RDP 2018-12: Where's the Money? An Investigation into the Whereabouts and Uses of Australian Banknotes 3. Lost Banknotes

A certain proportion of outstanding banknotes, while still recorded as being outstanding, are likely to have been lost, destroyed, forgotten about, or else are sitting in numismatic collections and are otherwise unavailable for spending – for the purposes of this paper we will refer to all such banknotes as ‘lost’.

Between 1992 and 1996, the Reserve Bank progressively introduced polymer banknotes to replace the previous paper banknotes. While not withdrawing legal tender status from the old paper series, the Reserve Bank and commercial banks have been removing from circulation any paper banknotes received by customers since this time.

By assuming that all unreturned paper banknotes are lost, we can use historical data on outstanding paper banknote values to calculate an implied annual loss rate, and then apply this rate to outstanding polymer banknotes. Figure 4 shows annual loss rates for paper banknotes, and compares current estimates to those one would make using data from June 2008, with the difference the result of those paper banknotes that have been returned to the Reserve Bank over the past decade (we will return to this later).

A couple of features are worth noting. For low-denomination banknotes (less than $50) there is a rough inverse relationship between the value of the banknote and the loss rate; this extends to paper $1 and $2 banknotes, where we estimate the loss rate at around 4 and 2 per cent, respectively (not shown). This makes sense: people are likely to show greater care towards banknotes of greater value. In addition, the estimated loss rates for $5, $10 and $20 banknotes have changed relatively little over the past 10 years, which suggests that most of these banknotes truly are lost, destroyed, forgotten about, or sitting in numismatic collections.

For high-denomination banknotes ($50 and $100) we see the opposite: the relationship between the value of the banknote and the loss rate is positive. This is most easily explained by past hoarding of these denominations, with some earlier-hoarded banknotes either still in known-about hoards or otherwise forgotten about and genuinely lost. Further, we see that the largest change in the estimated loss rates over the past 10 years occurs with the $100 banknote, followed by the $50. This is also indicative of hoarding, and suggests that stocks of hoarded paper money do gradually re-enter circulation and come back to the Reserve Bank, for example, after being discovered in deceased estates. This also suggests that a non-trivial proportion of the $810 million in outstanding $50 and $100 paper banknotes is not actually permanently lost, but rather still in storage, and that the estimated loss rate for these denominations will continue to gradually fall over coming years.

While we believe that the loss rates of paper banknotes serves as a reasonable indicator for the loss rate of polymer banknotes, there are some important reasons why they may differ. Polymer is more durable than paper, which is reflected in polymer banknotes having longer average life spans than paper banknotes; this should reduce losses caused by disintegration for polymer relative to paper banknotes. Working the other way, the flow of Australian cash overseas has increased substantially over the past two decades, which is likely to increase the number of banknotes lost or forgotten about outside of Australia.

It is difficult to know the net effect of these factors and so we use the minimum loss rate of the paper denominations to estimate a lower bound and the maximum loss rate to estimate an upper bound. This suggests that $4–8 billion, or roughly 5–10 per cent of all banknotes on issue, have been lost, destroyed, forgotten about, or are sitting in numismatic collections.^[5] To put this in perspective, this corresponds to around $170 to $340 per person. Outstanding non-returned paper banknotes correspond to around 6 per cent of the peak in outstanding paper banknote value.

For comparison, when Finland converted from the markka to the euro, Finns were given ten years to redeem old markka banknotes before they became invalid. At the end of that period, 5 per cent of outstanding markka banknotes as at the time of euro issuance had not been returned (Bank of Finland 2012). For the entire euro area, Stenkula (2004) estimates that around 10 per cent of national currency banknotes were not redeemed for euros, with wide variation between countries. Sweden upgraded their banknote series and withdrew legal tender status from the old banknotes over the period from 2015 to 2017 (although old banknotes can still be redeemed at the central bank for a SEK100 fee). As of June 2018, 11 per cent of outstanding banknotes by value were ‘invalid’, which is to say banknotes that are no longer legal tender and have not been returned to the Riksbank (Sveriges Riksbank 2018).

Footnote

An alternative method to estimate lost polymer banknotes would be to use the respective paper denomination to estimate loss rates for each polymer denomination. This is problematic, however, for the reasons outlined above and as the real value of each denomination has changed substantially over time (e.g. Lowe 2018). [5]