The case against $50 and $100 banknotes
Following is the relevant extract from a letter to the RBA in July 2012. While this letter was circulated and the the main points published in an AFR magazine, it was not until September 2012 that the question of the 'missing' $100 notes was raised and the story published in the SMH and AGE.
The published story then gave the story a 'rev up' that attracted attention.
The general idea was however prescient -- later, in India, their high value banknotes were withdrawn -- in Sweden there is concern that cash is not being used at all -- and the RBA is now more open to the prevalence of 'hoarding'.
Mean time 'notes per head' in Australia has blown out to some $3000 -- still some three-times the situation in NZ.
[EXTRACT] - the continuing need for cash does not include either $50 or $100 notes
The actual tipping point has already passed, apparently unnoticed, but Australian now has a central bank note-issuing authority embroiled in a very problematic business – issuing $50 and $100 bank notes which are now better regarded as bearer-bond investments for age-pensioners than circulating ‘currency’.
One persuasive illustration of the problem is the marked difference in the per-capita holdings of currency notes as between Australia and New Zealand. In broad terms the average value of notes held by New Zealanders is about one third of the $A2, 000 held by Australians -- almost all of which, by value, is in the $50 and $100 denominations. An obvious explanation for the difference – means-test free age-pensions in New Zealand -- similarly obviously points to the benefits some age-pension recipients in Australian unfairly take by holding undeclared assets as these hoards of bearer-bonds masquerading as $100 banknotes reported as being ‘in circulation’.
As a policy issue this has all been a bit inconvenient and one which the Bank has, for years, been plainly not happy to see identified and discussed. Nonetheless it is an issue growing in importance and one that will become ever more contentious – it is a public-policy problem for which the Bank could have, and should have, made a better fist of managing.
There are a number of options open. One would see the responsibility for the note issue returned to the Treasury so that the possible attraction, to the Bank, of having first call on the $1.5 billion+ p.a. profit from an over-inflated note issue, does not compromise the Bank’s inclination to better manage the note issue in the national interest. This reform might similarly sensibly work to bring the day-to-day funding of the Bank more clearly within the normal purview of government budgetary decisions. There is a lot to be said for that and the attendant accountability.
That change alone would, however, not address the problem of a grossly inflated currency issue disguising a very substantial dead loss to the national coffers – currency hoarders may not get the 4% p.a. interest, that becomes profit on the note issue, but, being only old and not at all silly, these hoarders are almost certainly taking a much higher return on their bearer bond investments as unfairly claimed entitlements to higher pension payments. One relevant policy question then, is about the Treasury having a stronger incentive to better balance the net costs to revenue against the illusory sense of continuing to issue $50 and $100 notes.
While withdrawing $50 and $100 notes from circulation would be an intriguingly contentious proposal, and most certainly should never be done in any way precipitously, it is a proposal with both merit now and a longer term sense of inevitability -- especially as the retail payments system becomes progressively more exclusively electronic for making payments of any substantial value. A 5-year plan would be sensibly credible.
What would remain in circulation are coins and a modestly expanded issue of currency notes in the $10 and $20 denominations: there is every reason to expect that a national currency issue of this character would soon be adequate to meet the reasonable needs of a community ever more exclusively making substantial payments electronically.
Continuing, though reduced, incentives to hold bulky hoards of $20 notes would be further dampened if notes older than five years were only be redeemable at a progressively larger discount to their face value.
The prospect of gently restructuring the currency issue in this way would have the additional advantage of strengthening the business case for a new national electronic payments clearing hub in addition to the domestic and international payment networks of Visa and MasterCard operating independently but in association with Australian banks.
It is about time to take a couple of short preparatory steps of faith towards the inevitability of conventional cash currency eventually being essentially redundant and similarly stepping away from what was a currency-issue responsibility now become an arrangement irresponsibly facilitating misbehaviour.