Currency

In the UK, Like America, Cash is King—of the Growing Shadow Economy

In an age of digital transactions, demand for British banknotes and coins continues to grow to satisfy off-the-books work.

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Americans are not alone in hoarding old-fashioned cash and in their taste for using the stuff for under-the-table transactions beyond the reach of intrusive officials. Britons, it turns out, love their notes and coins just as much, and for the same reason: the untraceable anonymity the stuff offers. In fact, even as we supposedly enter a digital age of payment apps and electronic transactions, the demand for banknotes continues to increase. That's almost certainly because the portion of the economy taking place of the books is growing, driven by taxes and regulations.

Perhaps unsurprisingly, the increasingly popular "solution" to the situation does not feature any changes to the policies driving people to hide their activities.

What's impressive about the latest estimates of cash circulating in the U.K.'s underground economy is that they're from the Bank of England–the U.K.'s central bank. Official U.S. sources have published papers on off-the-books activity, but an occasional moan about tax evasion is the closest a government institution in the country born out of smuggling and tax revolt has come to admitting that there's a whole lot of greenbacks stuffed under the nation's mattresses. The best American numbers on the subject come from Edgar L. Feige, an emeritus professor of economics at the University of Wisconsin–Madison. His research suggests that domestic holdings of cash dollars add up to $2,300 for every man, woman, and child in the country.

The Bank of England, in its latest quarterly bulletin, says "there is now the equivalent of £1,000 [about $1,500] in banknotes in circulation for each person in the United Kingdom."

The bulletin goes on to parse that a bit more finely.

"The evidence available indicates that no more than half of Bank of England notes in circulation are likely to be held for use within the domestic economy for transactions and for 'hoarding'. The remainder is likely to be held overseas or for use in the shadow economy. However, given the untraceable nature of cash, it is not possible to determine precisely how much is held in each market."

As the BofE points out, there's no easy way to get a handle on how many pound notes are held overseas vs. those fueling un-taxed work and business. But Feige arrived at his U.S. numbers by working out that usual assumptions about overseas holdings of dollars—a currency widely favored over local funny money—were exaggerated. The British pound doesn't enjoy the same worldwide don't-leave-home-without-it status as the dollar, so it's a fair bet that most of the U.K.'s banknotes are back home, keeping the local economy healthy and hopping.

And demand for banknotes is increasing faster than the size of the official economy.

The BofE downplays the idea of a growing shadow sector, but economists aren't convinced. Last year, in a column for the Centre for Economic Policy Research, Charles A.E. Goodhart and Jonathan Ashworth pointed to the growing ratio of physical cash to GDP in the U.K. as evidence that off-the-books transactions are increasing relative to the official economy.

"The grey economy, defined as otherwise-legal activities that are deliberately not recorded in order to avoid or to evade taxation, has almost certainly been expanding, and probably quite fast."

The reason is no surprise to anybody who has ever filed a tax return or negotiated a favorable cash price with a plumber. Goodhart and Ashworth point to a desire to avoid VAT, National Insurance (social security) contributions, and income tax as the reason "the size of the grey economy has expanded by around 3% of UK GDP since late 2007."

Feige agreed when he described the ravenous demand for cash in the U.S. as evidence "individuals and  firms prefer to hide from the government either to avoid taxes, regulations or punishment for illegal activities."

And the BofE bulletin points out the commonly accepted wisdom that people hide in the shadows to "circumvent or otherwise avoid government regulation, taxation, or observation."

So…What to do?

Just a thought, but if people find taxes and regulations so burdensome that they would rather work off the books, could we pull many of them back into the official economy by reducing that burden?

Silly me.

Writing in The Guardian, Dave Birch, of secure electronic transactions consultancy Consult Hyperion and the Centre for the Study of Financial Innovation, suggests what seems to be a popular "solution" among right-thinking pundits and economists: get rid of cash. He warns that "cash is a mechanism for greatly reducing the cost of criminality" and insists "it is time for Bank of England to develop an active strategy to start reducing the amount of cash in circulation."

It would be easy to scoff at the idea if Birch was alone in his suggestion that the problem of taxes and regulations can be ignored if we leave people no means to escape from them, but he's not. It's the same lock-the-exits approach favored by German government economic advisor Peter Bofinger, Citibank chief economist Willem Buiter, and Harvard University's Kenneth Rogoff.

Bofinger's colleague, Lars Feld, immediately objected that notes and coins are "printed freedom" that allow people to escape from state control—which he characterized as a good thing.

That is a good thing—both for the freedom itself, and for the signal that mass escape provides to policymakers that maybe they need to rein themselves the hell in.

But there's also an impractical side to unilaterally eliminating cash. People are pretty good at finding substitutes for all sorts of things—British currency included. Faced with a shortage of currency from the home country, early American colonists used tobacco as money, both physically and in terms of drafts drawn on warehouse stores of the stuff. Why would modern Britons be any less creative? 

In an email to Birch, I asked him the same questions I posed months ago to Bofinger, Buiter, and Rogoff: Wouldn't people denied locally issued notes and coins simply turn to foreign currencies, or eternally popular gold and silver? The modern world now offers new options in the form of bitcoins, which can be used across distances.  Isn't there a risk (if you want to call it a "risk") that eliminating cash would further reduce government control over much of the economy and increase reliance on alternatives to official currency?

