$100 notes: the heart of the black economy?

By Leith van Onselen
The Reserve Bank of Australia (RBA) last week released a new report examining why the circulation of Banknotes continues to grow strongly – especially high denomination notes – despite falling demand for cash among consumers:

Growth in the value of banknotes in circulation has been broadly steady at around 6 per cent per annum for more than a decade.1 Currently, the total value of banknotes in circulation is around $74 billion (Graph 1). Growth is evident in all denominations, although growth in demand for the higher denominations has generally outpaced that of the lower denominations over the past 10 years.

At the same time, evidence from the Reserve Bank’s triennial Consumer Payments Survey (CPS) indicates that the share of payments (by number) made with cash has fallen substantially over the same period.3 In 2007, around 70 per cent of consumer payments were made with cash. This fell to around 37 per cent in 2016 (Graph 2)…

The size of the economy is the most important driver of banknote demand, with a 1 per cent increase in nominal GDP associated with a 1 per cent increase in cash demand over the long term. While an increase in nominal GDP raises demand for all denominations, its impact is greatest on the higher denominations. Nominal GDP simultaneously captures the effect of population growth, inflation and real income growth, which suggests that these factors are important drivers of cash demand. In fact, these three factors can explain much of the growth in circulation over the past 10 years…

Compared with the total value of banknotes in circulation, the income adjusted real value of banknotes per capita in circulation has increased quite slowly over the past 10 years: around 1 per cent per annum, on average. This suggests that the value of banknotes in circulation has grown broadly in line with the Australian economy. Nevertheless, even this may seem surprising given the extent of the shift away from cash as a payment method indicated by the CPS…

The CPS data can be used to calculate each payment method’s share of total payments by value (Graph 4). Cash payments comprise a smaller share of total payments when measured by value than by number. This is because cash is more commonly used in low-value payments. The share of cash payments by value has fallen since 2007, but was stable between 2013 and 2016 at around 18 per cent.

… total cash payments made by Australian consumers is estimated to have fallen by around one-quarter between 2007 and 2016 (Table 1).5 Importantly, because total payments have increased – due to factors such as population, inflation and income growth – the fall in the total value of cash payments has not been as large as what is suggested by the changing share of cash payments, which declined by more than half.

…the CPS does not cover cash use by businesses, nor is it likely to fully capture the use of cash in the shadow economy (e.g. to avoid reporting income to the authorities or to finance illicit activities). Another important source of cash demand not captured by the CPS comes from overseas.

… a 10 per cent depreciation in the value of the Australian dollar (relative to the US dollar) is associated with a cumulative increase in $100 banknote demand of around 1 per cent over a three-month period…

The rising stock of banknotes in circulation alongside declining cash payments suggests that the velocity of cash has fallen over the past 10 years. That is, each banknote in circulation is being used in fewer transactions now than in the past…

In addition to its function as a means of payment, cash can also be held as a store of value. An increase in the value of banknotes held for store-of-value purposes necessarily reduces the velocity of cash because it has no effect on the value of cash payments…

Around 70 per cent of participants in the 2016 CPS reported holding some cash outside of their wallet…

While most tend to hold less than $100, around 3 per cent of respondents reported holding amounts greater than $1 000, and 1 per cent hold more than $5 000 (the highest category)…

These results suggest that a large amount of wealth held in banknotes is concentrated in a relatively small number of households, which is broadly consistent with the distribution of wealth more generally. In fact, households with far greater stores of cash have been identified from damaged banknote claims received by the Reserve Bank over the past five years. A number of claims where ‘house fire’ was cited as the cause of damage were in excess of $20 000. While the total value of banknotes being held as a domestic store of value is difficult to extrapolate from these data, it is clearly an important source of domestic cash demand. The data from these claims also provide some evidence that high-denomination banknotes are preferred for store-of-value holdings.

…low global and domestic interest rates have reduced the opportunity cost of holding cash over other assets…

There is evidence to suggest that the expectation of a depreciation of the Chinese yuan is associated with an increase in demand for the Australian $100 banknote…

Okay, to sum up: Australians are using cash less often, therefore, cash changes hands less frequently and we need more in circulation. Or put another way, because banknotes are involved in fewer transactions, we need more banknotes to do the same amount of cash transactions.

That said, there does still seem to be a lot of cash used for potentially dodgy purposes (e.g. drug deals or tax evasion purposes). While the RBA doesn’t have any direct data, its damaged banknote facility has uncovered multiple examples of huge cash piles in excess of $20,000.

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Unconventional Economist
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  1. Tradies doing special prices for cash jobs
    Pensioners hoarding to get the full pension
    Drug syndicates
    Overseas hoarding

    • That’s what I hear about as well. Instead of worrying about note values, the better way of dealing with the above would be through attacking those problems head on through the reform of our tax, welfare and legal systems.

      • “Bitcoin sold off to $3000 last week—a 30% drop—and then rallied 25% in 3 hours.
        Yup, that seems totally suitable for Bitcoin’s role as a currency.”

