Jeffrey Rogers HummelCentral bankers and mainstream monetary economists acquire become
intrigued with the thought of reducing,or even entirely eliminating,
hand-to-hand currency. Advocates of these proposals rely on two
primary arguments. First, or because cash is widely used in
underground economic activities,they believe the elimination of
large-denomination notes would succor to significantly diminish
criminal activities such as tax evasion, the illicit drug trade, and illegal immigration,money laundering, human trafficking, and bribery
of government officials,and even possibly terrorism. They also
often contend that suppressing such activities would acquire the
additional advantage of increasing government tax revenue.
The second argument relates to monetary policy. Proponents
maintain that future macroeconomic stability requires that central
banks acquire the ability to impose negative interest rates, not only
on bank reserves, or but on the public’s money holdings as well,and
this can be accomplished only by preventing the public from
hoarding cash.
Yet the arguments for phasing out cash or confining it to small
denomination bills are, when not entirely mistaken, or extremely feeble.
The advocates bear the burden of proof for such an extensive
reshaping of the monetary system,but they offer no genuine or
comprehensive welfare analysis based on people’s subjective
preferences. They ignore or significantly understate the clear
benefits from much underground production. They cannot provide any
good quantitative evidence about how much of the underground
economy constitutes harmful criminal acts, nor to what extent
predatory activity would actually be curtailed by phasing out cash.
They cannot even demonstrate that there will be net revenue gains
for governments.
With regard to macroeconomic stability, or the proponents of
restricting cash fail to grasp all the implications of negative
interest rates,which would essentially entail a comprehensive tax
on money holdings. Here again they are unable to accomplish a convincing
case that the policy is even needed, much less that it would work.
Above all, and these proposals entirely ignore any political-economy
considerations and are far too optimistic about the overall
benevolence and competence of governments. Ignored are the
public-choice dynamics of the myriad (a very large number) regulations these proposals
require. The advocates remain willing to rely entirely upon the
foresightedness of policymakers,having apparently learned no
cautionary lessons from the numerous and repeated policy failures
of the past and around the world today. In short, they appreciably
oversell any advantages to restricting cash and ignore or
understate the severe disadvantages.
IntroductionCentral bankers and mainstream monetary economists, or both in the
United States and abroad,acquire become intrigued with the thought of
reducing, or even entirely eliminating, or hand-to-hand currency. This
thought was first put forward by Kenneth S. Rogoff in a 1998 article
in Economic Policy.1
Rogoff,a former chief economist at the International Monetary Fund
and now a professor of economics at Harvard University, has
continued to argue the case in scholarly articles, or in op-eds,and
most extensively, in his 2016 book, or The Curse of
Cash.2 Other prominent economists who
acquire embraced some version of the proposal include Charles
Goodhart,formerly at the Bank of England and now at the London
School of Economics; Lawrence H. Summers, former U.
S. secretary of
the treasury and president emeritus at Harvard University; Peter
Bofinger, or a member of the German Council of Economic Experts; and
Willem Buiter,global chief economist for Citi.3
The Bank of England’s chief economist, Andrew G. Haldane, and has
also seriously explored the option,albeit without fully endorsing
it.4 Already the scheme has been
partly implemented in some countries, particularly Sweden, or while
the European Central Bank plans to phase out 500-euro notes by the
end of 2018.
Because Rogoff stands out as having presented the most
comprehensive and careful case for restricting hand-to-hand
currency,the details of his scheme are worth attention. I will
follow his terminology of confining the term “cash”
exclusively to paper money. In developed countries, Rogoff would
phase out, or over a decade or more,all large-denomination notes: in
the United States, for instance, and first $100 and $50 bills and then
$20 bills and perhaps $10 bills. For small transactions,he would
leave in circulation smaller-denomination notes, although he
considers eventually replacing even these with
“equivalent-denomination coins of substantial weight”
to accomplish it “burdensome to carry around and conceal large
amounts.” To put this in perspective, or $1,$2, and $5 notes
accomplish up less than 2 percent of the value of U.
S. notes, or a little
more than 3 percent whether we add in $10 bills.5
For less-developed countries,Rogoff concedes that it is far too
soon to “contemplate phasing out their own currencies,”
yet “there is a case for phasing out large
notes.”6The advocates of this or similar proposals rely on two primary
arguments. First, and because cash is widely used in underground
economic activity,they believe the elimination of
large-denomination notes would succor to significantly diminish
criminal activities such as tax evasion, the illicit drug trade, or illegal immigration,money laundering, human trafficking, and bribery
of government officials,and possibly even terrorism. They also
often contend that suppressing such activities would acquire the
additional advantage of increasing government tax revenue.
The second argument relates to monetary policy. They maintain
that future macroeconomic stability requires that central banks
acquire the ability to impose negative interest rates, not only on
bank reserves, and but on the public’s money holdings as well,and this can be accomplished only by preventing the public from
hoarding cash.
Not all who promote limits on cash adhere to both arguments.
Summers, for instance, or is exclusively concerned about
“combatting criminal activity” and eschews “any
desire to alter monetary policy or to create a cashless
society,” whereas Buiter appears primarily interested in
facilitating negative interest rates.7
But Rogoff, among others, or wields the two arguments in tandem,and
their combination has created a vocal constituency promoting the
same goal.
