Why The Move Towards A Cashless Society Is Bad News For Criminals

John Kay

Last week I left home without my wallet. I soon realised it did not really matter. I could even manage without a plastic card. My phone can summon and pay for a taxi, buy a cup of coffee and purchase a train ticket. This year the proportion of transactions in Britain made in cash is likely to fall below 50 per cent. Since cash is mainly used for low-value transactions, cards and electronic payment account for most of the value of payments.

Andrew Haldane, chief economist at the Bank of England, speculated last week about a cashless future. And yet cash in circulation has generally been increasing more rapidly than national income. The total volume of notes in issue is equivalent to £1,000 for every man, woman and child in Britain. The US figure is more than $2,000. And the quantity of euros in issue has expanded threefold since the single currency was established.

Where has all this money gone? Not into your wallet or mine. Even in Germany or Austria, where consumers are reluctant to use anything but cash, the average amount people have about their person is little more than €100. Some of that is transferred during the course of the day to the cash registers of shops, which generally bank it at the end of the day. But cash in bank vaults is only about 10 per cent of the total.

The pollsters who failed to persuade the voters of Britain to reveal how they would cast their ballots in May’s general election are not very likely to have secured honest and reliable responses to the question: “How much money do you have under your mattress?”. They acknowledge that their figures are likely to underestimate the true value, but the Bank of England speculates that 10 per cent of notes in issue are hoarded.

One-third of the value of euros in circulation is made up of €500 notes. But most Europeans report that they have never seen one with such a high denomination, and there are few retailers that are willing to accept them. These notes are useful for hoarders. But, like the SFr1,000 note, such a denomination is also useful for people who wish to make large transactions outside the banking system. The US Treasury and Bank of England have been unwilling to issue similar high denomination notes.

It seems likely that illegal activity accounts for a high proportion of the currency in circulation; that many of the dollars in use are outside the US; and that the creation of the euro provided an alternative to the dollar as a widely available medium of illicit exchange and store of criminally acquired value.

Some unlawful transactions may be relatively benign, say, the builder who pays and is paid in cash. Some are marginally lawful and far from benign — such as the plunder of parts of the former Soviet Union by oligarchs, and of resource-rich countries by corrupt politicians. Some currency use may be for terrorist finance, or the rewards of drug dealing and people trafficking.

The volume of currency in circulation has risen as the need for such currency in legitimate activity has declined. This is not a comforting combination.

Policymakers should progress towards a cashless society. Mr Haldane made his approving comments in the hope that it might enable central banks to reduce interest rates below even their current near-zero levels. The fanciful idea, trailed in each generation, that currency might have an expiry date has implications for both the conduct of monetary policy and the battle against crime.

One day, perhaps, carrying cash will be as much a cause for suspicion as the possession of a jemmy or a knife.

This article was first published in the Financial Times on September 23rd, 2015, and on John Kay’s Blog.