because they are worried about counterfeiting. After all, if you are a corner shop and you get stuck with a bent €500 note then you are €500 out of pocket: the ECB won’t take your counterfeit note and give you a new one. It’s worth paying a few cents to the bank for a debit payment to avoid that risk.

No $100s, $50s 

Anyway, apart from people like me, Professor van Hove and the European Commission, no-one much cared about legal tender one way or the other for years after the recommendation until Bitcoin came along, at which point the phrase became rather common. Almost everywhere I see, however, it is being misused (as I hope I have demonstrated). By all means please continue to use it, but please do read up on it first. Legal tender does not mean what you think it means.

The campaign against extreme cash is gaining momentum

I’m veery much in favour of getting rid of “extreme cash”. What I mean by this is cash at the extremes of the value range: the small coins and the big notes. In the UK, this means getting rid of the coppers and the largest banknote. So… hurrah! I read that the UK government is considering phasing out 1p and 2p coins, as well as £50 notes, in a bid to tackle tax evasion, money laundering and waste.

Since I’ve been going on about this for more than two decades I’m delighted to see that the government is finally coming around to my way of thinking. I read some newspaper reports that the government is to begin consultations on the subject, but I haven’t heard from them yet and I can’t imagine who else they might consider asking, so I stand ready to answer the nation’s call when as soon as it comes.

The issue of coins is a no-brainer. Back in 2014, I asked whether it is in the interests of the economy as a whole to continue to produce these small coins, saying that “I have no idea why the Royal Mint are messing about wasting our money on making 1p and 2p coins that nobody uses any more. It’s about time we recognised low-value coins for what they are. Scrap metal”. Five years ago I pointed out that in many countries, merchants and consumers alike had simply given up using small coins (such as the one- and two-cent euro coins) whether the mints produced them or not. When Nigel Lawson abolished the old halfpenny in 1984 it had a purchasing power close to the current 2p and there was no contactless. So I fully expect to see the 1p and 2p vanish, and if the government caves to the metals lobby to perpetuate them, which case I will be outraged.

I think the consultation around the £50 note will be more interesting, since there is “a perception among some that £50 notes are used for money laundering, hidden economy activity, and tax evasion”. I’ll say there is. Of the £ billions of notes and coins “in circulation” in the UK, which were in 2016 growing at 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, a fifth is in the form of £50 notes, which you never see in polite society. As I have discussed exhaustively and on many occasions, 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. So why not make crime, terrorism, drug dealing, money laundering and bribing corrupt politicians marginally less convenient and marginally more expensive by getting rid of high-value banknotes? It is not only deranged digital money deviants like me 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 that “we are determined not to make seigniorage a comfort for criminals”. By which he means that the stack of £50 notes underneath the Mafia boss’ pillow are earning interest for the British government. The government is, in a very real sense, living off of the proceeds of crime.

Now, I’m not so stupid that I think that getting rid of the £50 will stop crime! If the government drops the £50, then the criminals will carry on using the $100, €200 and the worst offender, the Swiss Franc. Sooner or later the law-abiding nations of the world will have to institute sanctions against the Swiss. When I last went to Switzerland and I never saw a CHF note or coin: I used cards everywhere, and as far as I could see so did everyone else. Yet 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 2016, you have had to show ID (how they verify the ID is beyond me) for cash transactions of $100,000 or more (Charles Goodhart, a former Bank of England policy maker, said this limit was so high that it could only be described as a joke).

Am I taking crazy pills? The Bank of England, 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. So yes, let’s ditch the £50 but let’s also spearhead an international campaign to add morality to the cash issue and reduce the maximum value of the circulating medium of exchange to EUR 50, USD 50 and CHF 50. If the central banks won’t do it, then we should prosecute their governors for conspiracy to support money laundering.