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The €500 is dead. Long live the €500!

by Guillaume Lepecq | May 14, 2016
500_euro_inabottle_smallOn May 5th, the Governing Council of the European Central Bank decided to discontinue the production and issuance of the €500 banknote. However, it remains legal tender and will always retain its value.

The decision came after a series of criticisms targeting the €500 and high-denomination notes more generally. A key recurring  - and very naïve - argument in this debate is that large denominations are not used in day-to-day transactions and therefore they are not legitimate. The same critics are pursuing their claims and are now calling for the further elimination of high-denomination notes. Unfortunately, they are forgetting three things.

Banknotes are not exclusively for day-to-day transactions. They are also used as a store of value. This is the primary role of high denomination notes. According to a recent survey by Virgin Money in the UK, 7.6 million adults say they are hoarding cash representing an estimated total of £ 1.3 billion. The main cited reasons for saving cash are: to have money where they can see it (29%); because they use it for everyday items (16%); because they like to be able to access it at all times (14%).

High denominations also play a role in transactions. According to the Federal Reserve Diary of Consumer Payment Choices, the share of transactions of $100 and over settled in cash reached 11% in 2015, up from 9% in 2012. According to the ECB household survey on the use of cash, 20% of purchases between €200 and €1,000 are paid in cash. And 4% of respondents use cash for purchases of over €10,000! And this is perfectly legitimate.

And then we have interest rates. The Bank of Japan introduced negative interest rates on February 16th, a move that triggered a sharp increase in demand for ¥10,000 notes. Likewise, the demand for CHF 1,000 in Switzerland is correlated to short-term interest rates. The Bank of Korea summarizes the situation well in its 2014 annual report, « the main driving factors behind the recent increase in demand for large-denomination banknotes in Korea can be summarized as low interest rates and the outbreak of the financial crisis, which were also the common macroeconomic factors that affected other major economies.»

Eliminating high denomination notes will not reduce crime or tax evasion. Criminals already make use of other, less tangible, payment methods. Tax evaders don't need cash to conceal their earnings - tax havens already take care of that. Eliminating high denominations will only make cash less efficient and increase the overall cost of payments to society. The danger is that this might be the first step to eliminating cash altogether, and that is a totally different kettle of fish.

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  1. Ken Niven | May 17, 2016
    With a finite number in circulation creating a scarcity value, could there be a premium placed on the €500?

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