Kenneth Rogoff: Big Cash Bills Are a Curse

Kenneth Rogoff: Big Cash Bills Are a Curse

Below is a new interview with Kenneth Rogoff on the issue of abolishing cash, published in today’s issue of the Swiss Business newspaper Finanz und Wirtschaft by editor Christoph Gisiger. Excerpts from the interview re-printed with permission.


Professor Rogoff, you are proposing to get rid of cash. Why? I actually favor a less cash society over a cashless society. Currency has a lot of important uses which are not so readily replaced in the foreseeable future. The use of cash in the legal economy is very concentrated in small purchases where I guess it’s convenient. It’s also used in poor communities. But it’s different with big bills. Their importance for large legal and tax compliant transactions is rapidly diminishing. In the United States for example, the last careful survey found that cash was used and accounted for only about 14% of the value of all transactions. Now it has probably fallen closer to 12%. And in the Scandinavian countries cash usage is certainly under 5% of the value of transactions now.

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So why do you argue for government intervention since the trend is already going towards a natural  phase out of cash? In most of the advanced countries cash is used and held by people who are engaged in crime and tax evasion. Also, cash plays a huge role in black labor and illegal immigration. If employers couldn’t pay workers off the books in cash it would basically hugely reduce illegal immigration, particularly in the United States. That’s why I say: Big bills are a curse. Of course, I don’t pretend that eliminating large bills is going to somehow change human nature and end tax evasion, crime and illegal immigration. But if we can reduce it even a few percent it’s worth doing. That’s sort of my basic argument. It’s a very simple and sane proposal – especially compared to Donald Trump’s proposal to build a wall against illegal immigration. But if it’s so simple, why didn’t we get rid of cash a long time ago?
I have been working on this topic for more than twenty years. I wrote a paper already in 1998 that covers a lot of the issues. There are two important reasons for the slow progress. One certainly is that central banks and treasuries think that they’re making a lot of money with cash. But it’s penny-wise and pound-foolish to think that this is a money maker. True, cash is a form of interest free debt and if the government didn’t issue cash it would have to issue debt to pay for the same expenditures. Of course, with today’s low interest rates it’s really not very impressive because government debt is so cheap. But potentially some day it would be more. Also, what I argued already twenty years ago is that if you could cut tax evasion by 10% – and the IRS certainly suggests that’s likely – than you would already be more than covering all the lost revenues from printing money. What kind of amounts are we talking about here? There is very good data for the United States where tax evasion, counting all levels of government, is about $700 billion per year. The Internal Revenue Services has done very careful studies for many years and they find that a large amount of this is concentrated in small and medium businesses. Compared to that, the kind of tax evasion that’s been in the news a lot, about people putting money abroad in Switzerland and or in Luxembourg is actually relatively small. It’s much smaller than the tax evasion that occurs within the United States by people who just don’t report their income. And what’s the other reason for the slow progress to phase out large bills? There is a very small but strong lobby who pushes very aggressively to keep cash. Also, there are people who just don’t think that they should pay their taxes and don’t want to be forced to pay their taxes. In the United States, there seems to be a big overlap between the people who want to keep large bills and people who are against stopping people from buying semiautomatic weapons. It’s this mentality of “I don’t trust the government, the IRS is going to invade me.” Of course, that’s just a stupid argument. If you have a totalitarian state that wants to take your cash, the government can just inflate. But many people are just concerned with respect to their privacy. Each country is different. If Japan phases out paper currency, that doesn’t mean Switzerland has to do that, too. But I argue that there has to be a balance between the individual right to privacy and the government’s right to enforce tax laws and criminal laws. That’s why I would leave around small bills. For instance, for the US I’m leaving ten dollar bills. I guess that would be about ten francs in Switzerland. So you can buy something for one or two thousand dollars rather easily with ten dollar bills. But if you want to buy something for a hundred thousand or a million dollars it starts to get much more of a burden. So I’m trying to find a way to make it difficult to run a human trafficking business or commit extortion of big scale corruption without necessarily interfering with ordinary people and their day to day life. Then again, criminals could just switch to Bitcoins. I’m not advocating Bitcoins or other cryptocurrencies as an alternative to cash. Not at all. I think they need to be regulated. Do you think that getting rid of big bills should be based on a democratic vote? Of course, Switzerland is the home of referenda and I think people in Switzerland are able to use them in a pretty constructive way. So maybe for Switzerland a referendum would be a good idea. But for most countries  I think it would be ridiculous to put something like this to a vote. In the Unites States, the Treasury today already has the right to issue 500 dollar bills or to get rid of 100 dollar bills. For that matter, I also think putting the Brexit question to a popular vote was a historic mistake. If you are going to have a big change like that you want a clear majority. It ought to require a lot more than a simple majority in a one-time vote. Nevertheless, critics say that the true intention of your proposal is just to make it easier for central banks to push through with unconventional policies like negative interest rates. As a matter of fact, a second consideration which we can come to is that if we take away the larger denominations it’s one very important step towards enabling central banks to have much more effective tools in fighting a financial crisis and in particular to use negative interest rates in an effective way. Right now, they’re very limited because if you set interest rates too negative big players will hoard cash. Yet, so far negative interest rates seem to scare the financial markets. Central banks have only been able to tiptoe into negative rates. What I imagine is that negative rates are important if we have another deep recession, another financial crisis. I don’t imagine using this day to day. And if you make some legal institutional changes, negative rates would work just like normal monetary policy. A lot of these other policy tools like helicopter money or quantitative easing are difficult tools. Particularly when you’re buying private credit as the ECB does in Europe. So you’re using the central bank, which is a limited purpose institution, to run fiscal policy. I think that’s a very dangerous place to be, having the central bank to become a multipurpose institution, trying to do lots of things run by technocrats who are not elected. My proposal would deal with a lot of these issues without making the central bank a multipurpose institution. If you can have negative interest rates, it would sort of take the pressure of a lot of these other proposals. By that, it would narrow the remit of the central banks tremendously to the way it was before the financial crisis.

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