Interesting Market History

The Not-So Curious Case of Britain’s ‘Missing’ Cash

Paper money will never fully be accounted for.

Quick, alert Miss Marple! There is a grand mystery afoot: $67 billion (£50 billion) of cash is missing in the UK! That, at least, is the headline finding from a parliamentary report getting wide attention from headlines and politicians alike. But before you start hunting for Britain’s DB Cooper, consider the details. According to the British Parliament’s Public Accounts Committee (PAC), around three-fourths of the UK’s paper money supply isn’t being spent regularly. Politicians are up in arms over the Bank of England’s alleged failure to trace this “missing” cash. The PAC warns it could be out of the country, stuffed in British couch cushions or lining gangsters’ pockets, and politicians are demanding that the BoE do something to find these so-called undeclared savings. The BoE’s response was a delight: “Members of the public do not have to explain to the Bank why they wish to hold bank notes. This means that bank notes are not missing.” They are out in the wild, being bank notes, and that is that. However annoying to politicians this might be, it seems like the most beneficial response to me, as recent history shows problems arise when politicians try to tackle this problem.

First off, here is a partial solution to the mystery. When I left Heathrow a few years ago in the pre-COVID era, I didn’t feel like dealing with currency exchange fees and decided just to hold £85 in bills for the next time. (The ECB, Swiss National Bank and People’s Bank of China might appreciate knowing there is also a handful of euros, francs and yuan in my piggy bank as well.) I’m sure this isn’t unique to me. Many international travelers keep foreign cash for a future trip or give it to relatives as souvenirs. This is normal, non-nefarious behavior.

So is keeping emergency cash on hand at home, however unwise it may be. With all the sour sentiment toward banks and talk of negative interest rates, is it really so weird that people would feel more secure having a hidden cash trove in their personal castle, where it is immune to bank runs, account fees and potential erosion from a negative interest rate, if the BoE enacts one? Perhaps it isn’t the most logical or beneficial response, and not just because it doesn’t consider catastrophes like fire or robbery. But the mindset is understandable, and not just because I have watched my fair share of Doomsday Preppers.

The third potential residence of this missing cash, the criminal underworld, is, sensibly, politicians’ primary concern. That is totally understandable. But drug running, trafficking, terrorism, other illicit activity and general graft, unfortunately, aren’t problems you can solve simply by finding cash. India tried to use a cash call to clean up its own underground economy a few years back. Like officials in most major nations, policymakers there believed large-denomination banknotes were monopolized by criminals who transact with big briefcases of big bills. Which might be true! Their solution was to declare 500- and 1,000-rupee banknotes in circulation invalid on November 8, 2016, and give people 50 days to exchange their “demonetized” notes for new 500 and 2,000-rupee bills. But they set the per-capita exchange limit at 4,000 rupees (later raised to 4,500, then dropped to 2,000), on the theory that regular law-abiding folks would have less than this in cash, while the criminals would have much more. So, the theory went, they would be barred from exchanging their cash, said cash would become worthless, they wouldn’t get the new banknotes, and their criminal enterprises would dry up. The government’s initial projection estimated 20% of demonetized notes wouldn’t be exchanged, and if that came true, they would have seen it as a victory.

According to a post-mortem by the Reserve Bank of India, however, that isn’t what happened. Instead, 99.3% of demonetized cash was exchanged. Many theorize that crime bosses sent scores of underlings to exchange small batches of cash and even hired others to help. Investigators found some jewelers and electronics shops helped launder cash by issuing backdated invoices, collecting cash and then exchanging it themselves. As for the other goal—stamping out counterfeit money—the outcome was predictable: Counterfeiting simply spread from large bills to small. In short, the central bank determined, it was a failure. The same would likely hold true elsewhere—especially when you consider cryptocurrencies and the dark web could easily facilitate illicit activity. The sad truth is, they often do.

This would all be academic if it didn’t have real-world economic consequences. Because the rollout of the new bills was chaotic, Indian money supply plunged and took several months to recover. The cash crunch was especially problematic for the countless small businesses that operated in what was, at the time, a cash-heavy economy.[i] That caused a sharp slowdown in consumer spending growth, which dwindled from 11.2% y/y in Q4 2016 to 4.9% y/y in Q1 2017, which for an Emerging Market at India’s stage of development is generally considered as bad as a steep contraction in the developed world.[ii] The botched demonetization effort also sapped most of the government’s political capital, stymying other reforms. Overall, it is not a bright spot in India’s recent economic history. It is a case where the attempted “fix” turned out to be more of a problem.

Obviously, British politicians bemoaning the central bank’s lack of “curiosity” in trying to track down the allegedly missing money is light years from India’s demonetization. They aren’t even investigating now! So the chances of counterproductive moves to rein in cash seem pretty low. But ultimately, the curious case of the “missing” £50 billion is one best left unsolved, in my view. Miss Marple and Poirot can stand down.



[i] Card and mobile payments have since soared and represent a larger share of consumption than cash, according to S&P Global.

[ii] Source: FactSet, as of 12/4/2020.


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