Mexico’s Central Bank Just Broke with the War on Cash

Motivated by inflation?

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

A strange thing just happened in Mexico. The Bank of Mexico (Banxico), announced that it is considering launching a 2,000 peso note (ca. $105), double the highest denomination note currently in circulation. It’s also considering doing away with Mexico’s lowest denomination 20 peso bill (ca. $1.05), which will be replaced by a coin with the same face value.

Not everyone’s happy about the proposal, which forms part of a range of measures aimed at updating Mexico’s currency notes. Miguel González Ibarra, director of the Center for Financial Studies and Public Finance of the National Autonomous University of Mexico, said that introducing a higher denomination bill flies in the face of the broad trend among advanced economies to weed out such notes.

In 2016 Peter Sands, the former CEO of the British bank Standard Chartered, set the tone of the debate when he published a report for Harvard Kennedy School of Government imploring central banks around the world to stop issuing high-denomination notes and bills. They include the €500 note, the $100 bill, the CHF1,000 note and the £50 note. This is the first rule of the war on cash: make high-denomination notes taboo in law-abiding circles.

“Such notes are the preferred payment mechanism of those pursuing illicit activities, given the anonymity and lack of transaction record they offer, and the relative ease with which they can be transported and moved,” the report warned. In other words, only criminals use cash. High-denomination notes, the report added, “play little role in the functioning of the legitimate economy, yet a crucial role in the underground economy.”

Since the publication of the report, the ECB has decided to stop producing €500 banknotes as of the end of 2018. Although the Eurozone’s highest-denomination note will remain in circulation for some time, its phasing out has already had the desired effect: most consumers today associate it with criminal activities, such as corruption, drug trafficking, or the financing of terrorism, and dealing with it is now more trouble than it’s worth.

In Mexico the highest denomination bill currently in circulation, the 1,000 peso note, was introduced in April 2008. But even today the bill is still rejected by many retail establishments due to the inconvenience of providing so much change or out of fear that it could be forged, which begs the question: why the sudden need for an even higher denomination note? The most likely answer? To keep up with inflation.

In the last 10 years the Mexican currency has lost much of its value despite the fact that inflation during that time has been relatively tame by Mexican standards! The accumulated inflation rate of the last 10 years of so-called “moderate” inflation is 51%. The result has been a 34% fall in purchasing power.

It’s a stark reminder of how even “moderate” inflation can, over an extended period of time, obliterate the value of the money people earn, spend and save. Inflation may be good for companies and landlords because it means they can hike prices and rents, and can report higher revenues without having sold a single extra thing. But for workers whose salaries do not keep up with the rising prices, it can be brutal. In Mexico, a country that has become a paradise for low-cost production, most salaries have been left in the dust.

In 2017 the National Council for the Evaluation of Social Development (CONEVAL), an independent government organization, calculated that the percentage of the population with daily earnings lower than the basic daily food basket — just 92 pesos ($4.96) — was over 41%. This relentless increase in prices, which is really a mirror reflection of the unending loss of purchasing power of the currency, may explain why the face value of Mexico’s highest denomination bill is no longer deemed high enough by the country’s central bank.

And that has many people spooked. While annual inflation, at 4.8%, remains more or less under control by Mexican standards — and certainly compared to what’s happening in places like Argentina and Turkey — Banxico’s proposal to introduce a 2,000 peso note has set off alarm bells among older members of the populace who can still recall the devastating effects of Mexico’s last bout of hyperinflation, in the late eighties, when average annual price rises reached a peak of 180%.

“A 2,000 peso bill would send a negative psychological message concerning the loss of purchasing power of our currency,” says Raymundo Tenorio, director of Economics course at the Monterrey Institute of Technology and Higher Education. González Ibarra agrees, noting that the main reason for issuing a higher denomination note would be as a vain attempt to keep up with the peso’s ongoing loss of purchasing power.