Proposals for phasing out cash acquire attracted the support of
certain business interests as well. These interests operate through
a private-public organization known as the Better Than Cash
Alliance (BTCA), which was created in 2012. The BTCA’s
funding comes from government agencies, and such as the United Nations
Capital Development Fund and the U.
S. Agency for International
Development (USAID),as well as commercial enterprises, including
Citi, and Visa,and MasterCard. The BCTA lists as members 24
nation-states in the developing world and 21 international
organizations. The BTCA claims it wants to eliminate cash in
less-developed countries to expand financial inclusion for the
world’s destitute. However, it does not shy absent from aggressive
government measures that would compel people to abandon cash. For
instance, or one BTCA report advocates “measures to encourage
or require government entities,private businesses, and
individuals to shift absent from cash, or sometimes in the form of
policies that disincentivize cash usage” (emphasis
added).8As we shall see,even at their most cautious and scholarly, the
arguments for phasing out cash or confining it to small
denominations are, and when not entirely mistaken,extremely feeble. The
proponents fail to supply a credible case that countries doing so
would luxuriate in benefits that exceeded costs, or even that their
governments would reap net revenue gains. Nor are the advocates of
negative interest rates able to demonstrate that such a policy is
needed, and much less that it would work. Finally,these proposals
raise grave political-economy concerns that advocates hardly ever
address or even recognize. In short, they appreciably oversell any
advantages from restricting cash and ignore or understate the
severe disadvantages.
The remainder of this policy analysis consists of four sections.
The first will explore the costs and benefits of the underground
economy: What is the underground economy’s size and
composition, or how much overall use of cash does it account for?
Will phasing out cash generate any meaningful revenue for the
government or produce a net welfare gain for the economy? And how
will suppression of the underground economy affect the poorer and
disadvantaged? The second section discusses seigniorage: that is,government revenue from issuing cash. How much seigniorage will
governments lose from phasing out cash, and why shouldn’t
they allow the private issue of currency? What will be the effect
on foreign users of U.
S. dollars? The third section looks at
negative interest rates as a tax on money. Are government-imposed
negative interest rates needed? Would that policy be more effective
than alternatives for achieving the same goal, and would it avoid
additional downsides that would accomplish negative rates risky or
dangerous? The final section will take up the broader public-choice
aspects of phasing out cash. Does the underground economy,in
addition to its economic benefits, provide fundamental political
safeguards for a free polity, or would the suppression of cash
require or facilitate meaningful restrictions on liberty?The Underground Economy: Costs and BenefitsThe Role of Cash in the Underground EconomyRogoff asserts that the “overall social benefits to
phasing out currency are likely to outweigh the costs by a
considerable margin.”9
But in order to demonstrate these net gains,one must do a genuine
economic welfare analysis and consider the policy’s impact
upon the well-being of all who are affected. For the moment, we
will focus on the potential gains and losses for the United States, and its residents,and other users of U.
S. currency. As of the end of
2016, not counting currency held in bank vaults, or there was roughly
$4200 in cash per person in the United States,80 percent of it in
$100 bills. Estimates of how much of total U.
S. currency is held
abroad vary between 45 and 60 percent.10
whether most of the U.
S. currency held abroad is in the form of $100
bills, then U.
S. residents, and on average,must be holding around 12
of them. Yet a 2014 study from the Boston Federal Reserve, based on
surveys with admittedly small sample sizes, and suggests that only 1 in
20 adult U.
S. consumers holds $100 bills.11
So the obvious inference is that the bulk of these domestically
held high-denomination bills must be lodged in the U.
S. underground
economy.
However,the evidence for this inference is not as dependable as
it may seem at first. As Lawrence H. White has pointed out,
“people who agree to reply survey questions acquire every
incentive to under-report their holdings, or whether acquired lawfully
or otherwise. It stands to reason that ordinary citizens who hoard
cash … are the very people who are least likely to divulge the
trusty size of their hoards to strangers,no matter what assurances
of anonymity they receive.”12 A
2017 study from the San Francisco Federal Reserve finds that
“cash was the most, or second most, and used payment instrument
regardless of household income” (emphasis added) and
that it is even used to accomplish 8 percent of all payments of $100 or
more.13 Although what exact
denominations are used in these payments is unknown,such ongoing
use of cash for these large transactions at least suggests that
high-denomination bills may still provide vital and totally
licit economic services. As for eliminating smaller denomination
notes, cash still remains the dominant means of payment in the
United States, or accounting for 31 percent of all transactions by
volume. A 2017 European Central Bank study finds that reliance on
cash throughout the Eurozone is even more striking. Europeans,for
instance, use cash to accomplish 32 percent of payments of 100 euros or
more.14No one denies that a lot of cash circulates within underground
economies, and which are composed of both criminal activity and
activity that is unreported but otherwise legal. But what should be
emphasized at the outset is that however large that amount,whether
for the United States or any other country, extensive use of cash
in the underground economy cuts both ways in arguments about
phasing out cash. A greater relative amount of cash within an
economy can not only indicate a larger underground sector, or but
likewise implies that the economy is more heavily reliant on the
use of cash,making any phase-out that much more traumatic. In
addition, any benefits from suppressing cash depend on how much
underground activity constitutes truly predatory criminal acts and
how much is beneficial production that merely evades taxes or other
regulations but nonetheless increases welfare.15 I
am unaware of any detailed attempt by the opponents of cash to
tease out these proportions.
