Getting rid of big banknotes is not as easy as it sounds
A SIGN on the door of a Wild Bean café in Zurich shows the nine different cards accepted for payment inside. Below the logos is a picture of a purple bank note, crossed out in red. From behind the counter, Aymen Kandil explains that for everyday transactions, “thousand-franc notes are not so good”.
Although many merchants will not accept them, the SFr1,000 ($1,000) note makes up over 60% of all Swiss cash in circulation. It is the most valuable banknote issued by a Western country and is worth twenty times its weight in gold. Rather than being a way of paying for things, it is meant to act as a convenient store of value. In 2008, as banks were failing and the value of most assets collapsed, demand for the SFr1,000 note jumped by 16%, having grown by only 1-4% in previous years.
Yet lawmen suspect that most high-denomination notes are in the hands not of jittery savers, but of criminals. Good data on the use of such notes are scarce—their anonymity is one of their attractions.
But a report in 2010 from a British police unit that focuses on organised crime claimed that only 10% of €500 ($542) notes were used for legitimate purposes. A report from Europol recounts how criminals will sometimes pay more than face value for high-value notes because of how convenient they are to transport. And it seems telling that the €500 note accounts for around 30% of euros in circulation, yet 56% of Europeans surveyed by the European Central Bank say they have never seen one.
David Lewis of the Financial Action Task Force, an international body that co-ordinates efforts to prevent criminals using the financial system, says big notes are used mainly in drug- and people-trafficking, money-laundering and racketeering. Finance for terrorism is another concern. A courier for jihadists caught travelling to Turkey in 2014 with 40 €500 bills (€20,000) in her underwear would have needed knickers of epic proportions to transport the same sum using €100 notes.
To make life difficult for criminals, Britain has barred banks and money-changing firms from providing €500 notes; the biggest British note is a mere £50 ($70). Canada started withdrawing its C$1,000 note (then worth $670) from circulation in 2000 for the same reason. Singapore is phasing out the S$10,000 note, the world’s most valuable (worth $7,100). The ECB seems to be moving in a similar direction. In early February it announced an investigation into the use of the €500 note.
The ECB will report to euro-zone finance ministers by May 1st, but resistance to scrapping the €500 note is already strong. Some (particularly in Germany) fear that the withdrawal of big notes is a precursor to the eventual abolition of cash, and thus a vast increase in the state’s power to pry and meddle. There are other benefits to the state from getting rid of high-value notes than hitting big-time criminals. Withdrawing them could help fill government coffers, by making tax-avoiding cash payments more awkward. It might even grease the wheels of monetary policy, by making it easier to impose negative interest rates. Yet the “slippery slope” argument need not hold: Canada still has smaller notes, long after it binned the C$1,000 bill.
A weightier concern is that the process of eliminating big notes has less impact on criminals the more slowly it proceeds. But central banks are reluctant to cancel or even put an expiry date on notes, for fear that this would undermine trust in those left in circulation. Instead, they tend to ask commercial banks to filter out the offending notes whenever they receive any. That is what Canada did in 2000 and, 16 years on, some 20% of C$1,000 notes remain in circulation.
Moreover, getting rid of one kind of big note will have only limited impact as long as there are others in circulation, points out Peter Sands of Harvard University. He would like to see the ECB scrap the €200 and €100 notes as well, and the Federal Reserve withdraw the $100 bill, which would be a huge inconvenience to drug-traffickers moving money across the Mexican border.
The Swiss National Bank has stated categorically that it has no plans to get rid of high-value notes, so criminals will have at least one option for the foreseeable future. As Mr Lewis says, “Whatever you do, the problem is going to get pushed somewhere else.” Nonetheless, he continues, “What you’re doing is making it harder for criminals to smuggle cash and easier for authorities to detect them.”
That is nothing to sneer at.