Another reason is the slow uptake of electronic and mobile payment methods. Due to the rampant hacking of personal data and cloning of cards, many people in Mexico prefer to continue making payments in cash rather than risk using electronic methods. Also, Mexico, like many other countries in Latin America, has a very large informal economy that shows little sign of going away. As a result, cash is still very much king.

In its latest press release, Banxico said it would issue the new bill only if it deemed that “such a bill is required to satisfy user’s needs.”

But many users are fearful that the real reason behind Banxico’s apparent interest in issuing a higher denomination bill is that the old bugbear of rampant inflation is about to rear its ugly face once again. With the US dollar rising, emerging market currencies swooning, and hot money getting cold feet in higher-risk markets, you can’t exactly blame them. By Don Quijones.

To diversify from the euro debt-crisis, the biggest Spanish banks pushed deeply into Emerging Markets. Now, six years later, they’re in a new crisis. Read…  No Other Banks Are This Exposed to Turkey, Argentina, Brazil…. Emerging Markets Haunt Spanish Banks

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  24 comments for “Mexico’s Central Bank Just Broke with the War on Cash

  1. Brian says:

    So going to the market and buying 5 (if you are lucky) bags of groceries is illicit activity that usually costs $100, or 2000 Pesos. If your card doesn’t work, you go hungry.

    • Tom Kauser says:

      If your card doesnt work move to Reno (your money is already waiting on you in Nevada!)

  2. Old dog says:

    “…Due to the rampant hacking of personal data and cloning of cards, many people in Mexico prefer to continue making payments in cash rather than risk using electronic methods.”

    That’s the darkest side of the digital economy. In the name of efficiency, they push you to do everything electronically. I can clearly see the benefits. As clearly as I’m able to see the biggest downside: consumer protection is a joke. Does Equifax ring a bell? In some countries, like Mexico and Argentina, it’s a disgrace.

    And that’s before we start considering the wet-dream that many self-respecting politicians have of turning a democracy into a police state.

    It makes you wonder (rhetorically), efficiency for who?

  3. hotairmail says:

    It is no surprise the Chief Executive of a bank would want to get rid of cash. A run of cash withdrawals is the biggest fear of a bank and the banking system. And it means they get to keep hold of all that money for their own various nefarious activities. Criminals are competition for them more than anything else.

    • Frederick says:

      True they could lock you out with a click of the mouse They can do that by just freezing your account now actually Depositing your wealth in a bank is a fools game Too risky for the return I know it’s insured Yeah sure it is

    • Tom Kauser says:

      Nailgun being a close second?

  4. polistra says:

    Sounds like Mexico has learned from what happened in India. It’s nice to see a central bank with some degree of intelligence and some regard for the PEOPLE of the country.

  5. stephen wright says:

    Maybe they are listening to Hugo Salinas Price and are going to back with silver?

    • Jaco says:

      Hopefully they are listening to him.

      The mainstream media lies to the US citizens and uses propaganda to thwart the use of cash, by reporting that many European countries are moving away from cash.

      I got news for them – I was recently on the Island of Corsica, and it was unbelievable how many restaurants there refused to accept a credit card. I was also in Barcelona and Northern Italy, and many places there except for the chain hotels wanted cash as opposed to the card.

      The US and it’s banks is the country behind trying to reduce and/or eliminate the use. Most Europeans I met much preferred cash in their hands as opposed to a credit or bookkeeping entry in the bank account.

  6. Eastwind says:

    I’ve lived in Mexico for the last 2 years. Everything is paid in cash here, only businesses have checking accounts. I have no Mexican bank account, I withdraw cash from my US account using a Mexican ATM. I pay my rent in cash and my utility bills in cash. I’ve never yet seen the 1000 peso note, the ATMs give 500’s, worth about $27. I don’t pay for anything using credit cards for fear the cards will be compromised.

