Swiss bankroll

As Larry White, someone who I always take very seriously in any such discussion, said in the Cato Journal “Some other writers and officials… do seek a cashless society. They want to drive all transactions into forms that leave an audit trail for the law enforcement and tax authorities”. I think I’m probably in this category. While I appreciate the arguments of Larry and others about anonymity, I do not agree with them. This is because I do not see that the only two options as being anonymous physical cash or unconditionally traceable digital money. We have a wide variety of tools available to us to construct the next generation of digital money and some form of pseudonymous alternative is probably best for society as a whole.

In this article, Larry notes that the Swiss National Bank (SNB) is "the most important central bank still bucking the trend". It has said that it has no plans to withdraw its 1,000 Swiss Franc (CHF)  note.  The highest-denomination banknote in the world, this is an inordinately profitable commodity. It costs about 40 centimes to make, generating a 250-fold seigniorage return.

I read with interest the recent comments by SNB Vice Chairman Fritz Zurbruegg on the news that they are to continue production. Herr Zurbruegg said that there were "no indications" that criminals use the CHF 1,000 note more than any other note. So what are these notes used for? I read the Swiss National Bank’s payment survey for 2017, the most recent available, and it reports that the 200-franc and 1000-franc notes accounted for a combined 23% of the total number of Swiss banknotes in circulation, with 61 million and 50 million units respectively. These banknotes had a combined value of CHF 62 billion, or 76% of the value of all banknotes in circulation.

Where are these banknotes? Apparently, three-quarters of Swiss households keep less than 1,000 Swiss Francs as a store of value, so obviously they aren't using the CHF 1,000 that much. In fact, of the cash that is held as store of value, less than 5% is CHF 1,000 notes.

(The report goes on to say that "it should be borne in mind that respondents’ answers on this sensitive topic are likely to be not wholly reliable due to both security and discretion considerations", which may point us in the direction of the actual use of the notes.)

Still the main point is that less than a quarter of Swiss household have even one CHF 1,000, which given that they account for a substantial portion of the cash in circulation suggests a long tail: there are a few households with a lot of them.

(The report also notes the particular importance of the SFR 1,000 note in livestock trading. Presumably Swiss farmers find the payment facilities provided by the nation's financial institutions to be inconvenient in some way.)

Interestingly, in his comments on the continued production of the SFR 1,000, Herr Zurbruegg went on to say that should these notes be used for tax evasion, then “this is an issue for the legislators and authorities to prevent”. But as Cash & Payment News Volume 2, Number 3 (March 2019) goes on to observe about this perspective, in other industries the manufacturers are not allowed to wash their hands of the negative side-effects of their products (cars have to meet safety standards, for example). On the contrary, it is the manufacturers who are required to pay in some way for the potentail harrm that their product may cause.

The idea of making the producers of high-value notes (central banks) pay some sort of tax to compensate society for the damage done by those notes does, I’ll  admit, seem a little far-fetched. But the alternative, which is to considerably reduce the value of the highest-denomination notes, does not. Why not get rid of the US$100 (of which there are more “in circulation” than $1 bills), the £50 and the €500?

Well, as it happens, the European Central Bank (ECB) has stopped production of the €500 note. While it was indeed partly successful

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Denmark is ignoring a request by the European Central Bank and moving to ban 500-euro notes, as the Nordic country toughens defenses against money launderers.

From Denmark Ignores ECB to Ban 500-Euro Note in Dirty Money Battle - Bloomberg.

 

Yay! Go Denmark! There really is no excuse for printing such high value notes in the modern world. Perhaps it was once a reasonable aspiration to displace the $100 bills stuffed into drug dealers’ mattresses with €500 bills and thus redirect the proceeds of crime (the seigniorage earned on those bills) from the Fed to the ECB, but no more.