By Kenneth Rogoff
In my book ‘The Curse of Cash’, I make a serious case for phasing out the bulk of paper currency, particularly large denomination notes. Since pre-publication copies started floating around just a few weeks ago, a number of engaging, thoughtful reviews have published. But mere rumors of the book’s impending publication have also evoked an extraordinary number of visceral comments (online and by email): “This idea is almost as bad as banning semi-automatic weapons,” is one theme. Another is, “Why should people feel guilty about doing business in cash to avoid paying taxes when we all know the government will just waste the money?” Having first explained two decades ago why governments that print big bills are penny-wise and pound-foolish, I am well familiar with how emotional this topic can be.
There have also been some comments having to do with individual liberty and wondering if criminals will use other currencies and transactions media. I address these and many other serious concerns in the book, and I have tried to do so in a clear and engaging way that anyone can understand. But here is a quick version to straighten out some key points.
The most fundamental point is to emphasize that the book argues for a less-cash society, not a cash-less one. There is a world of difference. If the U.S. first phased out one hundred-dollar bills and fifty-dollar bills, and then after perhaps two decades phased out twenty-dollar bills, there would still be ten-dollar bills and below. I strongly argue these should be left around indefinitely, and explain why it would be a mistake to withdraw cash entirely, as opposed to just larger bills. Even if we get down to ten-dollar bills, making an anonymous cash purchase of $1,000 would still be pretty easy—and even a $100,000 purchase would require only a briefcase. The aim of my proposal is to get at wholesale tax evasion by businesses and higher-income individuals, and by large-scale criminal enterprises, e.g., drug lords and crime bosses. With ten-dollar bills and below—which will be left in place indefinitely—there will always be ways for ordinary people to make private (anonymous) payments and for low-income individuals to buy groceries.
Any reader of the book will see that I am not proposing getting rid larger bills as segue to an outright abolition of cash—I explain why I’m against eliminating physical cash into the very distant future, perhaps another century. But for all the advantages of cash, we have to recognize that the current system is badly off kilter. A lot of central banks and finance ministries know it, as do justice departments and tax authorities.
What about the argument that in lieu of big bills, criminals and tax evaders are always going to find other ways to make anonymous payments? Obviously this is an important point, and one that comes up throughout in the book. But there is a reason why cash is king. No other anonymous transactions vehicle, however, is as remotely easy to use. Gold coins have to be weighed and assayed, and can hardly be spent at the tobacco shop. Uncut diamonds are even less liquid. Bitcoin is somewhat anonymous (albeit traceable in many instances), but governments have been putting up all sorts of tax rules and restrictions on financial institutions that make it a very poor substitute for cash. And by the way, governments will continue to do this with any new transaction media they view as facilitating tax evasion, money laundering, and crime.
As I explain in the book, big bills facilitate big crime—taking them out of circulation will have a significant effect.
Finally, another very early comment on the book, of a vastly different type, is from someone I greatly respect but do not always agree with, Edward Chancellor. Unfortunately, he makes a couple of absolutely critical misrepresentations. Most importantly, he seems happy to blur the critical distinction between “less cash” and cashless. He slips easily into the “cashless” phraseology, for example, when wondering how to give money to beggars in my world. I am impressed if he can give out one hundred-dollar bills to beggars, but if so, I think he would find that a fistful of tens is also welcome.
I agree with Edward that to take advantage of today’s ultra-low real interest rates, it would be a good idea for governments right now to issue very long-term bonds. I have no objections to his preferred perpetuities. But there is an enormous difference between issuing registered perpetual bonds and issuing anonymous currency; that is my whole point. By the way, as the book notes, anonymous bearer bonds were effectively killed a long time ago.
Edward and I disagree on negative interest rates, but that it is whole different can of worms. I’ll just say that, in addition to explaining the issues, the section in the book on negative rates shows that effective negative-interest-rate policy is going to require laying many years of ground work—not a recommendation for something the ECB or the Bank of Japan can do tomorrow. But for reasons discussed, it is by a wide margin the best plan for the future. All the others are much worse.
In the meantime, anyone who has looked serious at the data will realize that even as currency use is declining in the legal economy, it is growing in the underground economy. Something is badly out of whack, and it is time to have a serious discussion about it.
Kenneth S. Rogoff, the Thomas D. Cabot Professor of Public Policy at Harvard University is the former chief economist of the International Monetary Fund and coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton).
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