When he was caught by DNA, the president of the Vaslui district, Dumitra Buzat, had a bag with over a million lei in cash. It was one of the biggest embezzlements revealed this year, following another scandal shortly before: the embezzlement of the Bucharest Hospital administration. If you look a little at the circulation of cash in the economy, you will see a paradox.

Although the number of ATM withdrawals decreased, while the value of ATM withdrawals decreased (apparently indicating a decrease in demand for physical money), cash in circulation increased. I mean money outside the banking system.

BNR published monetary indicators just on Monday

Cash in circulation (outside the banking system) as of August 31, 2023 amounted to 108,452.3 million lei. This is more than 20 billion euros.

At the beginning, the value of cash outside the banking system amounted to 105.9 billion lei, the National Bank also reports. There were also 1.65 billion notes and 5.4 billion coins outside the banking system. In 2021, there were 1.5 billion banknotes and 5.1 billion coins outside the banking system. Some of this money is used for everyday purchases and can be found at store checkouts. But a significant part avoids any form of control or monitoring.

In 2021, every Romanian was entitled to 5,200 lei in cash, and in 2022 the amount will increase to 5,800 lei

The increase in the number of banknotes outside the banking system was recorded in denominations of 1 lei (+8.1%), 10 lei (+10.1%), 100 lei (+2.2%), 200 lei (+11.8%) and 500 lei (+11.8%). +5.4%).

The smallest share in the total number of banknotes outside the banking system was the 500 lei note (0.9%), in which all the money was taken by the head of the Vaslui district council.

At the end of 2022, there were 87 banknotes and 286 coins outside the banking system per inhabitant. At the end of 2021, there were 83 banknotes and 270 coins outside the banking system per inhabitant.

The huge bribe discovered on Saturday shows that a large part of the cash in circulation is being used for illegal transactions. But who could control these operations? Could the issuing institution (BNR) monitor them better?

The first central banker to admit that something strange was going on with banknotes was Andrew Bailey in 2009, then chief cashier of the Bank of England, who has been the governor of the Bank of England since March 2020, writes The Economist (subscription may be required). Since 1853, every pound note has featured the signature of the Chief Cashier, who is responsible for making sure Britain has the money it needs.

Bailey asked this question at the conference. He noted that he had a surprise: for what he called the “cash lobby is dead”: the demand for cash had increased and the electronic payments lobby was at its peak. He called it the “banknote paradox.”

Bailey offered a twofold explanation. On the one hand, he argued, the financial crisis has reduced public trust in banks, so many people find it safer to keep cash at home. At the same time, the number of ATMs grew, which meant more money was needed to feed them.

America’s Federal Reserve had its own explanation: since inflation is low and bank interest rates are low, why put your money in accounts, especially since banks also charge various fees?

All of the above explanations are better than the one proposed by the European Central Bank (ECB) in 2021 when it published a follow-up report on the banknote paradox. Having analyzed cash transactions in the eurozone countries, the bank concluded that only about a fifth of banknotes in circulation were used for controlled sales and purchases. However, in 2020 – the year of the pandemic – the demand for banknotes was so high that the central banks of the Eurozone printed an additional 140 billion euros.

Romania is not the only country trying to deal with the illegal movement of cash. Bills worth billions of dollars are merrily spinning outside. Almost one billion euros circulates outside the eurozone. Of course, not all of this money is used illegally. But it is clear that we are dealing with a huge shadow financial system over which the authorities have no power and no clear intention to control.