        Or better still

        “Austria is preparing to issue a 100-year bond that yields just two percent.”

  2. Why don’t you worry about the fraud you’re committing by issuing notes that aren’t redeemable for anything RBA…

    • This is the whole point, they and the fed know the money they have issued is not worth the plastic it is printed on.
      the sooner they get that back in house and shredded before any one finds out the better, for them,
      By the end of next year the fed will be pulling $US50 billion a month out of the us economy.
      When the money was issued it was expected the money would be used for business like productive purposes, instead it has been used for share buybacks and generally pissed away by company directors, so far with impunity.

  3. We can follow what India did : phase out the $100 note over 3 months, and then only allow $500 to be exchanged at the bank for $50, else it must be deposited into an account. The money that is saved from government benefits will more than pay for the exercise.

  4. More from the RBA last year which was conveniently left off this site:

    “As noted, it is not possible to estimate the extent to which cash, or any particular banknote denomination, is used in illegal activities. However, liaison with AUSTRAC (Australian Transaction Reports and Analysis Centre) and the Australian Crime Commission suggests that it is the $50 denomination – rather than the $100 – that tends to be preferred by criminal elements because of its ubiquitous use in legitimate transactions. This suggests that to the extent that the $100 banknote is being used for nefarious purposes, any phase-out may not be particularly disruptive to those engaged in such activities.

    “..liaison with major cash industry participants indicates that increases in overseas demand are a fairly usual occurrence when the Australian dollar depreciates. Part of this demand is likely to stem from the increased attractiveness of Australia as a destination for tourism and education, with both of these groups of visitors tending to be large users of cash.

    Plenty of further arguments against phasing out cash / large denomination notes:


    Leith, you were praising India for their demonetisation of ‘large value’ notes the last time this came up, how did that work out for them?

    Why don’t you draw an obvious link between the increase in tourists (in particular Chinese) who are probably large users of these notes for travel here?

  5. Plenty of pensioners hoard notes to pass the assets test.

    They are doing it tough, sitting in multi-million dollar homes with hundreds of thousands of cash in the safe, complaining about being poor.

  6. Seems like a bit of a stretch to say tradies are hoarding $100 bills. It’s only anecdotal, but whilst they may accept cash for jobs, none of the the tradies I know are sitting on wads of $100 notes stuffed in their couch. They tend to put notes back into circulation pretty quickly. Again anecdotally, even if you got rid of the $100 note, none of them are going to knock back $50s because it’s slightly less convenient. Nor is your average drug dealer.

  7. Tradies sit on piles of $50s

    Chinese stuff $100s in suitcases to buy houses.

    $100s are also favoured by employers of foreign students who require wage ‘rebates’ /sarc

  8. Hundreds of billions of dollars of electronic accounting entries created to spray at asset prices.

    Hundreds of billions of dollars sucked into the country for unproductive purposes.

    But we need to worry about $100 notes?

    It is such a shame that Steve Jobs sold his reality distortion field to the banking industry before he left as it really does work a treat.

    • Amazing that authorities claim they can’t do anything on some issues and the issue is verboten to talk about, yet when some issue serves entrenching or expanding their sphere of power suddenly it is talked about and something can be done about it.

  9. huge cash piles in excess of $20,000.???? Please !
    The opportunity cost of holding cash has never been lower. After going through 2008, holding cash and avoiding banks and forgoing the bank interest ( taxable ) seems like a very sensible and prudent act.

    • There is probably more than a few people converting that cash into gold bars as well. Want people to stop hoarding cash, INCREASE interest rates. Problem solved.

  10. Overheard a Chinese lady quietly ask to withdraw $1M from NAB Doncaster Shoppingtown last week, bank teller had no idea what to do and had gone into the back office as I left.

  11. Just put a massive tax on land or tap water and rebate $5000/year to each poor voter.

    And stop giving out work visas for $0 each! Charge $100k for each one.

  12. All those cheerleading an end to cash will rue the day. Tradies’ cash-in-hand jobs are not going to mend budget (except in the land of the lukewarm IQ). Legalising drugs would actually be a far more effective way of raking in some extra moolah, but that’s a discussion for another day.

    Cash is freedom. Once it’s gone the State will have you for its bitch: you’ll find your bank account subject to the joys of “negative interest rates” and the “one off” raid on your bank account (one off, twice a year) to keep the .Gov apparatus well oiled.

  13. As a retailer I dont see many $100 notes, plenty of $50’s but a disproportionately small amount of $100’s.

    I prefer cash, not because I’m doing anything nefarious but because I dont have to pay bank fees on it – and nobody likes the banks.

    Since the tap-and-go tech came out my retail sales went from 60% card and 40% cash to 90% card 10% cash in six months. I now have some days where I take no cash at all, its all cards. The uptake of this new has been phenominal, everybody from Gran to teens loves it and I’ve spoken to some 20 year olds that refuse to carry cash and simply wont shop at places that dont take cards.