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Indian Prime Minister Narendra Modi last month sprung a surprise on his nation by ordering the withdrawal of 500 and 1,000 rupee notes from circulation. Meanwhile, the European Central Bank (ECB) announced that it is cracking down on high-denomination notes, by gradually phasing out the €500 bill. And then there is the Swedish central bank, the Riksbank, which announced last month that it is examining the possibility of eliminating all national banknotes, and replacing them with a Swedish digital currency.
Welcome to the surprising twists of the global ‘war on cash’.
Modi’s decision to eliminate the 500 and 1,000 rupee notes and replace them with new designs has been justified as a blow against corruption in the country. As he said in his address to the Indian people on 8 November, India was ranked 76th globally in the latest available Corruption Perceptions Index 2015, not a position to be proud of.
Furthermore, in January 2016, Transparency International stated that India was ‘falling short’ of its promises to clamp down on corruption in the country. As an issue that has featured heavily in election campaigns, and one that Indians themselves think has been handled ineffectively, the latest decision was intended to hit those who obtain cash illegally or who shielded their cash from the tax authorities.
Under the scheme, the old notes could be swapped for the new ones, but owners of such notes were recorded and were called upon to explain how they came to have the cash.
However, the disadvantages inherent in India’s approach are more severe than the anticipated benefits, as subsequent developments quickly made obvious.
The consequences are threefold. First, in a cash-heavy society such as India’s (with 85% of the cash in circulation consisting of 500 and 1,000 rupee notes), there has been an impact on the way in which citizens across the country can pay for necessary services and conduct transactions.
Queues for cash machines were witnessed across India, and some banks were reported to have run out of cash in the week following the announcement. Restrictions on cash will be felt in particularly poor communities, where locals cannot rely on electronic payments to facilitate day-to-day transactions.
Second, despite the fight against the black market and illicit financial flows being a key reason behind the decision to ban the notes in question, Modi has introduced new 500 rupee notes and also a higher denomination 2,000 rupee note.
High-denomination notes are key to the illicit economy, where they are highly prized by those transferring large amounts of cash. So, while Modi may have hit one generation of black marketeers with his measure, he has done nothing to prevent the rise of another, once the new high-denomination notes are in circulation.
The third reason why this move will not have the intended benefits is that the Indian monetary authorities forfeited something that cannot so easily be won back – trust. A central bank that declares its notes worthless (even after a prescribed period of time, as in India) is one that will struggle to convince its citizens that it can in fact be trusted not to do the same thing more frequently in the future.
The Indian measure could, therefore, have the effect of pushing people to store money in currencies that seem more secure and are not subjected to the vagaries of the Indian government, such as the US dollar or the euro.
Meanwhile, in Europe, the ECB, which issues and manages the euro, took the lead in showing how the fight against large cash denomination should really be run. In May, the ECB announced that the €500 note would be gradually phased out and would not be replaced by a higher denomination note.
This was helped in part by the fact that Germany is less reliant on cash now than when the Eurozone was first created; it was pressure from Germany that persuaded the ECB to create the €500 note to appease those citizens who were accustomed to using the 1,000 Deutsche mark note, which was worth around the same as €500. As cash usage has waned in Germany and other European states, the ECB has been able to eliminate high-denomination notes to crack down on illicit financial flows.
Within criminal circles, the €500 note is known as the ‘Bin Laden’ because of its propensity to be used for money laundering and terrorist financing due to the ease with which a large value can be stored and transferred. However, unlike in India, the ECB notes will continue to be redeemable by the ECB even after it ceases to be issued, which is expected to be around the end of 2018.
So, a variety of criminals may no longer find it so easy to move around large quantities of cash. However, at the same time, the ECB has protected its essential reputation as an issuing bank which does not demonetise its own currency notes.
While the ECB has taken steps to eliminate a certain note, another – non-Eurozone – EU member state is looking into moving away from cash altogether. Hoping to be the first central bank to issue its own virtual currency, the Riksbank – the world’s oldest central bank – announced last month its intention to explore the feasibility of creating electronic krona (e-krona).
As Deputy Governor of the Bank Cecilia Skingsley noted:
‘The less those of us living in Sweden use bank notes and coins, the clearer it becomes that the Riksbank needs to investigate whether we should issue electronic money as a complement to the money we have today’.
Ranked at number three globally in the Corruption Perceptions Index 2015, Sweden’s move is less focused on tackling corruption and more a reflection of the way in which Swedish society has developed and moved away from physical cash.
However, even if it is not the principal reason behind the research, creating a digital currency will result in black money being brought into the legitimate banking system, and illicit financial activities being more difficult to conduct in the future, since presumably all the electronic currency transactions would be traceable.
While each one of these examples is underpinned by its own logic, it is clear that the continuing battle against illicit financial flows is now focused on the technical aspect of cash. What will be interesting to follow in the coming years is the debate that will emerge between fighting criminality and the need for governments to keep in place a monetary instrument that provides its citizens with a way to conduct payments in relative privacy. And, hopefully, with more efficiency than the latest moves in India.
Banner image: People standing in queue to withdraw cash from a bank in Kerala, India, following the government's currency demonetisation decision. Courtesy of Arunvrparavur/Wikimedia.