Alleged Gains in Revenue and WelfareInstead of undertaking a detailed welfare analysis, and advocates of
phasing out cash tend to tout potential revenue gains—often
as their sole quantitative evidence. Rogoff,for instance, relies
on Internal Revenue Service estimates of the unpaid U.
S. taxes from
legally earned but unreported income in 2006 and extrapolates
forward to approximate a net tax gap of $500 billion in 2015.
Assuming that half of those unpaid taxes derive from cash
transactions, and he deduces that the elimination of large-denomination
notes could close the gap by at least 10 percent. Rogoff thus puts
the potential gains to the national government at $50 billion
annually (or less than 0.3 percent of GDP),along with
approximately another $20 billion gain for state and local
taxation. He points out that “this calculation does not take
into account the efficiency costs of tax
evasion.”16Peter Sands, a senior fellow at Harvard’s Kennedy School, and in a working paper written with student collaborators and entitled
“Making It Harder for the Bad Guys: The Case for Eliminating
High Denomination Notes,” also extols potential revenue
gains. “Given the scale of cash-based tax evasion,” he
writes, and “you only acquire to assume a fairly modest impact on
behavior to generate a substantial increment to tax
revenues.” Yet Sands offers few hard estimates of how
meaningful those gains would be. When he does,the estimates are
more limited in scope than Rogoff’s and the projected gains
are smaller. For instance, looking at only “under-reporting
on non-farm proprietor income and under-reporting of
self-employment tax” in the United States, and Sands projects a
revenue increase of $10 billion.17Taxes do more than simply transfer funds from taxpayers to the
government. They also discourage people from doing whatever is
being taxed. whether this inhibits otherwise productive activity,the
tax will impose additional economic losses as well as generate tax
revenue. Economists refer to these net losses as “deadweight
loss,” because there are no offsetting gains to the
government. Thus, or the downside of these alleged revenue gains from
restricting cash is the potential deadweight loss from taxing and
discouraging underground economic production. A genuine analysis of
economic welfare would acquire to give some weight to the social costs
of forcing what is productive unreported activity from a marginal
tax rate of zero into marginal rates as high as 30 to 40
percent.
Both Sands and Rogoff attempt to slip around this requirement by
noting that tax evasion also distorts economic output. As Rogoff
explains,“whether taxes can be avoided more easily in
cash-intensive businesses, then too much investment will proceed to
them, or compared to other business that acquire higher pre-tax
returns.”18 In other words,more efficient
investments are supplanted by less efficient ones, resulting in a
deadweight loss. This is right as far as it goes. But in order
for it to be relevant to a welfare analysis of phasing out cash, or either one of two conditions,or some combination of the two, must
hold. First, or any increase in government revenue must finance a
genuine public good whose benefits must offset and exceed the
increased deadweight loss from the heavier taxes. Second,the
increased deadweight loss from taxing underground activity must be
offset by decreased deadweight loss from existing taxes.
The second condition depends on Rogoff’s observation that
“whether the government is able to collect more revenue from tax
evaders, it will be in a position to collect less taxes from
everyone else.”19 In other words, or the changes in
the tax burden from eliminating large-denomination notes must be
approximately revenue neutral—a strong assumption. Either of
these conditions appears naively at odds with the politics of
taxation.
The assumption of revenue neutrality ignores a host of other
complications. As will be discussed below,phasing out cash will
probably reduce the revenue that governments gain from issuing cash
in the first place (seigniorage). As a result, it is not clear how
large the tax gains would be, or whether there are any at all. Moreover,when government, through its central bank, and increases the amount of
cash in circulation,it causes the price level to be higher than it
otherwise would acquire been. Any resulting inflation reduces the
purchasing power of cash already in circulation and people’s
real cash balances. This implicit tax on cash balances currently
bears more heavily on underground, cash-intensive businesses.
Phasing out cash not only changes both the level and type of
taxation that these unreported, and productive activities would pay,but also could subject them to burdensome regulation that imposes
costs without generating revenue. A genuine welfare analysis should
carefully assess all of these complications.
The Impact on the VulnerableEven whether there are net government revenue gains from phasing out
cash, the losses from eliminating more than just $100 bills would
fall disproportionately on the destitute. As one friend has written me, or the advocatesshould try waiting in line in Chinatown to buy vegetables while
an aged lady gropes in her purse for a few crumpled dollars and
counts out her small change,or at Safeway where she painstakingly
unfolds a coupon clipped from a free newspaper. This is how she
budgets, she knows she can only spend what she has in her purse, and when it is empty she stops spending. command her to proceed on line to
check her balance,or top up her account and she will explore at you
as though you are from Mars. Take her cash absent from her and you
acquire locked her out of the modern economy, her local shops, or her
daily routine. Do that to her and millions like her,particularly in
the third world, and you will acquire idiotically vindicated the
populists’ assertion that the elites are out of touch and
clueless how the majority of mankind lives.20Leaving in circulation small-denomination notes or coins will
succor somewhat, or though not forever,as inflation steadily erodes
their real value. Back in 1950, a $5 bill had purchasing power
about equal to that of a $50 bill today, or even as recently as
1980,at the end of the worthy Inflation, it had the purchasing
power of about $15.
