The Next Capital Control: Banning The €500 Bill

As SF Fed's John Williams notes (here), cash is king, but the strange thing is that while credit/debit transactions rise exponentially, the cash in circulation is also rising at a rapid pace. So where does all the cash go? The short answer is into large-denomination bills and out of the country by his findings. While low denomination bills suffer (as we discussed here) it is worth asking who is 'hoarding' the $100 bills? This is the question that BofAML asks in Europe as the huge EUR500 Bill (the developed world's highest value note in circulation) remains in great demand (apparanelty by shady offshore types). This is not good news for the central banks of the world as they run dry of monetary policy tools to drive velocity in money (or spending).

BofAML's proposal: Ban the EUR500 Bill; force those shady people who 'stack' these high denomination bills to spend that money into circulation. This would appear to be the latest 'capital control' strawman, 'floated' to eliminate the people's right to keep cash segregated from a banking system and out of broad electronic circulation. So in both the US and Europe, high denomination bills are being hoarded (or exported to 'safe' havens) as Williams notes, "around the world, during periods of political unrest or war, cash - especially the currency of a stable country... - is seen as a safe asset that can be spirited out of harm’s way with relative ease."

This, of course, is not what the elites want - and we suspect a "ban the EUR500 Bill" legislation will be coming soon to the EU Commission.

The US Fed is worried about it (pdf here)

According to one estimate, the share of U.S. currency held abroad rose from about 56% before the tumultuous events of the past five years to nearly 66% in 2012. The chart below shows the surg ein high denomination notes dominates the low (sub-$50) deonomination for currency in circulation...

And so is Europe...

Via BofAML, Time to get rid of the €500 bill?

Demand for the euro as a store of value has started declining. We use the demand for the €500 bill, which is by far the highest currency denomination in G10, to document this trend and argue that it could eventually weaken the euro.

Although the ECB has no plans to remove the €500 bill from circulation, we argue that it should do so. It will weaken the euro, supporting the economy. It will address concerns that the bill is primarily used to hide illegal income. More importantly, we propose a scheme in which the removal of the bill will be a tax on illegal income, allowing using the proceeds to address the periphery crisis.

The €500 bill is by far the highest currency denomination in G10 and one of the highest in the world (Chart 1). Its issuance started with the introduction of the euro banknotes on 1 January 2002.

An ECB study suggests that only one-third of the €500 bills in circulation are used for transaction purposes. The remainder is used as store-of-value.

But who is 'hoarding this store of value' outside a bank?

Holding large amounts of “mattress cash” to store value outside the banking system raises many questions. A number of banks in the Eurozone remain weak after the global and Eurozone crises, but European banks were considered to be strong and enjoyed the public’s confidence in the pre-crisis years. Indeed, some evidence suggests that the €500 bill is popular with criminals and tax evaders:

  • Money exchange offices in the UK stopped selling €500 notes from 20 April 2010, because of their use in money laundering. Indeed, according to the Serious Organized Crime Agency, 90% of all €500 bills sold in the UK are in the hands of organized crime.
  • According to the New York Times, one fourth of the €500 notes in 2006 were in Spain, despite a GDP of only 11.5% of the Eurozone’s GDP at that time. This may have to do with the large share of the underground economy in the country. The Spanish public had nicknamed them “Bin Ladens”, as everyone knew they were there, but nobody had ever seen them.
  • Reports suggest that the police in various countries use the bill to track money laundering.
  • Other countries have removed large denominations because of such concerns. US President Nixon issued an order in 1969 discontinuing the US$500 bill as a way of combating money laundering by organized crime. Canada withdrew C$1,000 bills in 2000, because of growing concerns over their use by organized crime.

The fear is that the drop in demand for EUR500 bills reflects on the more general decline in the demand for the euro as a store of value...

And we can't have that... so...

and BofAML's Suggestion... Plan....

Time to get rid of the €500 bill?

Despite no plans by the ECB to remove the €500 bill from circulation, we see a number of benefits if it does so. It will reduce the demand for euro to store value, which will weaken the currency helping the Eurozone economy recover from its continued recession. It will address concerns about the use of the bill to hide income from illegal sources. And, more importantly, removing the €500 bill from circulation can help raise substantial revenue by taxing illegal activity, based on a scheme that we describe below. Consider the following:

  • The public has only a month or so to deposit all €500 bills in a bank, after which the bills become worthless. The deposit can take place only in a European bank, in Europe or abroad.
  • Depositors will have to present evidence of legal income sources for deposits of €500 bills above a specific amount, let’s say €10,000– such requirements are already in place regardless of the currency denomination of new deposits.
  • All €500 bills that are not deposited in a bank within a month or are not justified by legal income sources become ECB profit.
  • The Eurozone can then use the proceeds to recapitalize banks in the periphery, capitalize the ESM and/or reduce the periphery’s sovereign debt burden.

We believe that the revenue raised in such a scheme could be sizable. The value of €500 bills amounted to €290bn in February 2013. If most of it cannot be justified by legal sources, as our discussion above suggests, the Eurozone can raise a substantial amount of funds to help address the ongoing periphery crisis. For comparison, the capital of the ESM is €80bn. Moreover, the scheme will be politically popular, as it will be equivalent to a 100% tax on €500 bills resulting from illegal activities and tax evasion. We have seen nothing to suggest that the ECB and the Eurozone authorities have ever considered such a scheme, but we believe that it would be a win-win idea.


And so there it is, the strawman for the latest cash-liberating capital control for the world's safe-haven seeking cash hoarders...