The European Central Bank is rethinking its policy on large banknotes to curb crime, tax evasion and deflation
The end of the $100, £50 and €500 note could soon be upon us as experts suggest the removal of large denomination notes from circulation could both decrease crime and assist in preventing deflation.
Former Standard Chartered Chief Executive Peter Sands proposed phasing out these high value notes to make crime more difficult and reduce tax evasion in the paper Making it Harder for the Bad Guys, published by the Harvard Kennedy School. The paper argues that while cash makes sense for small transactions, like buying lunch or a newspaper, consumers favour electronic payments for more expensive items. The majority of transactions involving high value notes are made by either tradespeople conducting cash in hand deals to avoid tax, or in criminal transactions. While removing the notes would not stop crime, it would make high value illegal transactions far more difficult.
This comes shortly after Mario Draghi announced the European Central Bank is reviewing its policy on €500 notes. In addition to curbing crime, experts also suggest abolishing the note could support current inflation measures. Where the negative interest rates currently set across Europe and Japan encourage banks to withdraw their central bank deposit, removing the large notes would make storing the withdrawal in cash a far more difficult option. Bank vaults are only so large and security costs would be greatly increased. Speaking to Bloomberg Business, professor at the London School of Economics Charles Goodhart said removing large notes “would allow some further cut in the level of nominal interest rates because it would make the storage of cash considerably more expensive or difficult.”
The move is not without precedence. In 2010, British banks and money exchange services stopped dealing €500 notes following a report showing 90 percent of the demand for them came from criminals.