Maybe the cash-haters are all sharing notes, but Birch emulated the other would-be banners of notes and coins in ignoring my questions.

Or maybe—and I suspect this is the real answer—they just can't come up with answers that they find palatable.

Pundits and big-government-friendly economists may not like it, but cash is popular in Britain and the United States alike because it helps people hide their activities from the authorities. Those authorities can change the tax and regulatory policies that turn off so much of the population—or they can continue to watch the economy trickle away into the shadows.

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    1. We have somebody for this. Watch out you don’t get fisted.

  1. Cheers!
    “but cash is popular in Britain and the United States alike because it helps people hide their activities from the authorities.”
    The purpose is not to hide my activities but to not have every single action controlled by anyone.
    I have experienced the use of dollars & euros exchanged in countries without any-or weak banking systems. Such as when we dismantled much of the functioning society in Iraq. Cash represents freedom to live, eat, or escape as your circumstances dictate. “They” would need to come & try and take my money out of my well armed hand.

  2. As a U.S. resident and just recently getting a mortgage I can tell you, cash works. From the time you apply for a mortgage until the time you actually sign they (lenders) look at every transaction you have, credit, deposits, withdraws, payments, etc. They question everything, down to wanting to know where a deposit for $100 comes from. It took 6 months for our house to be built and the process to finish. In that time I did some “one the side” work, made sure to cash the checks instead of depositing them. Didn’t want any questions asked.

    Really a big pain in the ass. But had to do it. We also tend to pay with cash most of the time.

  3. I’ve been building a small stash of U.S. (Cdn) cash and silver (and gold where I can) reserves.

    My paranoid, skeptical side (Dale Gribble talking over my left shoulder) tells me to. For a while I was one of those ‘oh please nothing will happen’ optimists (and generally I remain) but the mere fact assholes like Sanders and Krugman are around and have many, many cult-fans worries me a tad. Not to mention, and I think more of a concern, I’m not so sure about these Top Men academics anymore. Their goal is to expand state control which (wittingly or not) leads to less personal liberty.

    Better to be safe than sorry.

    1. Silver is at an all time low. It also has many uses besides currency. I have a small stash of copper tubing as well. It can be cut down into portable currency, or used in making a still. Anyway I am thinking along similar lines as you Rufus. The stuff does not cost that much, it won’t go bad, and if I do not need it I can sell it off. However it’s not a bad insurance policy if I have to participate in the grey, and black markets.

      1. Where do you get your copper?

        1. Hardware stores, Home Depot, or a plumbing supply stores.

          1. Oh yeah. You can also pick the stuff up for free from old industrial fridges, and ice making machines.

            1. I see people doing that all the time.

              1. One mans trash =D

  4. Google pay 97$ per hour my last pay check was $8500 working 1o hours a week online. My younger brother friend has been averaging 12k for months now and he works about 22 hours a week. I cant believe how easy it was once I tried it out.
    This is wha- I do…… ?????? http://www.online-jobs9.com

    1. Do they pay in gold or silver?

  5. the more you regulate commerce the more people will find a work around. further proof that more regulations does not create law and order but greater anarchy the one thing they are trying to prevent.

    1. They aren’t trying to prevent anarchy. They are trying to institute their control by regulating more and more.

  6. Another point is that in an era of negative interest rates on the horizon, it is cheaper to stash your cash under the bed that it is to pay the bank to store it for you.

    1. There was a semi serious proposal to ban cash in the UK recently for just this reason…

  7. Hard currency is an extremely tiny amount of the money in circulation and the cash-based “shadow economy” is a very small part of the overall economy. It’s hardly worth the government’s time to go after these “tax evaders”, especially considering the gov gets a decent cut from sales tax / VAT and those who take are honest with their 1099 income…

  8. The Cult of Central Planning is full of people who have nightmares about all the unregulated and untracked activity that the Peasants engage in. We really should relieve their anxiety ? permanently.

  9. Get rid of Cash altogether.
    Eliminate Cards.
    Use only Biometric to identify the individual.

    With the elimination of cash, we’ll see
    – the elimination of tax evasion
    – illegal immigration will be a thing of the past as no one not in the system would be able to buy
    stuff. There would be no need for a fence, ICE, etc.
    – elimination of organized crime as we know it.

    1. And a barter system, higher unemployment, and greater welfare expenditures, as well as loss of anonymity in personal business transactions and giving the government the ability to seize all your money with the push of a button.

    2. Fellate the state, who do you think will maintain a biometric database?

      These stupid and monumentally stupid….you are in the latter category puss.

  10. Unfortunately the problem of shadowed economy is common for all countries, despite the level of their development. The growing taxes and extra charges can explain why people choose to solve financial issues in the shadow. However, in such way the economy is really getting worse and the government can’t support it. To change this situation the government needs to use some instruments to attract people to show their finance. For people it can be also useful to check best payday loan companies UK list to be aware about available financial options. This can help to find necessary money to invest in business.

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