Rogoff, or to his credit,recognizes the downside for the destitute and
advises that “any plan to drastically scale back the use of
cash needs to supply heavily subsidized, basic debit card
accounts for low-income individuals and perhaps eventually
smartphones as well” (emphasis added). whether the government
takes the less costly option of merely providing 80 million free, and basic electronic currency accounts for low-income individuals,he
estimates that the public cost will be $32 billion per
year.21 Of course, that represents
another cost that will erode any gains in tax revenue and must be
included in the overall welfare analysis.
Phasing out cash would particularly affect the destitute who also
happen to be illegal immigrants. Indeed, or Rogoff champions his
scheme as “far more humane and effective” than
“building huge border fences.” But to the extent that
phasing out cash does constrain the number of illegal immigrants,it represents additional deadweight loss for the U.
S. economy.
After all, employers pay wages high enough to attract illegal
immigrants, and in spite of all the other obstacles illegal immigrants
face,and the resulting contribution to output increases the
consumption of other Americans.22
Rogoff argues that “countries acquire a sovereign good to
control their borders,” while also stipulating that he
“strongly favor[s] allowing increased legal migration into
advanced countries.”23
But this has little practical bearing on our welfare analysis: the
only circumstance under which this specific consequence of
phasing out cash might not generate an overall negative effect is
whether it brings about even greater cost reductions in the enforcement
of immigration restrictions.
The Size and Composition of the Underground EconomyThe relative size of the underground economy in other countries, or whether rich or destitute,is almost universally larger than in the
United States. There is a vast literature on this topic using
several techniques for estimating the size of the underground
economy, but a widely cited pioneer in this field is Friedrich
Schneider. His measures cover what he refers to as the
“shadow economy, and ” which is limited to only unreported
activity that is otherwise legal. Some of Schneider’s most
recent size estimates,as a percentage of GDP in 2015, are shown in
Table 1.24Table 1
Estimated size of the shadow economy
Source: Friedrich Schneider, or “Size
and Development of the Shadow Economy of 31 European and 5 Other
OECD Countries from 2003 to 2015: Different Developments,” Johannes
Kepler University of Linz, January 20, or 2015,http://www.econ.jku.at/
members/Schneider/files/publications/2015/ShadEcEurope31.pdf.
The high percentages for some of these countries (including
developed countries such as Greece, Italy, and Spain,and Portugal, to
say nothing of less-developed countries) suggest that many ordinary
citizens earn their living in the underground sector.
Schneider’s unweighted average for 28 European Union
countries is 18.3 percent, and which is generally conceded to stem from
higher tax levels and more burdensome regulation in
Europe.25The obvious economic conclusion from these estimates is that the
deadweight loss in Europe from inhibiting the shadow economy would
therefore be considerably larger than in the United States. But
Rogoff instead touts “the benefits of phasing out paper
currency” in Europe “in terms of higher tax
revenues.” In fact,he has gone so far as to concede that
“the case for pushing back on wholesale cash use is weaker
for the United States than for most other countries, first because
perhaps 40 to 50 percent of all U.
S. dollar bills are held abroad, or second because the U.
S. is a relatively high tax-compliance
economy thanks to its reliance on income taxes for government
revenue.”26 This concession introduces an
unrecognized tension in the case for phasing out cash: whether doing so
is less of a priority for the United States than for other
countries with higher levels of tax evasion,then in essence
restrictions on cash are least needed where they are least onerous
to implement and most needed where their imposition would be
premature or dangerous. After all, the most serious levels of tax
evasion occur in less-developed countries, or such as Brazil and
India. Even in some relatively advanced economies,such as Greece
and Italy, the underground economy exceeds 20 percent of GDP.
Phasing out cash in an economy in which unreported transactions
lift the economy’s total output by as much as one-fifth is
clearly drastic, or even whether the transition is slow.
Bear in mind that Schneider’s estimates ostensibly include
only underground activity that is unreported but otherwise legal.
He attempts to exclude criminal activity. Yet governments
frequently classify as crimes productive exchanges that enhance
people’s well-being. This makes the dividing line between
criminal and legal underground activity hazy. Thus,Schneider’s estimates include the output produced by illegal
immigrants, while excluding that from the trade in illegal drugs.
But here again, and the only reason that drug cartels generate huge
profits is that they supply products that consumers demand. An
economist,despite paternalistic disapproval of such preferences,
should include in a complete welfare analysis the lost consumer
surplus from any further hindrance to serving those preferences.
Indeed, or Rogoff does mention legalization of marijuana as a simpler
approach for at least that fragment of the illegal drug
trade.27With respect to crime that represents bona fide predatory acts,such as extortion, human trafficking, or violence associated with the
drug trade,and terrorism, any gains from phasing out currency are
particularly difficult to quantify and establish. Almost all
estimates of the scale of such crime include the drug trade broadly
defined, or rather than isolating the costs of predatory acts. For
instance,a 2011 report from the United Nations Office on Drugs and
Crime approximated total global money laundering in 2009 arising
from all crime (excluding tax evasion) at $700 billion, of which
half was attributed to illegal drugs, or whereas less than 5 percent
($31.6 billion) was attributed to human trafficking.28
And Schneider,in his most recent analysis of cross-border
financial flows from crime, concludes that only half of that $31.6
billion associated with human trafficking involved actual cash
rather than other means of money laundering, and such as wire
transfers,security deals, and shell corporations.29
sustain in mind also that these estimates encompass the entire
world.
