Future Forum | Bank of England

Why is there so much cash in circulation?

Ian Collier
Ian Collier | 3 months ago | in Money, Money, Money

I was surprised when I discovered that there was approximately £1000 of cash in circulation for every man woman and child in this country.

With the vast majority of citizens having little or no savings, one wonders who holds this cash.

Most people one talks to never use £50 notes or have even seen one in months. But the number of £50 notes in circulation is increasing rapidly.  Possibly these notes are used for illicit purposes or hoarding of large amounts of cash by the few.  Why do people need to hoard cash if not predominantly for illicit reasons?

Abandoning these notes would reduce hoarding and illicit transactions.

What do people think would be the outcome if the £50 were retired or replaced by a new note only replaced by depositing their old notes into a bank account and withdrawing the new notes, hence creating transparency.

Neelu 3 months ago

Thanks Ian for your thoughts. Indeed I am surprised by your stats. I too, never usually never use cash. Your exact idea was executed in India last year through the demonitisation exercise with an attempt to get black-money out of the system with the ban on 500 rupee notes.

Ian Collier 3 months ago

Yes the idea by PM Modi was good, but poorly planned and now they are not much more advanced although a vast number of people opened bank accounts.

David Fagleman 2 months ago

It was very poorly planned!

Ian Collier 3 months ago

The public will not call for the abolition of cash. They enjoy the option, even if the option allows for illicit purposes.

Ian Collier 3 months ago

Of course the vast amount of cash transactions are perfectly legal.

Ian Collier 3 months ago

The problem will arise when the use of cash becomes very expensive to provide. At that time those already disadvantaged by having to use cash will become even more disadvantaged

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Shelley (BoE Moderator) 3 months ago

Interesting stats - thanks for sharing Ian!

Sabrina Rochemont 3 months ago

This study from the Reserve Bank of Australia (March 2018) analyses the demand for high denomination banknotes in Canada, Australia and the UK. Some useful insights there...

Andrew (BoE Moderator) 3 months ago

Many thanks Observateur for this link - looks like some interesting analysis from our friends at the Reserve Bank

Ivoni Mataj 3 months ago

Thank you Observateur for this interesting study.

The increase of high-denomination banknotes in circulation in UK, Australia and Canada,due to overseas demand and changes to central banks policies, indicates that:
1- availability of cash depends on demand and supply.
2 - external environment is a very important variable;
3- the role of the central bank continues to evolve.

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Ellen (BoE Moderator) 3 months ago

Thank for your comments Ian. I think you could argue that some people hoard cash because they prefer to hold their wealth in the form of tangible assets which they can access quickly. In this instance, there may be a preference for higher denomination notes to minimise physical storage requirements.
The £50 is also used for a variety of legitimate means e.g. higher value purchases and tourist spending. It is often sold by bureaux de change to overseas visitors, for example, for spending later on in the UK.

Ian Collier 3 months ago

Of course £50 notes are used for legitimate reasons, and probably most are used for legitimate reasons.
May I ask you when you last used a £50 note or even when you last saw one?
But their issuance is increasing rapidly.
The level of Notes in Circulation per head of population is so great that it is clear that much hoarding is taking place.
Of course many do prefer to hold cash rather than use banks which they may not feel trustworthy. Witness the jump of NIC at the time of the 2008 financial crisis.
However, the requirements for illegal immigrants whoneed payment in cash, and the situation around what is called "modern day slavery" may also be contributory factors.

Adrian Cole 2 months ago

Personally, I don't think hoarding is a problem, its another form of saving, and has been pointed out by others, many people still don't trust high street banks choose to keep some funds outside banks (gold coins are also popular).

Removing cash from circulation is an affront to financial privacy and it also does not help the 1.5 million people working in the UK who do not or cannot get bank accounts. Using cash is also crucial for people who struggle on low budgets and can easily get into debt with electronic payments.

The experience in India will be one for the world to learn from - especially as the unbanked population is far higher than in the UK.

I do wonder if there is any real public research data on the industries or market sectors that use cash the most heavily, but given its anonymity it may be hard to determine accurately. Hotels, antique dealing, gambling, horse trading, market traders, car washes, second hand car sales, event catering, private transactions, window cleaners, taxis etc.. the list is likely very long.

