In September of this year, Peter Mair’s submission to the RBA Innovation Review Conclusions created a surprising media splash. Mr Mair, a former RBA official and current finance media commentator, suggested significant and widespread hoarding of $50 and $100 banknotes by older Australians. In the media frenzy that followed, Mr Mair further suggested that “the average pensioner couple could hold up to $50,000 in undeclared $50 and $100 notes to get access to the pension.”
Not surprisingly, these comments set off a media firestorm. The Minister of Finance Penny Wong commented, responding, somewhat tongue in cheek, that she hadn’t been looking under any pensioner’s bed for cash!
The coverage raises the issue of high denomination banknotes in Australia. Are we awash in high denomination banknotes in Australia? Is Australia out of line with its international peers? Where are all those $100 notes and what are they being used for?
According to the CPSS “Red Book”, the 2011 value of currency (both banknotes and coins) in circulation per inhabitant in Australia is $US 2685, above the CPSS international average of $USD 1624 and well above countries such as Canada and South Africa. However Australia is well below a number of jurisdictions including the US, Euro area, Hong Kong and Singapore.
Source: CPSS – Red Book Statistical Update
As well, Australia’s use of $100 as the value of the highest banknote is not out of line with international practice, being close in value to the US ($100), New Zealand ($100), UK (50 pounds), Canada ($100) and Japan (10,000 yen).
Indeed it is the Euro area, with its 500 Euro note (equivalent to about 620 Australian dollars) and Switzerland, with its 1000 Swiss franc note (equivalent to about 1050 Australian dollars) that have notes of very high value.
While Australia is not out of line with international practice, the specific location and use of higher denomination banknotes in Australia remains perplexing.
Tracking cash use is notoriously difficult and statistics about cash use remain spongy, particularly when compared to the more precise statistics available on cheques, card and electronic payment use.
In a study of banknote quality, the RBA suggests that larger value notes, in particular $100 banknotes, are not used regularly in transactions but rather used as a store of value. Despite Mr Mair’s interesting hypothesis of cash hoarding by age pensioners, actual research by the RBA on cash holding by Australian individuals finds that, on average, Australian individuals have closer to $90 in cash on hand at any one time. Even Australians aged 60 and over have an average cash holding of $130, a far cry from $50,000.
It could be argued that these survey results disguise larger cash holdings by a minority or that the respondents methodically lied in the surveys, given the deception and criminality involved. Indeed, cash at hand is not exempt from the age pension means test and not reporting these assets is potentially a criminal offence.
While larger denomination notes are not heavily used in retail transactions, $50 bills are now very common in ATM withdrawals. As well and somewhat surprisingly, the average over the counter cash withdrawal from a branch in Australia is a whopping $1400.
Though many of us don’t see or use $100 notes in an everyday retail environment, RBA statistics do state that cash is still used in one-third of face to face transactions over $100.
Overall these statistics suggest an infrequent but significant use of $100 notes in particular face-to-face purchases. Indeed one of Australia’s leading appliance and electronic retailers was using, until recently, the tagline of “Pay Less, Pay Cash”, suggesting the sectors where such cash purchases may occur. Overseas research does identify the persisting use of cash for electronic goods, white goods and used vehicles, likely driven by a desire for “delivery versus payment” and the perceived high costs of card acceptance.
In addition there is the issue of the use of large notes in the grey and illegal economies, itself a very challenging issue to measure. Recent research from Harb and Bhattacharya at Deakin University suggests the illegal economy is equal to about 2 to 3 per cent of gross domestic product. Widespread cash hoarding by age pensioners could be part of this, but Centrelink statistics identify underreporting of income and false reporting of personal arrangements, rather than asset hiding, as the vast majority of Centrelink fraud. Mr Mair’s comments remain, at best, an interesting but untested hypothesis.
Without much firmer evidence, phasing out high denomination notes would be of questionable value in policy terms. The other alternative put forward by Mr Mair, of maintaining high denomination banknotes but discounting their value based on their age, would create a compliance burden of unfathomable complexity for Australian consumers and businesses.
Further exploration into who holds or uses $100 banknotes and why, would help us understand the resilience around cash usage. But the solutions to their continuing use will be less about making it harder to hold or use cash but more about making available the digital alternatives that can address both unmet existing and possible future payment needs.