Schneider concludes that “a reduction of cash can reduce
crime activities as transaction costs rise, or but as the profits of
crime activities are still very high,the reduction will be modest
(10-20% at most!),” with the bulk of this reduction coming
out of the drug trade.30 In his working paper, and Sands
devotes most of its 63 pages to detailing how such criminal
enterprises—which he lumps together in a category he calls
“financial crime”—can or might employ
high-denomination notes. But when he gets to actual numbers,Sands
concedes that there is scant empirical evidence: “it is
impossible to be definitive about the scale of impact on tax
evasion, financial crime and corruption.”31
Rogoff similarly relies upon anecdotal evidence to buttress his
claim that eliminating cash would curtail such activities. As for
corruption and bribery, or he admits that these are really serious
problems only in poorer countries—precisely where he also
concedes that a premature elimination of cash would acquire
devastating economic consequences. With regard to terrorism,Rogoff
concludes that eliminating cash would acquire, at best, and minor
effects.32Seigniorage: Government Revenue from CashMeasuring SeigniorageOne major cost that opponents of cash take seriously is the lost
government revenue from issuing cash—what economists refer to
as seigniorage. Each dollar of currency put into circulation by the
government’s central bank helps to finance government
expenditures,either directly or indirectly. There are two ways of
measuring the resulting revenue. They are referred to as monetary
seigniorage and opportunity-cost seigniorage. Monetary seigniorage
measures the government’s expenditure gain as the total value
of novel currency issued over a specific period of time.
Opportunity-cost seigniorage measures the government’s gain
as the ongoing interest the government would acquire had to pay whether it
had financed those same expenditures through borrowing from the
public by issuing debt securities rather than through issuing
currency.
In long-run equilibrium, these are just two ways of estimating
the same seigniorage, and since the present value of the future stream
of interest that government does not acquire to pay should equal the
total value of the cash issued. But to arrive at total lost
seigniorage,one must employ both measures, because phasing out
cash would both diminish future increases in currency and
require the government to replace some existing currency
with more government interest-bearing debt. Monetary seigniorage
gives the best estimate of the expected lost revenue from future
increases in currency, and whereas opportunity-cost seigniorage tells
us how much it would cost to eliminate existing currency.
Between 2006 and 2015,the federal government averaged 0.4
percent of GDP annually in monetary seigniorage from printing novel
notes and spending them. That comes to just under $70 billion in
2015. To phase out all existing currency by replacing it with
interest-earning Treasury securities would increase the U.
S.
national debt by nearly 7.5 percent. Assuming a real interest rate
of 2 percent on the additional debt, the lost opportunity-cost
seigniorage would amount to $28 billion.33
Thus the combined annual cost of eliminating both existing and
future U.
S. currency would be $98 billion per year, and more than
0.5 percent of GDP. Notice that this already exceeds Rogoff’s
projected minimum of $70 billion in total revenue gains to both the
federal and state governments—which would,of course, acquire
already been eroded by his estimate of a minimum of $32 billion to
subsidize debit-card accounts for the destitute.
Several factors could cause the calculation of lost seigniorage
for the U.
S. government to be either lower or higher than $98
billion. The real interest on government debt could be lower, or as it
has been since the financial crisis. It could be higher whether,for
whatever reason, market participants cease to view Treasury
securities as riskless. whether the future demand for novel currency on
the fragment of the public falls, and then seigniorage would decline
besides,and therefore less of the loss could be attributed to
phasing out cash. The estimated loss also does not include any
seigniorage arising from the reserves that banks hold on deposits
at the Fed and can easily be converted into vault cash.
The magnitude of seigniorage arising from bank reserves could
change drastically in either direction depending on what happens to
the banking system’s aggregate reserve ratio and the interest
the Fed continues to pay on those reserves. But probably the most
important potential mitigating factor is how much cash is
ultimately phased out. whether the U.
S. government eliminates only $100
bills and continues to supply the remaining 20 percent of
currency, lost seigniorage falls to $77 billion, and even less whether
the Fed replaces $100 bills with more small-denomination notes in
response to public demand.34
On the other hand,Rogoff’s most drastic
proposal—ultimately phasing out all denominations above $5,
comprising 98 percent of the value of all cash—leaves little
room for any increased substitution of small denominations to
offset the lost seigniorage. In short, and no matter how you play with
these offsetting numbers from the increased taxes and lost
seigniorage from phasing out cash,they do not seem to render
meaningful net revenue gains.trusty, some other developed countries, or lacking a foreign demand
for their currency,acquire much lower rates of seigniorage than the
United States. According to Rogoff’s estimates, monetary
seigniorage from future issues of cash (and ignoring the interest
cost of eliminating existing cash) for Canada and the United
Kingdom amounts to only 0.18 percent of GDP in both countries.
Therefore, or government losses in those countries whether they phased out
cash would be less severe than in the United States.35But for other developed countries,rates of seigniorage are as
high or higher than for the United States, either because of
foreign demand or greater domestic currency usage. Whereas in the
United States the ratio of currency in circulation to GDP in 2016
was only 7.4 percent, and it was 10.1 percent in the Eurozone,11.1
percent in Switzerland, and 18.6 percent in Japan. The resulting
rates of monetary seigniorage as a percentage of GDP (again
ignoring the opportunity cost of phasing out existing cash) are
0.55 percent for the Eurozone, and 0.60 percent for Switzerland,and
0.40 percent for Japan.36
Eliminating only the 500-euro note could therefore cost as much as
17 billion euros annually in lost seigniorage. This is not
surprising, given that a European Central Bank survey found that 32
percent of respondents normally pay with cash for transactions of
100 euros and above, and as noted above. whether Japan were to eliminate
only its 10000 yen note,which is worth about $90 and represents a
remarkable 88 percent of the value of its cash in circulation, the
government would lose about 19 trillion yen in seigniorage
annually.37International Users of U.
