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Jakob Wilhelmus
Associate Director, International Finance and Macroeconomics Research
Capital Flows and Finance and Regulation and Systemic Risk
Jakob Wilhelmus is an associate director in international finance and macroeconomics at the Milken Institute. He studies topics relating to systemic risk, capital flows, and investment. Concentrating on market-level information, his work focuses on identifying and analyzing financial data to produce a better understanding of the behavior and underlying structure...
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The Trouble with Going After Big Money

By: Jakob Wilhelmus
May 12, 2016
   
   

Talk of doing away with higher denomination bills has gone on for years on both sides of the pond: In the U.S., recent arguments have focused on the $100 bill, while Europe has targeted its larger €500 bill. Opponents say that high-value currency facilitates criminal activities, such as tax evasion and terrorism financing, by helping to move large sums of cash in marginal size.

It’s for this reason that the European Central Bank’s decision this week to phase out the €500 euro bill (worth about $570) does not really surprise most people. But what’s surprising is the awkward timing of the announcement.

Since the financial crisis, central banks have been having a tough time staying out of the media’s and public’s crosshairs. While it’s normal for an institution to attract attention in times of turmoil and distress, it doesn’t seem sensible to invite scrutiny on purpose. The announcement regarding the €500 bill is ill-timed for two main reasons: negative interest rate perception and the crumbling image of European unity.

At the 2016 Milken Institute Global Conference just last week, thousands of financial experts gathered and discussed a variety of timely topics. One worry kept surfacing in the economic panels: the impact of current negative interest rates. If the ECB’s intention was to calm all the talk about negative interest rates and the boundaries of alternative monetary policy, the decision to get rid of the highest denomination bill was certainly not a step in that direction.

Negative interest rates have generated buzz for quite some time, with more financial institutions and individuals doubting the cost-benefit analysis that has apparently led central banks around the world to believe that the broken sink can be fixed by turning on the faucet. We are now at a crossroads where getting further into negative rates becomes less of an option, and holding cash looks ever more attractive for both institutions and private depositors. Logically, there will be a point where the idea of paying a few cents for every dollar deposited makes you consider pulling out the money. The viability of this option comes down to a physical practicality: Can you withdraw the cash and carry and store it easily? This depends largely on the denomination of available bills—smaller denominations mean a larger package of money to haul, while higher ones make for compact storage.

A Divided Union

Since the formation of the European Union, the image of a united Europe has shown cracks that have been difficult to patch. The reasons have been manifold, from political disagreements, such as the Brexit debate or the ongoing Greece debacle, to ideological clashes over the way monetary policy should be implemented. The latter has intensified amid increasing criticism from German politicians that ECB decisions are too harsh on domestic savers.  At the same time, the public has grown more skeptical about the direction the euro has taken, with banks running out of deposit boxes and spikes in cash held by households since the financial crisis of 2008. And while the ECB need not be concerned with its perception in specific member countries, it has to be mindful of the reality that the European Union is still in a distressed environment.

Even if the ECB had announced its decision under more favorable circumstances, it is highly optimistic to think that suspension of the €500 bill—which will remain in circulation until the end of 2018—will have a major and lasting impact on criminal activities. One important question is whether it is a sound strategy when everyone is trying to read too much into monetary policy. For the U.S., it will likely rekindle talk of getting rid of the $100 bill, but this will hopefully die down with the realization that there are many reasons to keep it as the highest-valued legal tender.

In the end, money is the only tool that allows the public to vote using their economic power. Just as we should be able to voice dissatisfaction with companies by not purchasing their products, we should be able to voice distrust in financial intermediaries by withdrawing deposits. The fact that the same tools that allow free markets and democracy to exist can be misused for criminal activities should not lead to their abolishment.