Crime is of course a problem (be it financial crime and the lost taxes or the actual crime itself), but it was ever thus. Use of cash for crime can take many forms, but I dare say that it's not the cash that's the problem per se - 2 £50 notes are easily replaced with 5 £20s and the crime goes on. Criminals also use mobile phones, the internet and many other modern conveniences for nefarious reasons and we don't want to ban those.

Ian Collier 2 months ago

Thank you for your comments.
First may I say that hoarding is not a major issue in itself. On the contrary the Bank loves it as it adds to the profit they make from Seignior age.
Second, we may all welcome the use for cash if we get a Stalinist government which raids our bank accounts (don't laugh, its very possible right now).
The point you make about crime is disappointing. So much crime, particularly violent crime, is because of cash or fuelled by the use of cash to hide ill-gotten gains.

Adrian Cole 2 months ago

"The point you make about crime is disappointing. So much crime, particularly violent crime, is because of cash or fuelled by the use of cash to hide ill-gotten gains."

Sorry, maybe my point wasn't made clear, I don't doubt it, but how do we know is the physical cash thats the root of the crime? Not social deprivation, lack of education, of life opportunity etc. Is the crime rate lowering in those counties that are abandoning (or controlling) the supply of cash? I'm thinking Sweden, Norway and India for different reasons. Sweden and Norway has been due to changing consumer habits, India due to government policy on large demonisation notes (and limits to personal ownership of gold).

I just don't see how removing £50 will reduce crime at all. I (genuinely) would love to see some evidence of this - not that I'm dismissing your hypothesis, I have no evidence to the contrary.

Re: your point about a stalinist government raiding bank accounts - I do agree with the sentiment, whether it's done directly or through stealth by inflation or demurrage.

Shelley (BoE Moderator) 2 months ago

Thank you for sharing Adrian!

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David Fagleman 2 months ago

Hi Ian. When thinking about the amount of notes in circulation it's imporant to take into account 1) the BoEs figures include all old series notes that have yet to come back and exchanged for new (e.g. old white fivers, paper £5 and £10); 2) there may old be so much cash in ciruclation to ensure that the c.70,000 ATMs and thousands of self-servcie and ticket machines in the UK have cash to dispense (in other words, the cash supply chain and points of acces have increased both in size and number over the past 10-15 years, although this is starting to decline in ATM numbers)

On the £50 - the BoE has annouced that this will, at a yet to be determined date, become a polymer banknote, providing an opportunity to track where all the current paper £50 come in from and then where the new ones go! Quite a task but one that will be very interesting and provide some evidence on the use of our highest denominational banknote.

Ian Collier 2 months ago

David, we are talking over £1100 for every man woman and child in the country so it is the sheer magnitude that is stunning.
Hoarding and keeping cash under the mattress instead if in banks is not a crime, but much of the cash may be being hidden because of illicit events.
I will let you think if £1100 for every man, woman and child seems excessive or not.

Sabrina Rochemont 2 months ago

Do we know if for efficiency reasons the float in ATMs has increased? This could help explain some of the cash in circulation paradox, as well as the recent appeal to cash machine raisers.

Ian Collier 2 months ago

No I don’t if average “float” in ATMs has changed. But we do know that the number of ATMs has reduced so if anything that increases the paradox

Sabrina Rochemont 2 months ago

Possibly, but it would be good for someone from the industry on the forum to validate or otherwise. As the cash in circulation paradox applies in all developed countries (bar Sweden maybe? not sure) - I cannot help thinking that a business pattern has changed instead of the usual behavioural explanation: the suspicion is due to the very different attitudes towards cash in various countries, yet, same result? Something does not add up (and illicit activities have probably gone digital too).
This could explain as well the recent, or at least perceived (UK) rise in spectacular ATM attacks: would criminals go to that extend for a small heist?
Maybe I should ask them, if I can find one (be reassured, I don't know one)

Ian Collier 2 months ago

We no that the BoE acknowledges that circa 50% of cash is used either for hoarding or illicit purposes.
What could have changed to create the paradox?
More hoarding? Yes maybe. Possibly by people who do not trust the banks (probably not substantial), people hiding money from authorities (yes possibly but it has always happened so growth probably not great) or people who cannot keep their money in bank accounts for various reasons. Illegal immigrants find it difficult to open bank accounts and get paid directly into them. With the strong migration of immigrants throughout Europe, this might be the most realistic cause. But this is just subjective from me.

Ian Collier 2 months ago

"know" not "no" in first sentence

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Amy Buckingham 1 month ago

This idea has been advanced to the current phase