Why shredding $100 bills could be great for the economy Justine Underhill
September 17, 2016
While more than half of all transactions in the US are electronic—think debit cards, Apple Pay and Venmo—there’s still a record $1.4 trillion in physical currency, from pennies to $100 bills, circulating in the global economy.
That’s almost double the amount from a decade ago, and about 80% of that cash is in $100 bills.
These large bills could be making us poorer and less safe, says Kenneth Rogoff, Harvard economist and author of the new book “The Curse of Cash.” For Rogoff, the benefits of phasing out both $50 and $100 bills are two-fold: It would hamper criminal activity and aid monetary policy.
“I argue [large bills] are more facilitating activity in the underground economy—crime, tax evasion, you name it—than they are in legal activity,” Rogoff told Yahoo Finance.
But cash can also be used as a form of civil disobedience for what is perceived to be an unjust law or an onerous regulation. Where exactly do we draw the line between a government’s right to enforce laws and the public’s right to privacy?
He admits that phasing out cash is a highly politicized and emotional topic, adding that the economy will still need cash—at least the smaller bills— for reasons of natural disasters, privacy, and unbanked neighborhoods.
“It’s 22 pounds for $1 million in hundreds, but it’s 220 pounds to carry around $1 million in tens,” said Rogoff. “So I’m looking for… how can people still do $500, $1,000, sort of retail transactions, but not be able to run these criminal enterprises.”
A less-cash society and central banking
In addition to hampering the underground economy, phasing out larger bills could give central banks additional tools to fight recessions and deflation, says Rogoff.
After the 2008 financial crisis, the Federal Reserve dropped its benchmark interest rate to near zero, with the expectation that low rates would stimulate the economy. The Bank of Japan and the European Central Bank took their policies a step farther, lowering rates into negative territory. In Germany, for example, an investor pays for the right to loan the government money for 10 years.
But central banks’ ability to venture into negative territory is limited, as people have the ability to convert their investments into cash and get 0% interest. If a central bank decides to lower rates to -5%, at some point investors are just going to take cash, rather than get a negative return in a checking account. This scenario would be counterproductive to a central bank’s efforts to fight a recession and deflationary pressures.
“When we wake up and see that there are only $10 bills, it’s way easier to have serious negative interest rates,” said Rogoff. “The idea is not that you’d have negative 6% rates for 10 years, but it would last a relatively brief period because you’re powering the economy out of the recession.”
In principle, Rogoff notes, there is no reason that currency holders should prefer a world with 2% inflation and a 0% interest rate on currency to a world with 0% inflation and and a -2% interest rate on currency. In both cases, the real rate of return on currency is -2%.
But should we give the government the right to tax our currency?
“Well, let’s face it. They can do whatever they want now,” Rogoff said. “There’s inflation. That works really well. It’s been used time and again. You are trusting the central bank apparatus to be trying to stabilize output, trying to stabilize inflation. Yeah, they can set a negative tax rate—a negative rate on currency. But if the market’s not calling for that, the currency is just going to empty out.”
Poster Comment:
How would eliminating $100s hamper criminal activity? When they got rid of $1,000 dollar bills, it changed nothing. Now if this happens, it will eliminate much of the cash in circulation.