Billions of banknotes are missing. Why does nobody care?

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One Saturday evening last October, a young woman called Tara Hanlon arrived at Heathrow airport with five suitcases. When a customs officer asked why she had so much luggage, she explained that she was going to Dubai with friends and didn’t know what she might want to wear. Hanlon’s long hair, plump lips and sculpted eyebrows gave her a passing resemblance to Kim Kardashian, but her diva-ish explanation didn’t satisfy the customs officer. Her bags were searched.

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Inside were stack upon stack of banknotes – £1,940,120 ($2.7m) in total – strewn with coffee in an apparent attempt to confuse the sniffer dogs. Britain’s National Crime Agency later released a picture of the bundled piles of money, spread out across a table, the Queen’s face reproduced at different angles. It was Britain’s biggest cash seizure of the year.

When the news about Hanlon pinged onto my phone, I hadn’t broken out a banknote in months. I’d almost forgotten the slippery feel of a polymer tenner. Since the lockdown started, my local shops switched to only accepting electronic payment, like others across Britain, worried about the possibility of transmitting the virus through physical money. ATM withdrawals plummeted to around half what they had been in 2019. But the decline of cash began long before the covid-19 – the number of in-person purchases paid for by debit cards overtook ones using physical money in Britain in 2017. The pandemic merely accelerated these trends.

Cash seems to have been doing fine without pedestrian consumers like me, however. In fact it has been booming. According to the National Audit Office, which scrutinises public-sector accounts, the value of all the sterling-denominated notes in existence has tripled in the past 20 years. It now totals around £75bn.

If you’re looking to public records to see what’s driving this demand you won’t have much luck. Only a third of that £75bn is being circulated in the kind of day-to-day transactions that officials can monitor. The remaining £50bn is out there somewhere, being put to unknown uses. “The Bank of England doesn’t know where, who by or what for, and doesn’t seem very curious,” said Meg Hillier, head of a parliamentary committee that recently investigated the future of cash.

There is more than $7,000 in paper money out there for every American

This curious absence of curiosity is not confined to the Bank of England. Central banks everywhere seem to care little about missing cash. The total value of US dollars in circulation jumped by 16% in 2020 alone, passing $2trn for the first time, quadruple the value of notes 20 years ago. There is more than $7,000 in paper money out there for every American, and more than €4,000 for every resident of the euro zone. Yet in America and Europe, as in Britain, most people use cash for little more substantial than a cup of coffee.

The fact that cash has gone up while recorded uses of it have gone down is an intellectual puzzle – and central banks have certainly taken that line, producing the odd speculative explanation without any real sense of urgency. But as Tara Hanlon’s case shows, those unaccounted-for banknotes represent more than a quirk in an abstract model. British law-enforcement officials say the Hanlon bust is just a tiny fraction of the currency smuggled out of Britain every year. Perhaps the real question is not what happens to all the cash, but why the people who print it aren’t more eager to find out?

The first central banker to acknowledge that something odd was happening with banknotes was Andrew Bailey in 2009, then chief cashier of the Bank of England, now governor. Every sterling note since 1853 has borne the signature of the chief cashier, who is responsible for making sure Britain has all the cash it needs. So Bailey had a particular insight into what was happening with all the money being printed.

Cash wasn’t top of the Bank of England’s priority list in 2009. After the 2007-08 financial crisis, central banks embarked on a radical project to keep credit cheap, called quantitative easing, or QE. This is often referred to as printing money, though it doesn’t actually involve any new tender being printed. Instead central banks created more electronic money in their ledgers and used it to buy government bonds and other securities.

A staggering amount of new money has been brought into being through quantitative easing, particularly since the pandemic, at the beginning of which the Federal Reserve injected some $3trn into the system. The increase in electronic money dwarfed the rise in banknotes printed – and is not particularly relevant to it. But perhaps the far greater quantity of new electronic funds around explains why so few people seem bothered by all the unaccounted for bills.

Despite the financial crisis and the vast quantities of electronic cash swilling around, Bailey still had to keep an eye on the bank’s more quotidian duties. All major central banks supply banknotes “elastically”, which means that they let financial institutions take out or hand in as much tangible money as they or their customers want. A commercial bank puts electronic money in a central bank’s ledgers, and the central bank duly hands over the same value in banknotes, which can then be withdrawn from ATMs, or distributed to bureaux de change. The aim is clear: anyone who wants cash can get it.