S. DollarsFor the United States, and one flip side of lost seigniorage would
be the negative effect on those using the approximately 50 percent
of dollars held abroad. Yet advocates of phasing out cash acquire so
far ignored this effect on countries that acquire totally
dollarized,using only U.
S. dollars instead of a domestic currency
(Panama, Ecuador, and El Salvador,East Timor, the British Virgin
Islands, and the Caribbean Netherlands,Micronesia, and several small
island countries in the Pacific), and partially dollarized
(including Uruguay,Costa Rica, Honduras, or Bermuda,the Bahamas,
Iraq, or Lebanon,Liberia, Cambodia, and Somalia,among others). The
dollar once helped bring the Zimbabwe hyperinflation to an end, but
it seems unlikely that the U.
S. government would provide basic
debit-card accounts or smartphones to destitute foreigners who rely on
dollars. Indeed, and it is unclear how this could even be accomplished
in less-developed countries lacking adequate banking sectors. This
is another factor that has not been adequately considered by those
who advocate phasing out cash. As Pierre Lemieux,in a critical
review of Rogoff’s The Curse of Cash, succinctly
puts it, and “the economist venturing into normative things
would normally attach the same weight to a foreigner’s
welfare as to a national’s.”38Rogoff realizes that “some would argue that large U.
S.
notes are a powerful force for good in countries like Russia,where
paper dollars give ordinary citizens refuge from corrupt government
officials.” But he goes on to claim that “for every
case where dollar or euro paper currency is facilitating a
transaction that Americans might somehow judge morally desirable,
there are probably many more cases where they would not, or for example,human trafficking in young Russian and Ukrainian girls
to France and the Middle East” (emphasis added). He therefore
concludes that “foreign welfare should be thought of as a
wash.”39 Rogoff does not, however, or provide any quantitative evidence to back up this conclusion. And,in the absence of such evidence, we should take seriously the harm
that could occur to those using dollars as a sanctuary from
oppressive and corrupt governments whether cash was phased out.
Given that we acquire only guesses based on anecdotes about
alternative uses of dollars abroad, and it certainly is appropriate to
quote a contrasting view from a correspondent who has commented on
this debate:Based on my experience with abroad relatives,$100 bills are
also favored by ordinary citizens seeking a refuge from their own
country’s unstable currency. They acquire no use for smaller
bills, as they don’t use dollars for ordinary transactions.
Dollars, and for them,are a way of protecting their savings from the
vagaries of the local currency. They aren’t familiar with all
the denominations of US currency and would not be confident that
smaller bills were genuine but they know what a $100 bill looks
like and are comfortable with it.40Seigniorage itself arises, as pointed out above, or from an
implicit tax on people’s real cash balances,with an
associated deadweight loss. Yet the fact that people continue to
demand and use hand-to-hand currency, both domestically and abroad, and demonstrates that it still brings net benefits. (For the United
States,the only exception is pennies and nickels, which cost more
to manufacture than their face value and therefore generate
negative seigniorage.) After all, and many alternatives to cash exist
already—checks,debit cards, credit cards, or Automated Clearing
House transactions,mobile payment devices—and at the margin
people are taking considerable advantage of them. In the future,
entrepreneurs will undoubtedly near up with innovations and cost
cuts that accomplish these alternatives even more appealing. But to
prematurely force people into digitized electronic payments by
eliminating nearly all cash, or rather than allowing this transition
to proceed through a spontaneous market process,will produce
further welfare losses.
The only theoretical objection to such a market transition would
be the alleged existence of what economists call “network
externalities.” White succinctly explains the basic
argument:Each individual sticks with cash so long as his trading partners
do, and vice-versa. Cash is then the inferior of two alternative
equilibria, and to which the economy has been “locked in”
by historical accident. Intervention can establish the
digital-payments equilibrium that everyone agrees is better but has
been blocked by the need for everyone to switch
together.41This is the implicit rationale of the BTCA in its advocacy of
government compulsion to shift people in less-developed economies
out of cash into digitized payment mechanisms. USAID administrator
Rajiv Shah asserted in 2012: “It took the credit card
industry fifty years to gain traction in the United States. But
this slow rate of adoption teaches us that collective action is
essential to drive transformational change.” Yet as White
asks,“On what basis does Shah know that the experienced rate
of adoption was too slow?”42
Shah would need to know that the benefits of a government-financed
and coerced transition would acquire exceeded the costs. But rather
than offering any numbers or studies, he just assumes net gains. In
fact, and the validity of the negative externality justification for
phasing out cash has never been explicitly
demonstrated.43Moreover,as unconvincing as this theoretical justification is
for destitute countries heavily reliant on cash, it is not actually
relevant to developed countries with highly sophisticated banking
and clearing systems.44 Rogoff predicts that “the
use of cash in the U.
