How Did £50 Billion in U.K. Banknotes Just Go 'Missing'?

The Bank of England has been criticized by lawmakers in the United Kingdom after it was discovered that £50 billion ($67 billion) in banknotes has essentially gone "missing".

A powerful group of MPs that make up the government's Public Accounts Committee (PAC) said the U.K.'s central bank needs to shoulder responsibility for the unaccounted cash and "take a more proactive role in tracking it down."

The Bank of England denies responsibility for the cash, and in a statement said: "It is the responsibility of the Bank of England to meet public demand for banknotes. The bank has always met that demand and will continue to do so. Members of the public do not have to explain to the bank why they wish to hold banknotes. This means that banknotes are not missing."

So just where is that cash? Much like the central bank, independent economist and economics fellow at the Institute of Economic Affairs (IEA) Julian Jessop argues that to say £50bn has gone "missing" doesn't quite do it justice.

"It's only missing in the sense that we don't know how that cash is being used," he tells Newsweek. "In a sense, we will never know. I have cash in my wallet, what is that being used for? I could buy something, or I could just save it for a rainy day. I think missing is the wrong word, I think unaccounted for is wrong too. It is out there in circulation, it's not that it's gone, or it's been stolen, it's just that we don't know quite exactly how it's being used."

The immediate reaction to the PAC report was somewhat alarmist, Jessop says. Accounting professor and Labour peer in the House of Lords Prem Sikka tweeted: "The Bank of England has lost track of £50bn of banknotes - equivalent to a stack of £5 notes, 800 miles high. Whatever happened to its internal controls, records and audits?" He "genuinely seemed to think the cash had been lost from the Bank of England's own vaults", Jessop says. "It would've been the biggest heist in history."

Rather than breaking the cash out of the bank's reported 8ft thick walls, the National Audit Office found that in July sterling notes worth £76.5 billion ($101 billion) were in circulation in the U.K. But the Bank of England estimated that just 20 to 24 percent was being used or held for day-to-day cash transactions.

The bank estimates that a further 5 percent of cash is held as savings by U.K. households. That leaves around 70 percent, or just over £50 billion, "unaccounted for". The PAC, which scrutinizes the economy and spending in the U.K., speculated that the money may have been held as unreported household savings, or possibly taken abroad, or even used in the shadow economy. "The Bank of England doesn't know," it said.

The IEA estimates that the shadow economy amounts to between 9 and 12 percent of GDP, or roughly £200bn ($264 billion). It's not just an issue impacting the U.K.. Punitive tax regimes have led to the shadow economy employing 30 million people across the European Union. In Italy, Greece and Spain, illicit activity makes up around 20 percent of national income, according to the IEA report.

Jessop says the shadow economy "could explain the missing cash" - but he thinks that is too simplistic a view. "It's not implausible, the IEA research suggests that around 10 percent of the U.K.'s economy might be the shadow economy, that could more than account for the £50bn," he said.

"If the £50bn is changing hands a number times in a year - that £200 billion is the annual figure - so if £50bn cash changes hands four times, then that explains everything. I don't think it's that though, I think it's more likely that people are more willing to hold on to cash now because the cost of doing so is effectively zero, and the benefits - if you were worried about putting it into a bank - are probably greater, so I think it's more likely it's that."

The problem of unaccountable banknotes is nothing new, but the pandemic may well point to a growth in the amount that is "missing".

Bank of England, London, UK
The Bank of England said that the £50 billion of British banknotes are not "missing" Daniel Leal-Olivas/Getty

"People are more nervous about a lot of things now than they have been in previous years," Jessop says. "You see headlines about 'a huge hole in public finances' and 'billions of pounds being borrowed by the government' and there is something comforting about holding your money in cash."

The "missing" cash may well show up in transactions and bank deposits when the pandemic eases and interest rates begin to increase once again, Jessop says.

Dr. Francesc Rodriguez Tous, lecturer in banking at the Cass Business School in London, also believes the absence of the notes could be due to a number of factors that are not necessarily connected with illegal activity.

"Even £50 billion is relatively small compared to the economy at around £2 trillion ($2.6 trillion). In an ideal scenario, these notes and currencies would show up and be spent, which would have a positive effect on consumption and GDP," he said.

PAC chair Meg Hillier said the bank "needs to get a better handle on the national currency it controls" and is unconvinced by the argument that the cash is being held in the wallets of individuals across the country.

"Are more of us putting money under the mattress because of COVID? It would have to be a lot of us doing that," Hillier said in an interview.

Jessop argues that the PAC's focus on the shadow economy distracted from the real issue at the heart of its report, the impact of a cashless society on vulnerable, elderly or remote communities.

"Almost anybody now can get a very basic bank account," Jessop said. "Beyond that, if you are not financially sophisticated, if you don't have access to the internet, I can understand why people are more likely to want to work in cash in terms of budgeting."

The PAC report cited Treasury work suggesting that "two million people are mostly using cash for their payment needs and that it is the elderly and disadvantaged who tend to be disproportionately reliant on cash". The £50 billion of "missing" cash "is, therefore, a sideshow", Jessop said.

"We should focus on the wider issues of access to cash, where some of the most vulnerable in our society face real problems," he said.