Historically, the Bank of England has been focused on keeping up with demand for cash (British people have been able to pay for things with credit cards only since the 1960s). The bank orders sterling notes from a private firm, De La Rue, which prints tender for countries around the world. But when Bailey spoke at a conference in Washington, DC, in 2009, contactless payments and online shopping were becoming so common it looked like central banks might soon have a different problem: what would they do with the banknotes that were no longer wanted?

The total value of banknotes now in circulation is approaching €1.5trn

Bailey tackled this question in his address to the currency experts and central bankers gathered for the conference. He noted that the share of purchases made with cash had halved in 20 years. But he had a surprise for what he called “the ‘cash is dead’ lobby”: demand for cash had actually accelerated over the same period. He dubbed it “the paradox of banknotes”.

Bailey offered a twofold explanation. On the one hand, he argued, the financial crisis had lowered public trust in banks, so many people thought it safer to keep cash at home. At the same time, the number of ATMs was increasing, which meant more cash was needed to keep them stacked. Neither explanation made much sense at the time, because the trend pre-dated both the ATM boom and the credit crunch (though the credit crunch did accelerate it). They make even less sense in retrospect. The number of ATMs in Britain is now falling, and the financial crisis is long past, yet the increase in both the volume and value of banknotes in circulation has accelerated.

America’s Federal Reserve had its own take on the paradox: since inflation was so low, holders of cash felt no urgency to pay it into their accounts. If money kept its value in paper form, why go to the trouble of trekking downtown and filling in a paying-in slip? Separately, the Fed argued, interest rates had been unprecedentedly low since 2008, so savers would profit little from money in their bank accounts: electronic money was all hassle and no reward.

The two explanations were elegantly connected, and no doubt persuasive to anyone who spends their life thinking about inflation and interest rates. In the real world, however, they are a bit bizarre. For most of us, a bank account isn’t about profit or loss, it’s about security: it prevents your life savings from being erased by a house fire, burglary or infestation of rodents; it stops you heading off to a casino on a whim and chucking everything on black. All of which are good reasons to put your savings into a bank, whatever is happening to interest rates. (About 5% of American households don’t use banks, mostly because they don’t have enough funds to meet the minimum-balance requirements many demand.)

Other economists have proffered different suggestions, usually related to the prevailing circumstances of a particular moment: the volume of banknotes in circulation was rising because conditions were too stable, because conditions were too unstable, because confidence in the financial system was too low for people to engage with it, or because people were using so many bank ATMs. These reasons can’t all be true; many contradict each other.

Still, all of the above explanations are better than the one proposed by the European Central Bank (ECB) in February, when it published a long report on the paradox of banknotes. After analysing cash transactions in countries in the euro area, the bank concluded that only around a fifth of banknotes in circulation were being used in recorded sales and purchases, a share that has fallen since the start of the pandemic. Yet during 2020 – the pandemic year – demand for banknotes was apparently so high that central banks in the euro zone printed some €140bn ($160bn) of extra cash. The total value of banknotes they now have in circulation is approaching €1.5trn.

“This seemingly counterintuitive paradox can be explained by demand for banknotes as a store of value in the euro area coupled with demand for euro banknotes outside the euro area,” the ECB’s analysis concluded. Strip away the jargon and it’s just another way of saying that people want banknotes because people want banknotes. It doesn’t tell us why.

If you really want to know more about this invisible demand for banknotes, Kenneth Rijock is a good person to start with. A square-jawed Vietnam-war veteran with a charming manner and a ready smile, he’s got plenty of time to sit and chat in coffee shops these days. But back in the 1980s he was working flat-out, laundering cash for drug traffickers in Miami.

“The Bank of England doesn’t seem very curious”

Rijock would stuff banknotes into scruffy old suitcases and turn up at the airport looking like “the dumbest tourist that ever stepped off a plane”. He’d fly to a tiny jurisdiction in the Caribbean, where a bank would be more than happy to credit the cash to the account of a shell company without asking where it came from. Once the money was in electronic form, he’d transfer it through banks in a few different countries to confuse anyone tempted to investigate it, before bringing it back to Florida where his clients could invest it in property, as if it were legitimate.

