My parents always taught me that it's impolite to talk about money. But it's time to break that dinner party taboo to address the big problems being wrought by big banknotes.
Last year the Reserve Bank of Australia reported an 11 per cent surge in demand for the $100 banknote. Yet, even with 300 million of these bills already in circulation, few Australians ever see our largest bill. Even fewer ATMs actually dispense them.
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The reality is that high denomination notes play a tiny role in most legitimate economies. Indeed, the Boston Federal Reserve revealed that only 5 per cent of American consumers use $100 notes. A similar story is likely true in Australia.
A team of researchers, including me and others at Harvard University, worked with Standard Chartered's former CEO, Peter Sands, to outline the troubling role high denomination banknotes play in facilitating illegal money flows. Anonymity of payments and the ubiquity of acceptance make large notes particularly attractive for those engaged in illegal activity. Big bills are now central to the drug trade, tax evasion, money laundering, organised crime and terrorist financing.
Of all global currencies, the worst offenders are the €500 note and the $US100 bill. Highly portable euros and dollars circulate the globe fuelling the shadiest parts of the illicit economy. It is what led authorities in Britain to ban the sale of €500 notes, which are often referred to as "bin Ladens" because everyone knows they exist but no one knows where to find them.
Nowhere is the problem more apparent than in the international drug trade. In the drug economy, cash is king. With sales of illicit narcotics conducted almost exclusively using cash, storing and transporting ill-gotten cash can pose serious logistical challenges for smugglers. Enormous amounts of currency accumulate at collection points and across supply lines over relatively short time periods. With the United Nations Office on Drugs and Crime estimating that sales of illicit drugs represent about 0.6 to 0.9 per cent of global GDP, there is plenty of cash that needs moving.
High denomination notes make it easier for drug traffickers to move cash across borders. Because large amounts of hard currency can be surprisingly heavy, big bills substantially ease the burden of transportation. A million dollars in $US1 bills weighs about one tonne – equivalent to a small car. But using $100 bills, the largest denomination in both the US and Australia, the weight of $1 million shrinks to about 10 kilograms and fits easily into an overhead bag. That load is again substantially lightened when smugglers use €500 notes. Weighing only 2.24 kilograms, a million euros squeeze comfortably inside a briefcase.
Former US Treasury Secretary Lawrence Summers agrees the analysis "is totally convincing on the linkage between high denomination notes and crime" and that stopping the issuance of high denomination notes would make smugglers' jobs that much harder. As the European Central Bank's president, Mario Draghi, is now signalling that the ECB is considering taking action against the €500 note, the time has arrived for Australians to consider the future of our own $100 bill.
To the extent that big bills are used in legal transactions, substitutes are readily available. While forcing drug cartels to use smaller denominations to smuggle millions in illicit proceeds would cause huge disruption, the inconvenience for consumers of having to use $50 notes or lower to do the weekly shopping is infinitesimally small.
Critics are right to highlight that scrapping high denomination notes won't stop the international drug trade. Smugglers will adapt. But given that efforts to combat the trade of illegal narcotics have been beset by decades of ineffective and expensive policy interventions, depriving criminals of high denominations notes removes a key tool for moving bulk cash across borders.
Forcing drug traffickers to abandon their dependence on cash will see them transition towards alternative methods for transferring value. As their reliance on formal payment systems and cryptocurrencies increases, so too does the likelihood that criminals will leave more fulsome digital trails for law enforcement officials to follow.
Governments have a responsibility to discontinue troublesome currency denominations. Sufficient precedent exists to do so. In 1969, when the US federal government became concerned by the illicit use of the otherwise redundant $500 banknote, what did it do? It simply stopped producing them. As part of an effort to tackle financial crime, Canada discontinued its $1000 note in 2000 and, in 2014, Singapore ceased issuing its $10,000 banknotes.
Discontinuing high denomination notes does not entail a broader war against fiat currency. Nor does it represent a conspiracy to surreptitiously facilitate negative interest rates. Rather, in a world where legal commerce is increasingly conducted via electronic payment systems, eliminating high denomination notes is simply sensible public policy.
Alexander Smith is a graduate student at Harvard University.