After an absence of nearly twenty years, some cash machines in the Netherlands can once again dispense €100 banknotes on request. Geldmaat, the operator of the country’s cash withdrawal network, has launched a pilot programme at a number of ATMs to assess the demand for this denomination and to identify the customers who choose to use it. The trial will run for approximately six months. Geldmaat and De Nederlandsche Bank expect demand for larger banknotes to increase as a result of inflation.
Remarkably, the €100 note has been largely absent from everyday circulation in the Netherlands for almost two decades. On 12 September 2007, the Dutch newspaper de Volkskrant ran the headline: “Retailers Ban the €100 Banknote”. In that article, I was quoted as saying that €100 notes were not dispensed by cash machines because people neither could nor wished to use them for routine payments. Moreover, €100 still represented a substantial sum of money at the time.
Why the disappearance of the €100 note was hardly a problem
The euro currency system follows a so-called denomination sequence: €1, €2, €5, €10, €20, €50, €100, €200 and €500. This sequence is close to optimal. It allows consumers and retailers to complete transactions as efficiently as possible using the smallest feasible number of banknotes and coins. An efficient cash payment is one in which the minimum amount of money changes hands.
Consider a purchase of €15. This amount can be paid efficiently either with a €20 note and €5 in change, or with a €10 note and a €5 note. In both cases, only two exchanges are required. Alternative methods involve three or more transactions and are therefore less efficient.
For every payment amount, it is possible to calculate how efficiently transactions can be completed when a particular denomination is unavailable. In a 2007 study, I demonstrated that the absence of the €10 and €100 banknotes results in virtually no additional inefficiency. The same cannot be said for the €20, €50 and €200 denominations, which prove to be much more important for the smooth functioning of cash payments.
To test whether these theoretical findings also held in practice, students and colleagues participated in a series of experiments using the Monopoly board game with different sets of banknotes. The results confirmed the theory: the absence of €10 and €100 notes caused hardly any difficulties, whereas the €20, €50 and €200 denominations were far more difficult to do without.
Is inflation bringing the €100 note back?
After all these years, the €100 banknote is making a modest comeback. The explanation appears straightforward: inflation has reduced the purchasing power of €100 compared with twenty years ago.
Some observers nevertheless fear that larger denominations may themselves contribute to inflation. This concern appears unfounded. My research into the Granger causality between larger banknotes and inflation, based on forty years of data from 59 countries, suggests that the causal relationship runs in the opposite direction. Larger banknotes do not cause inflation; rather, inflation creates the demand for larger banknotes. The return of the €100 note should therefore be viewed primarily as a symptom of changing economic circumstances, not as a cause of them.
About the author
Philip Hans Franses is Professor of Applied Econometrics at Erasmus School of Economics. His research focuses on the development and application of econometric methods to relevant and meaningful questions in marketing, finance and macroeconomics.
- Professor