This golden age of offshore banking for criminals didn’t last. In the late 1980s governments began to force banks to do more checks on the money they were moving. This due diligence has only become more intensive since, particularly after 9/11. (Rijock himself was caught and sent to jail in 1990. He now advises law-enforcement agencies on how to catch criminals.)

These days offshore banking is a highly risky option for criminals who want to move their ill-gotten gains into another jurisdiction. Cryptocurrencies, meanwhile, are illiquid, volatile and hard to spend in the legitimate economy. So criminals often fall back on the oldest technology, one that is anonymous, robust and universally accepted. “Bulk cash-smuggling is the crudest and most primitive, but still the most effective, means of evading detection for money-launderers,” Rijock told me.

As central bankers ponder where their banknotes are, officials who are fighting money-laundering say it’s no great mystery. By some estimates, perhaps half of all cash in circulation is helping criminals evade governments’ increasingly intrusive surveillance of the financial system.

Tara Hanlon’s adventures are a case in point. She was paid £3,000 for carrying those five suitcases to Dubai, and had already carried a total of £3.5m out of the country on three previous trips: “Them cases are HEAVY. And no one helps at all. Just watches you. I was like hello,” Hanlon texted the woman who recruited her. She was part of a network of couriers shipping criminal profits to the United Arab Emirates, where patchy law enforcement has created an ideal environment for laundering dirty money.

Britain’s National Crime Agency has analysed how many banknotes are printed, how many are used in recorded transactions and the size of the local criminal economy. It has concluded that so much cash is leaving the country each year that it must be being moved by trucks. The agency has formed a new task force, “Project Plutus”, to investigate the flow of cash.

It’s not just Britain that’s struggling to understand illicit cash movements across its borders. Billions of dollars’ worth of bills are circulating outside America, and €750bn outside the euro zone. This will not all be used for nefarious purposes. But it is clear that there is a vast global shadow financial system over which the authorities have almost no oversight.

Corrupt officials, terrorist bosses and mafiosi all rely on hard currencies to buy influence, move money around and support their organisations. And while law-enforcement agencies and compliance officers are slowly choking off criminals’ access to the global banking system, those in a position to restrict their cash supply barely acknowledge the problem.

At the heart of central banks’ complicated relationship with cash is a concept so ancient that we refer to it in Old French as seigniorage, “the prerogative of a feudal lord”, or seignior. When states first began to emerge, rulers demanded a monopoly on issuing coinage. Bullion would be brought to the mint, where it would be weighed and its content assessed, before being cast into coins bearing the royal likeness as a guarantee of their quality. Seigniorage was the share that the ruler took for his trouble.

It was a money-spinner, and became more so when kings realised they could redesign currency every few years, meaning that coins had to be regularly melted down and recast. Profits increased further as other base metals started to be used, even though monarchs insisted the new coins retain the same value as their silver or gold predecessors.

Minting all those coins was fiddly, however, which limited how much money could be made from the process of making money. The real advance began in the 17th century when European central banks started to issue banknotes and later determined that no one else was allowed to. A banknote costs pennies to print, but is worth whatever number is written on it. Seigniorage income started to mount up.

Calculating seigniorage income in the age of electronic money is more complicated than it was in the Middle Ages, but the core concept is the same: it’s the profits that derive from the monopoly on issuing currency. Printing a $100 bill – a decorative piece of paper that is worth $100 only because the American government says it is – costs just 14 cents. And every time the Fed sends one out of the door it can invest the remaining $99.86 in something which pays it interest. Printing money, at the risk of stating the obvious, gives central banks a licence to print money.

If Hanlon had been moving her stash in €500 notes, they could have fitted into a briefcase

The Bank of England would have reaped more than £1.5m as a result of printing the £1,940,120 that Tara Hanlon tried to carry through Heathrow (sterling notes cost pennies to print). Some of the returns go on costs and administrative expenses, but the Treasury takes the rest. So seigniorage is a nice source of income for a government – provided you don’t think about how much organised crime and tax evasion costs the exchequer.