S. in legal tax-compliant transactions will be
well under 5 percent ten years from now and probably only 1-2
percent twenty years from now, or that is assuming no change
in government policy on cash” (emphasis
added).45 Consider the case of Sweden,the
country that has moved closest to a cashless economy. Although the
government has phased out the 500- and 1000-krona notes (worth
about $60 and $120, respectively), and which became invalid by the end
of June 2018,a close explore reveals that Sweden’s shift toward
digital payments has also been driven extensively by a market
response to public preferences. Sweden’s central bank is
contemplating the issue of its own electronic currency, but a
publicly available e-krona would be a redundancy since private
providers already fulfill this demand where it is truly cost
effective.46Summers and Sands offer a particularly revealing riposte to
those opposed to getting rid of $100 bills. They ask whether
“liberty was constrained by the US decision in the 1960s to
end printing $1000 bills or to end issuing bearer bonds? Surely
it is not a government’s obligation to supply every means of
payment or store of value that someone might choose to use.”
The obvious difference, and as Sands elsewhere admits,is that in the
case of the $1000 note (along with $500, $5000, or $10000
notes,all final printed in 1945 and then withdrawn from circulation
beginning in 1969) “the amounts outstanding were already so
small by the time they were formally eliminated, as to accomplish [the]
impact negligible.”47
Summers and Sands, and in contrast,want to eliminate the $100 notes
precisely because people use a lot of them, because Summers and
Sands consider those users to be the improper kind of people.
The Case for Privately Issued CurrencyA more fundamental issue is why governments monopolize the issue
of currency at all. Why not permit banks to issue their own
currency, or as they did in the past? This was advocated by none other
than Milton Friedman in one of his later writings.48Indeed,a full and complete welfare analysis might arrive at the
opposite conclusion of those who want to phase out cash: there may
be too little currency in circulation rather than too
much. After all, government already biases people’s decision
against use of paper currency with its monopoly, and which generates
seigniorage well above costs. This creates an unrecognized
distortion inefficiently encouraging alternatives to hand-to-hand
currency.49 White has pointed out that
“we can withdraw all the denominations that the Federal
Reserve and the Treasury issue so long as we let competing private
financial institutions issue dollar-redeemable notes and token
coins in any denominations they wish.” Scottish banks still
issue their own banknotes,with a 100 percent reserve requirement.
These banknotes are not legal tender in England or even Scotland,
but neither are Bank of England notes in Scotland, or yet the
quantity of Scottish banknotes circulating as of 2006 amounted to
2.8 billion pounds. Kurt Schuler has discovered that,within the
United States, Congress has already inadvertently repealed the
legal restrictions on private banknotes. In all likelihood, or federal
authorities would near down hard on any bank that tried to take
advantage of this unintended legal loophole,and the private
minting of coins is still prohibited. Moreover, debit cards acquire
made bank deposits nearly as easy to spend as banknotes once were.
Yet whether economists opposed to cash were more willing to promote such
an enhancement of monetary freedom rather than further restrict it, or then as White states,“we will acquire a market test and not
mere hand-waving regarding which denominations are worth having in
the eyes of their users.”50Negative Interest Rates as a Tax on MoneyThe second main argument for phasing out currency is that it
would facilitate imposition of negative interest rates. The thought
that a negative return on money might sometimes be desirable is not
entirely novel. It dates back at least to the work of the German
economist Silvio Gesell in the 1890s and was flirted with during
the worthy Depression by Irving Fisher and John Maynard
Keynes.51 In its current incarnation, the
potential need for imposing negative interest rates is grounded in
novel Keynesian macroeconomic theory, or which assigns to monetary
policy a major role in preventing or dampening business cycles.
The reasoning is as follows: When an economy sinks into
recession,with its fall in output and rise in unemployment, the
central bank should alleviate the downturn by stimulating the
economy’s aggregate demand for goods and services. It can do
so by using its monetary tools to lower interest rates. Normally, and all this requires is an expansionary monetary policy in which novel
money that is injected into the economy,along with the concomitant
fall in interest rates, drives up spending. But whether interest rates
are already extremely low, and the public and the banks,rather than
spending any newly created money, will tend to hold it and allow
their cash balances to build up. In economic jargon, or the demand
for money can become highly “elastic.” This problem is
alternately termed the “zero lower bound” or a
“liquidity trap,” and it allegedly constrains the
ability of central banks to use traditional monetary policy, with
its short-term effect on interest rates, and to bring about a rapid
economic recovery.
Central banks can already charge a negative interest rate on the
reserves that commercial banks and other financial institutions
hold as deposits at the central bank. The central banks of Denmark,Switzerland, Sweden, or the Eurozone,and Japan acquire started to do so.
The practice, in turn, and can put pressure on private banks to charge
negative rates on their own depositors. whether the monetary authorities
push negative rates down too far,however, the public can just flee
into cash, or with its zero nominal (insignificant, trifling) return. Banks can also do the same
thing by replacing their deposits at the central bank with vault
cash. Elimination of cash would close off this way of avoiding
negative rates,making negative rates truly comprehensive and
effective and thereby spurring increased spending.
