There is quite some discussion about the 100 dollar, 500 euro and the 1,000 Swiss franc banknotes. It is conceivable that soon no new banknotes will be printed similar to the discontinued issuance of the $500, $1,000, $5,000 and $10,000 bills in 1969. Although the U.S. stopped issuing those notes, they remain legal tender. As of 2015, the face value of such notes is around $300 million, although they have now become collectors’ items often worth more than their face value. (WSJ)
Frankly, I am puzzled by these plans: What’s the impact if these banknotes remain valid??
Supposedly, criminals would be hampered by such act. They would be hurt if the old banknotes in circulation would no longer be valid. They would also be hurt if there would be a single agency (eg, Central Bank) that would allow swapping into smaller notes provided that the holder shows identification and explanation and that all such swaps are registered. However, that is clearly not part of the considerations.
Stopping the issuance of new banknotes increases the ageing of old banknotes. Such ageing could be worrisome but these banknotes – most likely – seldom change or touch hands. Another interesting feature that would arise is that the value of the old banknotes may vary from its face value. Similar to Bitcoins, it’s likely that the daily value of an old 500 euro banknote will differ from its face value as its supply is maximised and demand will vary on a daily, weekly or monthly basis.
One could even argue that Central Banks would only increase the total cost of maintaining cash in circulation as the demand for smaller banknotes (eg, 100 euro note) will increase. In other words: it’s more expensive for a Central Bank to issue five 100 euro banknotes than one 500 euro bill. Essentially, efficiency and effectiveness of cash are decreasing.
Possibly these proposals serve another purpose as bad money always drives out good money. In economics, Gresham’s law is a monetary principle stating that “bad money drives out good”. For example, if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will disappear from circulation. (Wiki)
It is conceivable that the 100 dollar, 500 euro and the 1,000 Swiss franc banknotes need to disappear as this would further increase the use of electronic cash (eg, bank accounts). The benefits of electronic cash is that it leaves a (tax audit) trail. In Gresham’s Law, intangible electronic cash is certainly less valuable than tangible banknotes.
Indeed it makes more sense to assume that the real consideration for this plan is a crack-down on tax avoidance: “A more recent estimate from economists Richard Cebula and Edgar Feige in 2011 found that as much as 18% to 19% of all taxable income earned in the U.S. goes unreported – illegally depriving the government of nearly $500 billion in revenue” (WSJ).
Since this news, Greek “citizens who keep cash outside the banking system are running in droves to bank branches to ask for details and clarifications on reports that the European Central Bank is planning to withdraw 500-euro notes”. (ekathimerini, 11 February 2016)
George Harrison – The Beatles – Taxman (1966) – artist, lyrics, Wiki-1, Wiki-2
Let me tell you how it will be
There’s one for you, nineteen for me
Cos I’m the taxman, yeah, I’m the taxman
Should five per cent appear too small
Be thankful I don’t take it all
Cos I’m the taxman, yeah I’m the taxman
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