On the few occasions when there has been public discussion of all the missing banknotes in the world, the profitable business of seigniorage almost never comes up. Kenneth Rogoff, a Harvard economist and author of “The Curse of Cash”, argues that economists are more temperamentally inclined to talk about cutting-edge concepts like QE than the prosaic question of how banknotes are actually produced. “Economists tend to think ‘it’s not Keynesian macro so it doesn’t matter’,” he said.

It’s likely that apathy also plays a significant role in central bankers’ willingness to keep churning out cash. The prospect of coming up with fundamental reforms to cash supply can’t be very appealing when there is so much else to worry about in the economy.

But Peter Sands, a former boss of Standard Chartered, thinks that seigniorage is at least part of the explanation for inaction. “When a pharmaceutical drug has adverse effects, the pharma company is forced to do extensive research into the prevalence, severity and underlying mechanisms of such effects,” he said at a conference on the future of cash in 2017. “Yet when the most senior law-enforcement official on the continent says cash plays a critical role in money-laundering and terrorist finance, when tax authorities declare that under-reporting of cash revenues is the biggest source of tax evasion, do we see those who produce cash rushing to gather data and produce analyses?”

The answer, obviously, was no. “I don’t want to suggest that it’s all self-interest,” Sands concluded. “But I think you have to accept there is a conflict of interest.”

When Tara Hanlon was sentenced, the National Crime Agency issued a self-congratulatory press release, complete with photographs. Inside the institution, however, the mood was more gloomy. The criminal network Hanlon worked for hadn’t really tried to be discreet when moving the £2m, suggesting that this sum was a drop in a much larger ocean of liquid cash flowing across the border. “We have to accept that criminals wouldn’t be moving £2m in one go if they were worried about being caught,” a law-enforcement official told me. “The size of this seizure probably just shows us how many shipments we’re missing.”

Britain’s crime-fighting authorities can take consolation from one thing: sterling is not the most popular choice of currency for transnational criminal networks. A glance at Hanlon’s heavy suitcases shows why. Almost all of it was purple £20 notes, with the odd £10 mixed in. Just one £50 – the most valuable note issued by the Bank of England – was visible. The space-to-value ratio of British currency favours law enforcement over smugglers: you have to move a lot of notes to make up a large sum.

If Hanlon had been moving her stash in $100 bills, she could have got them into just one and half suitcases. In €500 notes, they would have fitted into a briefcase. So if you do want to move money across borders, you’re far better off using the big bills printed in Europe and America than those the Bank of England issues.

There are plenty of good reasons for central banks to keep printing banknotes. But some question whether it’s really necessary to issue so many high-value ones. More than 80% of all the dollars in existence are in the form of $100 bills – over 16bn bills in total, enough for everyone on Earth to have two (and I don’t have any, so at least one person is getting a double share).

There are nearly 400m purple scraps of cotton out there with the words “500 Euro” written on them (though the ECB did cease production of the €500 note in 2016, under pressure from the French government, which believed it was helping fund terrorism). The euro zone has printed a total of 750m banknotes worth €200, and another 3.5bn of the €100 denomination.

Why don’t most rich countries want to get rid of high-denomination banknotes? After all, India abolished its two highest-denomination bills in 2016 (albeit with mixed results).

The answer, as with many aspects of regulating the international financial system, lies in the difficulty of persuading everyone to act together. If either the Fed or the ECB committed itself to abolishing its large-denomination banknotes, for example, transnational criminals and kleptocrats would switch to operating in another currency. That would mean all the profit from printing banknotes would accrue to whichever central bank continued to issue those notes – and the other ones would see little benefit from a global reduction in crime. In the absence of a miraculous effort of multilateralism, the current system is likely to persist for the foreseeable future.

In June this year, Tara Hanlon appeared in court via video link, pleading guilty to money-laundering. The judge sentenced her to almost three years in jail. A week earlier, De La Rue, the British company that prints sterling notes, issued its financial results. Its presses – housed in a modernist factory in Essex which the company bought from the Bank of England in 2003 – were working at 100% capacity, De La Rue said. Why? “Strong ongoing global demand for cash.”

Oliver Bullough is the author of “Moneyland” and “Butler to the World” (forthcoming)


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