Monetary Policy

Access to cash is a far bigger problem than the “missing” £50 billion

On 4 December, the UK parliament’s Public Accounts Committee (PAC) published a report on the production and distribution of cash. The press release was headlined “PAC urges Bank of England to investigate ‘missing’ £50 billion of sterling notes”. This emphasis was unhelpful and drew attention away from the real problems.

The media coverage did at least generate a few amusing suggestions about who might have “run off” with the money (a certain Dominic Cummings featured heavily). But it also encouraged some serious misunderstandings. One member of the House of Lords (more shockingly, an Emeritus Professor of Accounting!) genuinely seemed to think the cash had been lost from the Bank of England’s own vaults…

I’m not even sure that “missing” is the right word. The notes are circulating in the economy, available to spend or invest (and to be taxed when this happens). It’s just that the Bank of England does not have comprehensive data on exactly how all the cash is currently being used, by whom, and where.

That’s not a surprise, since a banknote is anonymous, portable, and can have many potential uses at the same time, acting both as a medium of exchange and as a store of value. Or as a spokesperson for the Bank of England snappily put it: “members of the public do not have to explain to the Bank why they wish to hold banknotes. This means that banknotes are not missing”.

More importantly, the PAC report was actually mainly about the difficulties caused by the declining availability and use of cash. This is a serious worry for people and communities who may not have easy access to cash machines, or internet banking.

There are many valid concerns here. The PAC noted that public bodies “don’t appear to have grasped the full impact lack of access can have on communities, particularly in rural areas, or the real detriment caused to some groups and consumers. Unless the government acts quickly, there are clear dangers of hardship for some individuals and groups if we move precipitously towards a cashless society”.

The PAC report also cited Treasury work suggesting that “2 million people are mostly using cash for their payment needs and that it is the elderly and disadvantaged who tend to be disproportionately reliant on cash”.

These are the serious problems. Professor Kevin Dowd has written a useful overview of the “War on Cash” in the journal Economic Affairs (published by the IEA and University of Buckingham). In brief, the main arguments in favour of doing away with cash (alleged inefficiency of cash payments and the use of cash by criminals) need to be set against the potential costs (including losing the benefits of cash, overreliance on unreliable technology, and the impact on the vulnerable especially the “under-banked”).

I’d add that some people may have been further disadvantaged by the way many shops and cafes have insisted (albeit with good intentions) on contactless transactions during the pandemic.

The £50 billion of “missing” cash is therefore a sideshow, but here are the basic facts. Sterling notes worth £76.5 billion were in circulation in July. The Bank of England has estimated that 20% to 24% are used or held for day-to-day transactions in the UK. Back in 2018, it estimated that a further 5% are held as savings by UK households. That leaves around 70%, or just over £50 billion, “unaccounted for”.

There are a number of explanations. Some of the cash may be used or held abroad. Some will be used for unrecorded transactions in the “shadow” or “informal” economy. But I suspect that the key factor is simply that more people are now happy to hold cash. The 2018 figure of 5% for this category is surely now a huge underestimate.

In part this shift reflects the desire to have a pot of cash put aside as a precaution against some sort of Covid-related crisis. (I myself took out some extra notes at the start of the pandemic and haven’t yet spent them.)

But it also reflects the basic economics of low inflation and the prospect of an even longer period of low interest rates (effectively zero) as a result of the pandemic. This has reduced the opportunity cost of holding cash and made it more viable as a store of value (which is, of course, perfectly legitimate).

In contrast, the risk of cash being used to facilitate serious crime is probably exaggerated. It is more likely these days that large-scale illegal activities are financed electronically (e.g. with crypto-currencies or e-gift cards), rather than suitcases stuffed full of paper notes.

It also makes no sense to single out the Bank of England here. The share of cash that is “unaccounted for” is higher in the US and the EU than in the UK. This is mainly because dollars and euros are available in higher-denomination notes (and are used more widely internationally) than sterling.

Finally, it’s hard to see how any central bank could be expected to track every note after it has left its vaults (or printing presses). The PAC report notes that “the Bank [of England] does not have enough data even to make broad estimates of how much should be apportioned to each category”. But I would be wary of the implications for privacy if the authorities did have the ability to monitor all our cash holdings or spending in some way.

In short, we should focus on the wider issues of access to cash, where some of the most vulnerable in our society face real problems. The “missing” £50 billion is a distraction. As the economy recovers from Covid-19 and when interest rates do eventually return towards more normal levels, it may “reappear” anyway.


This article was originally published on Julian Jessop’s blog.

Julian Jessop is an independent economist with over thirty years of experience gained in the public sector, City and consultancy, including senior positions at HM Treasury, HSBC, Standard Chartered Bank and Capital Economics. He was Chief Economist and Head of the Brexit Unit at the IEA until December 2018 and continues to support our work, especially schools outreach, on a pro bono basis.

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