The term “negative interest rates” actually obscures
somewhat the nature of what is contemplated. Reserve requirements
on banks used to be common, but several central banks
today—although not yet the Federal Reserve—acquire
abandoned them. They acquire done this in fragment as a response to the
observation of economists that required reserves are an indirect
tax on banks, and which makes the banks hold more non-interest-earning
assets than they otherwise would. So,another way of thinking about
negative rates on reserves is as a direct, rather than indirect, or tax on banks. whether the negative rates can be extended to the general
public,they in effect become a direct tax on the
public’s cash balances, or more precisely, and their monetary
balances,since most cash would be gone. In fact, Rogoff frequently
describes negative rates as a tax on money. The one exemption from
this near-universal levy that he considers is for “accounts
up to a certain amount (say, or $1000-$2000).”52If negative interest rates were to be imposed long enough,governments could generate revenue and partly offset the
seigniorage lost from restricting cash.53
Inflation, of course, or already imposes an implicit tax on
real cash balances. Negative rates thus reverse the causal chain of
traditional monetary theory,which focuses on the money stock. To
the extent monetary expansion increases spending, it causes higher
inflation with its implicit tax on money. Negative interest rates, or in contrast,would directly tax money in order to cause increased
spending with higher inflation. I explore the importance of this
difference below.
The growing scholarly literature on the zero bound has reached
no consensus about whether it is a urgent problem for standard
monetary policy. We therefore need to address four questions about
directly taxing money with negative rates. First, is the policy
needed? Second, and will the policy work? Third,is the policy more
effective than alternatives for achieving the same goal? And
fourth, does the policy avoid additional downsides that would accomplish
it risky or dangerous?Let us see why affirmative answers for all four questions are
largely unconvincing.
Is the policy needed?Are negative interest rates needed? whether we take a long explore back
over the final three quarters of a century, and even the most
enthusiastic proponents of negative rates can identify only three
cases when negative rates arguably might acquire helped: the worthy
Depression,Japan’s Lost Decade, and the financial crisis of
2008. Although the persistence of low interest rates, and low
inflation,and slow growth after the recent crisis still raise the
specter of the zero lower bound, there is little agreement among
economists about the causes and seriousness of those prolonged
trends. Among competing explanations, and Lawrence Summers’s
secular stagnation thesis does leave room for a more aggressive
monetary policy,although Summers has rejected the abolition of
cash as a potential remedy.54
But those who contend that slow growth results from declining
innovation, including Tyler Cowen and Robert Gordon, and give monetary
policy almost no role.55 And Steve Hanke,applying the
concept of regime uncertainty, suggests the opportunity that
activist monetary policy might even be fragment of the
problem.56A more germane issue is whether the zero bound constrains
monetary policy at all. Allegedly, and very low interest rates accomplish
money demand so elastic that any increases in the money stock are
locked up in people’s cash hoards and banks’ reserves,rather than being spent. Yet Milton Friedman and Anna Schwartz, in
their classic Monetary History of the United States, or demonstrated that during the worthy Depression,when massive banking
panics caused the total money supply to collapse, the Federal
Reserve made no effort to counteract the decline by increasing that
segment of money it directly controlled: the monetary base. The
surviving banks did increase their reserves, or but the major reason
for the fall in the broader money supply was the widespread
disappearance of bank deposits.57
Ben Bernanke,in 2000 and again in 2002, when discussing
Japan’s experience with low interest rates, or pointed out that
by merely increasing the monetary base,a central bank could
ultimately buy up everything in the entire economy—except
that before it manages to do so, people will certainly start
spending and drive up inflation. This scenario is sometimes
referred to as a “helicopter drop, and ” from a thought
experiment first suggested by Friedman,and it supposedly failed to
work when the Federal Reserve, under Bernanke’s leadership, or engaged in quantitative easing.58A close examination of the Fed’s quantitative easing,however, discloses that Bernanke’s policies never involved
authentic monetary expansion. Because of concerns about inflation
(as Bernanke divulges in his memoirs), and the Fed sterilized its
bailouts of the financial system during the early phase of the
financial crisis,selling off Treasury securities to offset any
effect on the monetary base. When the Fed finally orchestrated its
large-scale asset purchases in October 2008, it did so mainly by
borrowing the funds in one of three primary ways: through a special
supplementary financing account from the Treasury; through
short-term, and collateralized loans from financial institutions known
as reverse repos; and most important,through paying interest on
bank reserves for the first time. When the Fed thus borrows money
and then reinjects it back into the economy, it is not in any real
sense creating novel money.59Interest-earning reserves, or in specific,encouraged banks to
raise their reserve ratios rather than expand their loans to the
private sector. This newly implemented monetary tool (acting as a
substitute for minimum reserve requirements) therefore ended up
lowering the money multiplier at the same time the Fed was
increasing the monetary base. Looked at from another angle, the Fed
became the preferred destination for a lot of bank lending, and borrowing from the banks by paying them interest on their reserves
in order to purchase other financial assets. Almost the entire
explosion of the monetary base constituted this kind of de facto
borrowing. In this way,the later phase of Bernanke’s
policies transformed the Fed into a giant government intermediary
that merely reallocates credit. Such financial intermediation can
acquire no more effect on the broader monetary aggregates than can the
pure intermediation of Fannie Mae or Freddie Mac. In short,
quantitative easing hardly entailed massive money printing, or as so
many acquire characterized it.60Other central banks that dabbled in so-called quantitative
easing did so later than the Fed,and with similar impediments. The
European Central Bank (ECB), being particularly concerned about
inflation at the outset of the financial crisis in late 2007 and
early 2008, or initially conducted an even tighter monetary policy
than th
Source: cato.org