Magazine article Foreign Policy

Easy Money: The Case for Killing Large Bank Notes to Win the War on Terror

Magazine article Foreign Policy

Easy Money: The Case for Killing Large Bank Notes to Win the War on Terror

Article excerpt

This year, the European Commission opened a new front in the fight against terrorism. Not, as one might expect, on a battlefield or in a particular military hub, but inside the otherwise dour world of central-bank printing presses. [paragraph] Over the next couple of months, the EU executive body will investigate whether the 500-euro bill, the largest denomination in circulation inside the eurozone, is being used by terrorists in the Middle East to transfer and store wealth. "These notes are in high demand among criminal elements," the commission reported in February, "due to their high value and low volume." So what happens if the commission finds a strong terrorist link? The European Central Bank may stop printing those big bills--and eventually even stop honoring them too. [paragraph] As the threats posed by the Islamic State and other terrorist groups have swelled over recent years, Western security officials have scrambled to find ways to undermine these organizations' logistical operations. One tactic has been to step up bank regulations in order to stop terrorists from moving money via electronic-payment systems.

So far, so sensible. But the problem is that this approach covers only half (if that) of the terrorist money machine. These days, a significant part of the financial flows supporting terrorism is taking place not within 21st-century cyberfinance, but via the old-fashioned medium of cash, particularly high-denomination notes. Indeed, precisely because of the clampdown on cyberpayments and regulated banks, the importance of paper money may now be rising.

Banning large bank notes, as the European Commission is contemplating, might undermine those flows. Consider it, if you like, as the financial equivalent of throwing sand in the wheels of the transfers: A ban might not stop all the illicit ways in which money is moved around, but it will make the attempts logistically harder.

And when it comes to tangible cash, physical details matter. For instance, to carry the equivalent of $1 million in 500-euro notes, you need only a small carrier bag, according to a 2016 Harvard University study overseen by Standard Chartered's former head, Peter Sands. To convert that same amount into $100 bills, it takes a simple briefcase, something not terribly difficult to slip into a plane, train, or car. It's an entirely different beast in the case of packing $1 million in $20 bills: That calls for four briefcases, which aren't easily carried by hand.

Cash usage is, in fact, rising in many countries, despite all the recent hype about financial technology and sophisticated forms of cyberfinance replacing the need for banks or traditional money. In Japan, for example, the volume of cash circulating is equivalent to 20 percent of GDP, up from 18 percent in 2010. In the United States it stands at 8 percent, having risen over the last six years, while in Switzerland and the eurozone, it tops 10 percent, also slightly higher than in the past. In fact, the only region where cash usage has actually fallen this decade is in the Nordic countries.

While those habits are interesting, it's the note breakdown that is actually most revealing--and alarming. Insofar as economists have done studies on cash usage, households generally grab low-denomination notes for everyday transactions and rely on bank accounts when handling larger sums. Indeed, it is rare, say, for an ordinary citizen to pay for milk with a $100 bill or throw down a 500-euro note to buy a pair of jeans; in fact, most EU citizens say that they have never even seen a purple 500-euro note. …

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