    Stores chronically have little or no change in the till, even places like McDonalds. If you pay with a bill you’re constantly asked if you can provide a few coins to make it easier to make change. At OXXO, the omnipresent convenience chain, they sometimes force you to choose bits of candy or gum from the display next to the register because they don’t have enough 1 peso coins in the register to use as change.

    You need to constantly watch how much you are carrying in small bills and change because if you have nothing but 500 peso notes you might as well be broke, because no one will take the 500’s for small transactions. If you buy something worth more than 200 pesos they will usually take a 500, but then they hold it up to the light to see the security strip and give you and your money a horse-eyed look first.

    When I get cash from the ATM, I make sure to choose an amount to withdraw that dispenses some smaller notes. I keep the 500’s to pay the rent, and live off the smaller notes. ATMs give a maximum of 30 bills at a time, and I withdraw large amounts to reduce total ATM fees, so I get mostly 500’s.

    I don’t think a 2000 peso note will be used for anything.
    I like the 20 peso notes, which are worth slightly more than US$1, you can never have enough of those most-useful things. The largest coin, 10 pesos, is already big and heavy, and so a 20 peso coin would be not nearly as easy as the 20 peso note.

    It’s too soon for this change, maybe in 5-10 years it will be appropriate. Just my two peso’s worth.

    • John Taylor says:

      I have a friend from India who was saying the same thing – his country was getting slammed as part of the war on cash when the 500 and 1000 Rupee note was banned.

      Despite being worth only $10 and $20 US at the time, the vast majority of transactions were in smaller notes … you can’t compare the dollar value to that here because the majority of people have comparatively much lower wealth & earnings in dollar values and prices are likewise cheaper.

      He was arguing that rampant counterfeiting on these particular notes was the main issue.

      It seems that much of how things operate in emerging markets cannot be compared directly to the patterns of life elsewhere, so you have to dig a bit deeper in forming conclusions. This is can be particularly difficult when mainstream media outlets tend to jump to conclusions and moralize rather than probe or question.

  7. Fernando Arzola says:

    Mexico is NOT a functional country. It’s now a group of regional and local governments/mafia associations with little connection to the central government. The president and central government is powerless and mostly symbolic. It’s kept in power and untouched to give the illusion to the world that it’s functioning, that’s all…only a benevolent dictator can fix it…its the only solution. Anyone who says otherwise has not lived in Mexico or way too optimistic of current democratic process…NAFTA has also destroyed Mexico, as well as the ability of the mostly corrupt class to move to the USA and bring their wealth here as well. They have all moved to San Antonio, Houston, Miami, etc…
    It’s costs pennies to them to obtain residency in USA, bringing the money that they don’t invest in their country with them, nor paying middle nor lower class descent wages…this is another way central and South America has been destroyed…

    • A1A says:


      Can u comment more in depth abt the regional economies? i.e. who controls them? Are u talking drug kingpins or actual semi legit businessmen- i.e. Slim.

      Who are these families and how does everything work?

      I am in TX and yes, u should see the wealth here from Monterey, Df etc. Its incredible when u actually pay attention.

      Thx for your insights

  8. MC01 says:

    Perhaps Mr Sands of Standard Chartered fame hasn’t been informed yet the massive fraud (allegedly India’s largest financial heist since independence) carried out by diamond and jewelry magnate Nirav Modi didn’t involve shady characters with suitcases full of cash but a lot of digital money changing a lot of hands very fast. And either amateurish lack of oversight or criminal complicity on part of Indian banking authorities. And why are so many myopic British bureaucrats named Sands or Sandys anyway?
    Perhaps Mexican banking authorities read the newspapers more often than Mr Sands so they were able to connect the fact the war on cash waged by the Indian government (with an enthusiastic support from gullible Westerners somewhat reminiscent of the early days of the Chavez presidency in Venezuela) could not stop Mr Modi from fraudulently getting his hands on an estimated 2,850,000 lakhs, or over four billion US dollars without touching a single banknote.

