The €500 is dead. Long live the €500!

On May 5th, the Governing Council of the European Central Bank decided to discontinue the production and issuance of the €500 banknoteA banknote (or ‘bill’ as it is often referred to in the US) is a type of negotiable promissory note, issued by a bank or other licensed authority, payable to the bearer on demand. More. However, it remains legal tenderMoney that is legally valid for the payment of debts and must be accepted for that purpose when offered. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered (“tendered”) in payment of a debt extinguishes the debt. There is no obligation on the creditor to accept the tendered payment, but the act of tendering the payment in legal tender discharges the debt. More 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 valueOne of the functions of money or more generally of any asset that can be saved and exchanged at a later time without loss of its purchasing power. See also Precautionary Holdings. More. This is the primary role of high denominationEach individual value in a series of banknotes or coins. More notes. According to a recent survey by Virgin Money in the UK, 7.6 million adults say they are hoardingThe term refers to the use of cash as a store of value. However, the term has a negative connotation of concealment, and is often used in the context of the war on cash. See Precautionary Holdings. More cashMoney in physical form such as banknotes and coins. More representing an estimated total of £ 1.3 billion. The main cited reasons for saving cash are: to have moneyFrom the Latin word moneta, nickname that was given by Romans to the goddess Juno because there was a minting workshop next to her temple. Money is any item that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular region, country or socio-economic context. Its onset dates back to the origins of humanity and its physical representation has taken on very varied forms until the appearance of metal coins. The banknote, a typical representati... More 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 PaymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More 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.