The Economics of Crime

Economists apply economic theories to all sorts of walks of life, not least crime and organised crime (organised crime should reduce overall crime, just as a monopoly reduces output in a market). It might be of interest to find that something as mundane as the money supply, and even the denomination of bank notes, can be hugely important when it comes to organised crime.

This article, by Mike Bird at The Wall Street Journal, points out two things about the money base – the amount of money that a central bank prints and puts out into general circulation – and in particular, the existence of large denomination notes. By large, the main target are the €200 and €500 notes the ECB circulates.

It’s long been accepted that such sized notes are the preserve of organised crime, since such people need ways to carry around large amounts of cash to avoid detection. As such, in the UK we only have a £50 note and nothing larger, and the largest note, er sorry, bill, in the US is the $100 bill.

But there’s another issue at the moment, namely the problem with negative interest rates. The Bank of Japan, Japan’s central bank, recently adopted a negative interest rate. Hence the central bank charges banks who deposit cash reserves at the central bank, rather than paying interest. It is to be expected then that banks will do the same with their customers.

Faced with a negative interest rate, i.e. a charge on depositing money with banks, cash then becomes a better option since it has a zero rate of interest (well, it loses value with inflation but if inflation is low or negative, as it is in Japan, then its value is not changing much or increasing). If large denomination bills like €500 exist, then millions of euros can easily be transported around without requiring large briefcases…

Who said the economics of large denomination notes was boring?…