    Speaking of Venezuela, perhaps Banxico should send a delegation on a fact finding mission in Caracas: inflationary concerns drove local authorities to take old banknotes from circulation, issue new ones of the same denomination (minus 3 zeroes), rename the new currency “bolivar soberano” and peg it to a cryptocurrency (or two: let’s not forget the petro-gold) nobody had heard of before. Compared to such a feat of monetary policies merely issuing a $2,000 banknote barely registers on the radar.
    The Mexican banking delegation may take some time to absorb such monetary wisdom, but on the plus side they’ll get to eat some truly mean arepas. Just don’t ask what’s in there.

  9. Paul says:

    My understanding is that Mexico also has in circulation a reasonably large silver coin, about an ounce, that is not denominated.

    It is worth whatever the buyer and seller decide that it is worth, but the value obviously would have some relationship to global spot values.

    I would be interested in seeing comments from those in Mexico about this?

    • golferdave says:

      You are referring to the silver Libertdad..surely one of the most beautiful coins in the world. I have wintered in Mexico for the last decade and always acquire a few of these each time. They are not in general use as currency but are bought and sold through Banco Azteca with about an 8 % bid spread. They have certainly held their value well vis a vis the USD and are a great protector of capital..but since bad currency chases out the good..the peso has chased the Libertdads under the mattress. Ten years ago the USD was widely used as cash..but has now also dissapeared.
      Most private homes have no mortgages. Even car loans require large down payments amd have high interest rates so most deals are done with cash..
      There is much to be monetized and shifted to the banks.

  10. Paulo says:

    My son phoned me two nights ago on a scratchy wavering connection. We were dropped a few times. He was having trouble purchasing online from Camp. He needed a plane ticket home (from Alberta) and wondered if he could use my card for the purchase as he could not get through to either Visa or the bank. He has one Visa credit card for plane tickets with a $1,000 limit. He pays it off every month.

    I said sure, and then he asked how I wanted to be reimbursed? Did I wish to have an email transfer that night? Immediately? I said, “No, pay me in cash when you get home”. The cash will go into our stash we use for local purchases; the backhoe I hired last week, a lunch out, Saturday market, etc.

    Good for Mexico. People like cash. Bank balances look nice on the computer screen, but an envelope of cash feels so much better! :-)

    It’s nice to have an assortment for ‘tips’. We try never to have anything over $50 Cdn. Twenties and below are the best for every day purchases. We use a card for online, gas, and grocery simpy because it’s faster.

  11. Setarcos says:

    I’m sure people involved in illicit activities are terrified that govts are taking such bold steps, e.g. removing large bills.

  12. L Lavery says:

    Cash is worth a thousand promises.

    That’s true for digital cash too. In fact even more so than physical cash, if you think about it.

  13. Crysangle says:

    Well in EU the pressure is from both sides. Even on transition to Euro there was near nothing for a cent or two, even less so now…but pricing is usually to the cent in supermarkets and retail. So at the (often busy) counter you are either left to rummage for an exact figure, or pay with notes/larger coins and accumulate cents, or pay with card…result being a card seems convenient. Euroent coins are trash clad efforts anyway, and there was talk of phasing out the 1 and 2. As that would mean pricing to 5 cents it would obviously look odd, and I guess the incentive to move to cards is wanted anyway.

  14. upwising says:

    IN THE EARLY-80’s in Costa Rica, ¢10 (ten colones) was worth close to 50 American cents. The bill was blue with the picture of Rodrigo Facio Brenes. Fast forward to 2017, and the ¢10 000 note (ten thousand colones) is worth about $17 (seventeen dollars) and is blue and, except for the zeroes, shockingly similar to the old ¢10 note (though with a new person on the bill – Emma Gamboa).

    Progress. As. Promised.

    Long zeroes.

    • WSKJ says:

      “Long zeroes” –

      a great laugh for today in a post and comments loaded with info-

      thx DQ, upwising, and all

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