The Shooting War on Cash Begins
The precarious and hostile coexistence between central banks and cash just ended. Earlier today the European Central Bank's Governing Council voted to withdraw the 500-euro note (worth $558) from circulation. The note is the second highest currency denomination issued in Europe after the 1000 Swiss franc note (worth $1013). Comprising 30% of euros in circulation, the note is second only to the €50 note as a proportion of total euro currency in value terms. Of course, ECB president Mario Draghi recently insisted that any decision to withdraw the note has nothing to do with "limiting cash." Rather the decision is aimed at fighting crime because, as Draghi melodramatically put it:
“There is a pervasive and increasing conviction in world public opinion that high-denomination bank notes are used for criminal purposes.”
As a long-time auditor of central bank-speak, I can tell you that Draghi's explicit denial that the decision has anything to do with suppressing cash is a resounding affirmation that abolishing cash is precisely its purpose. By making it more unwieldy and costly for those in the Euro zone to hold their money in the form of cash, the ECB immediately increases the range within which it can manipulate interest rates in negative territory. Furthermore, since criminals are rational economic actors who compare marginal costs and benefits, they are not going to suddenly stop committing crimes or begin transferring funds electronically, but instead will shift the bulk of their transactions and accumulated wealth to the less convenient 200-euro notes, which will then become the next target of the ECB's cash abolitionists. Thus one should take little comfort from Draghi's flippant comment that with the disappearance of the €500 note, people can hoard cash in € 200 notes.
Meanwhile, hang on to your $100 bills. A new report by Peter Sands, former chief executive of U.K.'s Standard Chartered Bank, recently released by Harvard's prestigious Kennedy School urged governments of the countries with the 20 largest economies (G20) to ban all high-denomination notes. According to Mr Sands, such notes are
. . . [the] currency of corrupt elites, of crime of all sorts and of tax evasion. They play little role in the functioning of the legitimate economy, yet a crucial role in the underground economy. The irony is that they are provided to criminals by the state.
What is truly ironic, however, is that, on Mr. Sands' watch, Standard Chartered was charged by the New York State Department with conspiring with the Iranian government to circumvent U.S. sanctions and “hide from regulators roughly 60,000 secret transactions, involving at least $250bn, and reaping SCB hundreds of millions of dollars in fees." In 2012 the department fined Standard Chartered nearly $1 billion dollars for the offense. In 2015, the bank was again accused of defying Iran's sanctions. I guess the Kennedy School thought it was a good idea to get a long-time and highly placed member of the "corrupt elites" to prescribe policies for dealing with them.