Part 2: Big bills in dark corners
In the second of three excerpts from Kenneth Rogoff’s new book The Curse of Cash, the Harvard economist tackles the surprisingly fuzzy problem of how cash is used around the world these days, and finds that the vast majority of it is in very large bills. These bills are often more useful in the underground economy than in the legal economy, and their dominance is part of Rogoff’s argument for the near-total abolition of paper money.
The most remarkable fact about paper currency is just how much of it is floating around worldwide, on a scale it is hard to get one’s head around. Even more stunning is that the vast bulk of the world currency supply is in large-denomination notes that ordinary citizens seldom see or use, including the United States’ $100 bill, Japan’s ¥10,000 note (about US$99 at present), the euro zone’s €500 note (about $560), Switzerland’s 1,000-franc note (about $1,030), and a host of cousins from other countries. For the United States, there is roughly $4,200 in cash per capita, 80 per cent in $100 bills, 84 per cent if we throw in $50s. Yes, some of it is abroad, and some of it is in cash registers and vaults. A very small amount has likely been lost, destroyed or even buried in graves as gifts to the deceased in the afterlife (a practice that has been documented in some Asian countries). Still, as we shall see, all the evidence suggests that a great deal of it, probably at least half, is held in the domestic (legal and underground) economy.
The situation for the single-currency euro-zone bloc is broadly similar, with about €3,200 per capita outstanding (about $3,590), over 90 per cent of which is in notes of €50 and above, with 30% in €500 notes alone. It is true that cash is quite popular in Germany (less so in France), but few German families report anything like €12,800 per family, and again, a great deal of the holdings are unexplained. In general, governments have a very good idea how much cash they put out there, and one can find detailed information in most (but not all) countries’ central bank reports.
The Curse of Cash
■ Read first excerpt: The evolution of money in its many forms
■ Read third excerpt: Show me the money
It is far more difficult to find information on who the major classes of currency holders are. This is in no small part because treasuries and central banks simply do not know.
What is remarkable about the huge demand for cash is that it persists and grows despite the proliferation of alternative payment mechanisms. Credit cards have been around since the 1950s, debit cards from the 1960s, electronic payments since the 1990s, and, more recently, mobile payments. And printed bank cheques, of course, have been around for more than two centuries. It is not surprising that cash is still competitive as a transaction medium for small daily payments, but such payments do not begin to explain $4,200 per person.
Figure 1 (view graphic here) charts the US currency in circulation from 1948 to 2015 as a share of GDP. The solid line represents the overall currency supply, the dashed line represents $100 bills. Dollar demand peaked during World War II at 11 per cent of GDP, but then dropped steadily to less than 5 per cent, where it stayed during the 1970s and 1980s. One impetus for falling demand was surely the advent of credit cards, but in addition the high inflation and interest rates of the 1970s and early 1980s made holding cash very costly. Starting in the 1990s, the demand for cash has been steadily rising, reaching more than 7 per cent of GDP today.
Notable is the steady rise in the share of $100 bills. Part of the explanation, of course, is that $100 is not worth nearly as much today as it was many decades ago.
Notorious Depression-era gangster John Dillinger reportedly liked to carry a few thousand dollars in carefully rolled-up packs of $5s, $10s and $20s. Back then, $100 was about $1,800 in today’s dollars, more than any actively circulating bill in the world today except the 10,000–Singapore dollar note (worth more than $7,300).
Many other factors contribute to the rise in demand for $100 bills from the 1990s, including the generalised fall in interest rates and growing demand from emerging markets. And it is also true that prices have cumulatively risen significantly over the past 25 years. If we go by the consumer price index, a $100 bill in 1990 had the purchasing power of $180-190 in 2016, although for technical reasons having mainly to do with accounting for new products, this is probably a considerable overstatement of how much more $100 was worth in 1990 than it is today. Regardless, such explanations have to be weighed against the explosion in alternative transaction technologies over the past six decades. And don’t forget the small detail that most of the cash outstanding is unaccounted for.
The trajectory for the euro zone (the single-currency zone in Europe) is broadly similar, though with some interesting and informative differences (see figure 2 in this graphic). Cash was already broadly popular prior to the circulation of the first euro banknotes in January 2002, albeit per capita holdings in Germany and Austria were almost double those of France, a situation that persists to this day.
The ratio of currency to GDP in the euro zone was just over 5 per cent of GDP in 1995. The demand for currency dropped sharply in the run-up to 2002, in part because people were afraid they would have trouble converting large hordes of legacy national currencies, a small fraction of which was never turned in. But since then, cash holdings have marched up steadily to where they are now over 10 per cent of the euro zone’s GDP, more than one-third higher than the US ratio.
Lest one write off the popularity of dollars and euros to demand from governance-challenged developing countries, note that all the advanced countries have issued huge quantities of their own currency. Yet none of the others, except Switzerland and Hong Kong (and perhaps Singapore), can claim a significant foreign demand for their paper (or polymer plastic) currencies. Unless somehow euro zone and US internal demand are radically different from other countries with similar financial systems and levels of development, it is safe to say that a lot of dollars and euros must be held domestically (in tax evaders’ attics, drug dealers’ closets, construction contractors’ basement safes, etc).
Yen notes are hardly common outside Japan, though there are certainly some floating around popular Japanese tourist destinations, such as the casinos of Macao or the golf clubs of Hawaii.
Japan has a much higher ratio of outstanding currency to GDP (almost 19 per cent) than either the United States or the euro zone. Japanese holdings of currency per capita amount to more than $6,600 per person, or roughly $27,000 per four-person family. True, one can point to a number of factors that might explain high Japanese cash balances, including low rates of physical crime, two decades of ultra-low inflation, and conservative behaviour by an ageing population.
Still, Japan has its Yakuza (mafia) and its tax evasion, and a substantial fraction of the cash is almost certainly explained by underground holdings. Indeed, many estimates of the underground economy suggest that it is larger in Japan than in the United States.
One reason might be a certain ambivalence in Japan about how rigorously tax laws should be enforced; some Japanese scholars trace the problem to the tension between the governing Diet, which writes tax laws, and the tax administrators who try to interpret them. This tension is discussed in the academic literature but also illustrated in popular Japanese films, such as A Taxing Woman.
Figure 3 (view graphic here) shows the evolution of Japanese currency since the early 1950s. As with the United States, there is a sharp upward trend in currency demand beginning in the 1990s, and the share of cash holdings in the ¥10,000 note is more than 90 per cent.
The phenomenon that large notes account for nearly all currency is fairly universal, although one has to account for widely differing practices across countries in what denominations are issued. I have already mentioned the €500 and 1,000–Swiss franc mega-notes, and of course the legacy 10,000–Singapore dollar note. The largest active note in Canada is worth 100 Canadian dollars, but until 2000, there was a $1,000 note, which still accounts for a little more than 1 per cent of Canada’s currency supply. One might expect that the largest UK note, worth £50 (about $65) would attract a large share of total sterling demand, but its share is under 20 per cent.
If we extend the definition of large notes to include (approximately) $50 and above, the share of large notes across a wide range of countries expands sharply and accounts for more than 80 per cent of the currency supply in most advanced countries. In many, the share is more than 90 per cent (see figure 4 in this graphic).
Edited extract taken from The Curse of Cash by Ken Rogoff, published by Princeton University Press.
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