Denominations Are Getting Smaller. But Not in Switzerland
SMITH BRAIN TRUST – Switzerland’s newest banknote begins circulating this week, and it’s an attention-grabber.
It’s not because the new bills are loaded with futuristic security features (although those are pretty cool), it’s because of their controversially large denomination. At 1,000 Swiss francs (roughly equivalent to $1,000), the banknotes are among the world’s most valuable.
“It’s really a striking thing for the Swiss central bank to do,” says Phillip Swagel, a senior fellow at the University of Maryland Robert H. Smith School of Business Center for Financial Policy and a professor of international economic policy at UMD's School of Public Policy.
By launching the new series of its large-denominated banknote, the Swiss National Bank is bucking a trend shared by the world’s major central banks. The European Central Bank this year is halting the issuance of its highest-denominated banknote, the 500-euro note, a move first announced in 2016. The U.S. Federal Reserve is under similar pressure to discontinue the $100 banknote, with critics arguing that these big-money banknotes make life too easy for criminals. Cash is anonymous and tough to trace. And in large denominations, it’s relatively simple to move around.
“If you think about filling a suitcase with cash, you can put a lot more money in there if you have larger denominations,” says Albert “Pete” Kyle, the Charles E. Smith Chair Professor of Finance at Maryland Smith. “Larger banknotes are very useful in organized crime.”
The decision reflects another trend being bucked in Switzerland, as well: the trend toward cashlessness. Just look at Sweden, where the central bank is predicting the country will be “cashless” within five years, amid the growing prevalence of mobile and other digital payments.
But while cashlessness may suit Sweden, where just 1 percent of the economy is cash-driven, Kyle says Switzerland isn’t ready to break up with its paper money (which isn’t actually paper at all; it’s polymer). The reasons why tell a story of Swiss money.
The stereotype of the Swiss people is that they are efficient and mindful about money, Kyle says. “They have a culture built around banking and thinking about the value of money,” he says. That culture is broadly anti-debt, less reliant on the ease of credit cards and forms of financing that are popular in the U.S. and across most of Europe.
It’s not unusual for a Swiss consumer to count out a stack of 1,000-franc and 100-franc bills for big-ticket stuff like cars, mortgage payments or appliances. They regularly go to the local post office to shell out banknotes to pay utility bills. Groceries, gasoline, fashion, fine dining, it’s all cash-driven. The Swiss like the physical money and they use it.
“The Swiss culture is running in a different direction than, say, Chinese culture,” Kyle says. “In China, people are less concerned with the idea of privacy and more concerned with convenience. Swiss people, on the other hand, like to do things in a manner that can’t be traced by other people.”
It’s consistent, he says, with the long Swiss tradition of bank secrecy and confidentiality. “It’s built into the culture,” Kyle says. For some, he adds, transacting in cash may also come with the added allure of evading some taxes.
It evades something else, too: Switzerland’s negative interest rates.
In a 2017 survey from the SNB, four in 10 respondents said they had at least one 1,000-franc bill in their wallets in the previous two years, with older Swiss people expressing a particular fondness for the largest banknote.
Switzerland’s 1,000-franc note surged in popularity in the past 10 years, since around the time the global financial crisis forced many central banks to drop interest rates to near zero. The Swiss National Bank, in defending its currency, took its monetary policy a step further, installing negative interest rates in a bid to keep currency speculators at bay.
That had a profound effect on Swiss consumers. With the country’s negative interest rates, banks actually charge consumers for keeping money in the bank. Put your money in the bank, and the principal will actually decrease over time, even without your spending it. “You can see how that’s going to make some people want to stockpile banknotes under their mattresses or something like that,” Kyle says. “With negative interest rates, you can put your money in a shoe box and get a better rate of return than the banks would give you.”
Cash is typically used in two ways: as a mode of payment and as a store of value. With Switzerland’s negative interest rates, Swagel says, “the franc is more of a store of value than most other currencies.”
Understanding this, the SNB has imbued the Swiss banknotes with a feature that will keep them from being socked away for too long – they essentially expire. The central bank issues new banknote series roughly every 20 years and then issues a 20-year deadline for all old banknotes to be exchanged for new. After that exchange period, the old bills essentially become worthless. This keeps the money circulating, Kyle explains, at least occasionally and attempts to pull money out of the shadows.
It’s a safeguard that, along with the issuance of new 1,000-franc banknotes, underscores the differences in money for the Swiss and the rest of the advanced world.
“The Swiss central bank is out of step with the practices of other major central banks,” Swagel says.
And it sounds like it will stay that way.
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