RDP 2018-12: Where's the Money? An Investigation into the Whereabouts and Uses of Australian Banknotes 1. Introduction

Relatively strong growth in the value of outstanding banknotes has been a consistent feature of the Australian economy for many decades.^[1] For example, over the 10 years to June 2018, year-ended growth in the value of outstanding banknotes averaged 6 per cent, bringing the total value to approximately $76 billion. Ongoing growth has occurred despite an observable shift away from cash as a means of payment, a phenomenon observed in many countries.^[2] To explain these diverging trends, it has been argued that the share of cash used for non-transactional purposes, particularly as a store of value, must be increasing.^[3]

This paper aims to provide an estimate of where the approximately $76 billion worth of Australian banknotes – or $3,000 per Australian – are held, and for what purposes these banknotes are used. Broadly speaking, at any point in time the stock of outstanding banknotes can be considered to fall into one of the following categories:

1. banknotes used to facilitate legitimate day-to-day transactions in Australia;
2. banknotes that are held, either domestically or overseas, as a store of value, for emergency liquidity or other such purposes (referred to as hoarding);
3. banknotes used in the shadow economy (either to conceal legal transactions to avoid tax, to pay for illegal goods or to store wealth generated by the sale of illegal goods); or
4. banknotes that have been lost or destroyed.

Individual banknotes, of course, are able to move between these different categories over time.

Cash, by its nature, is anonymous and hard to trace, and so any attempt to estimate where outstanding banknotes are and what they are used for, including that made here, is bound to be an approximation at best. To mitigate this, where possible we use a variety of techniques to estimate the same quantity, with the idea being that, if the errors of each technique are imperfectly correlated, then the range of estimates produced will provide a better indication of the truth than any individual method could. To preview results, our estimates suggest that:

1. around 15 to 35 per cent of outstanding banknotes are used to facilitate legitimate transactions within Australia;
2. roughly half to three-quarters of outstanding banknotes are hoarded; of this, we can allocate 10–20 percentage points to domestic hoarding, and up to 15 percentage points to international hoarding;
3. around 4 to 8 per cent of outstanding banknotes are used in the shadow economy, of which, 3–5 per cent are used to conceal legal transactions, 1–2 per cent are used to purchase illegal drugs, and up to 1 per cent are used to store profits from illegal activity; and
4. around 5 to 10 per cent of outstanding banknotes are actually lost.

Given the number of dissimilar methods that we use to estimate transactional demand, all of which give broadly similar results, we can have reasonable confidence that the true stock of transactional banknotes used for legitimate purposes falls somewhere within our estimated range. Our estimates of lost cash accord with international experience, and so again seem unlikely to be too far off the mark; and while our ‘transactional’ shadow economy estimates are less certain, our transactional demand estimates mentioned earlier – some of which implicitly include transactional cash used in the shadow economy – suggest that they are at least of the right order of magnitude. By implication we can have reasonable confidence that our overall hoarding estimate of roughly half to three-quarters of outstanding banknotes is broadly accurate.

The allocation of total hoarded banknotes to domestic hoarding, international hoarding, and the concealment of profits from illegal activity, however, remains quite uncertain. Our domestic hoarding estimate, which is based on a survey of households, is almost certainly too low: the distribution of domestically hoarded banknotes is likely to have a long right tail (that is, most people have little to no hoarded banknotes, while a few people have very large hoards), which makes it difficult to accurately estimate average hoarding; and people who choose to hoard banknotes are, for security or other reasons, unlikely to advertise this fact and so may not tell survey collectors their true holdings. Our estimates of overseas hoarding and the hoarding of profits from illegal activity are also very uncertain, and it is possible that these are larger than suggested above.

Footnotes

We will use the terms ‘banknotes’ and ‘cash’ interchangeably throughout the paper. [1]

For example, Doyle et al (2017) document that in 2016, electronic payments surpassed cash as the most common payment method. [2]

See, for example, Davies et al (2016) and Flannigan and Staib (2017), as well as Flannigan and Parsons (2018) for a comparison of trends in Australia, Canada and the United Kingdom. [3]