Against Currency Prohibitionism

From time to time we hear calls for withdrawing today’s lowest and the highest denominations of US currency, the pennyand the $100 bill, from circulation.  In the last year a growing chorus has been calling for prohibition of the $100 bill.

The rhetoric of the anti-high-denomination gang has gotten increasingly shrill.  Erstwhile Bank of England economist Charles Goodhart in September called the European Central Bank and the Swiss National Bank “shameless” for issuing “vastly high-denomination notes,” namely the €500 and SWF 1000, “which are there to finance the drug deals.”  Last month former Treasury Secretary Larry Summers writing in the Washington Post, and citing a working paper by Harvard colleague Peter Sands and student co-authors, extended the indictment to the US $100 bill: it too is used by criminals, so let’s get rid of it.

I have an alternative suggestion for removing $100 bills from the illegal drug trades:  Legalize the trade.  Your local pharmacy doesn’t pay cash to its wholesale suppliers.  My suggestion would reduce the demand for high-denomination currency.  Today’s high-denomination-currency prohibitionists, like today’s drug prohibitionists and yesterday’s alcohol prohibitionists, only think about the supply side.  But does anyone think that banning the $100 bill during Prohibition (when it had a purchasing power more than 11 times today’s, as evaluated using the CPI) and even higher denominations would have put a major dent in the rum-running business, if an army of T-Men couldn’t?[1]

The indictment needn’t stop with facilitation of drug trafficking, of course: opponents add tax evasion, corruption, terrorism, human smuggling, and any number of other activities to the list of crimes whose perpetrators find large-denomination currency convenient.  Sands et al. argue:  “By eliminating high denomination, high value notes we would make life harder” for such criminal enterprises.  No doubt.  But we would also make life harder for everyone else.  The rest of us also find high-denomination notes convenient now and again for completely legal and non-controversial purposes, like buying automobiles and carrying vacation cash compactly.  A serious survey of Eurozone currency use finds that “in Italy, Spain and Austria, … almost one-third of the interviewees always or often use cash for purchases between €200 and €1,000.”

The currency prohibitionists aren’t doing any serious cost-benefit analysis (at least I can’t find any), however.  In a 2014 paper Ken Rogoff enumerates various pros and cons of prohibiting paper currency, but he makes no attempt to attach weights to them.  (He nonetheless hints that he favors moving toward prohibition.)  Goodhart actually assigns a zero value to the cost of lost convenience for non-criminals, asserting that there is “no value whatsoever, except in seigniorage receipts to a number of small Swiss cantons,” from the SNB or ECB issuing the high-denomination notes.  Much less do the prohibitionists consider the effects on personal liberties.  Summers, at least rhetorically, seems to consider the mere suggestion that terrorists use high-denomination currency to be a clinching argument against letting anyone use it:  “The fact that — as Sands points out — in certain circles the 500 euro note is known as the ‘Bin Laden’ confirms the arguments against it.”

In the last few years the prohibitionists have added a second argument: abolishing high-denomination currency would raise the cost of storing currency for everyone.  You might think that raising the costs of a legal activity sounds prima facie like a bad thing, but then you’d be considering the matter from the point of view of ordinary citizens.  The prohibitionists regard it as a good thing because they consider it from the point of view of macroeconomic policy-makers.  If the cost of storing currency is (let’s say) only 0.1% per year[2], then the one-year interest rate can’t go below -0.1%.  It can only be barely negative, in other words.  Why?  At any lower interest rate people will store cash rather than hold one-year bonds, so demand for the bonds vanishes.  Abolish the $100 bill, and the cost of storing a given value in cash (now in the form of $20 bills) increases five-fold: storing bulk cash requires five times as many lockers or safes.  This allows the central bank more leeway to lower rates, in the example to -0.5%.  Thus Goodhart calls the abolition of the €500 note a move that might also prove beneficial by trimming interest rates.”

Both arguments are made by BOE chief economist Andrew Haldane, who in a widely-cited speech takes the arguments to their logical conclusion that society would maximize both (purported) benefits by prohibiting not only high-denomination currency but all currency:

A more radical proposal still would be to remove the ZLB constraint [the Zero Lower Bound on nominal interest rates] entirely by abolishing paper currency.  This, too, has recently had its supporters (for example, Rogoff (2014)).  As well as solving the ZLB problem, it has the added advantage of taxing illicit activities undertaken using paper currency, such as drug-dealing, at source.

Among the prohibitionists, then, one might say that those who want to prohibit only high-denomination notes are the moderates.  The benefit of prohibiting all cash in order to give central banks more leeway to conduct negative interest rate policy, to put it mildly, is very far from having been shown to be worth the cost.

Finally, I note that currency prohibitionists too often regard those who defend high-denomination notes not as intellectually honest but mistaken opponents, but rather as morally suspect characters.  Larry Summers goes out of his way to smear an ECB executive from Luxembourg (who has had the temerity to ask for better evidence before accepting the case for prohibiting high-denomination notes), and by extension to impugn the country’s entire set of policy-makers:

I confess to not being surprised that resistance within the ECB is coming out of Luxembourg, with its long and unsavory tradition of giving comfort to tax evaders, money launderers, and other proponents of bank secrecy and where 20 times as much cash is printed, relative to gross domestic [product], compared to other European countries.

In this one sentence Summers misrepresents several issues.  Luxembourg does protect depositor privacy (aka “bank secrecy”) in general, but not in cases where it would conflict with OECD rules on anti-money-laundering.  Contrary to Summers’ insinuation, banker confidentiality and financial privacy are valuable practices, not per se grounds for suspicion.  Regarding taxation, the former Treasury Secretary Summers, like many current European fiscal authorities from high-tax jurisdictions, blurs the distinction between sheltering illegal activity (“giving comfort to tax evaders”) and allowing legal tax avoidance through competitive tax policies.  Even on its critics’ evidence, Luxembourg’s less onerous tax laws (and specially negotiated tax deals) allow corporations and individuals to legally avoid taxes that they would have to pay if domiciled in other European jurisdiction.  Such competition is naturally not welcomed by authorities from the higher-tax jurisdictions.  As for disproportionate currency issuance (not literally printing) by Luxembourg banks, it should be noted that they also hold a disproportionate volume of bank deposits (about 2.8% of total EU bank deposits, despite the country generating only about 0.36% of GDP).

The case for prohibiting large-denomination currency, to summarize, is largely based on guilt by association or on wishful thinking about the benefits of allowing greater range of action to discretionary monetary policy.  A case based on serious evaluation of costs and benefits has not been made.  Indeed, not even attempted.

Personally, I favor the same policy with regard to large, small, and medium denominations of currency: 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.  Then we will have a market test and not mere hand-waving regarding which denominations are worth having in the eyes of their users.


[1] According to the Bureau of Engraving and Printing, $500, $1000, $5000, and $10,000 denomination notes were last printed in 1945, and the Federal Reserve began retiring rather than re-issuing those deposited into banks beginning in 1969.  The Bureau also produced $100,000 “Gold Certificates” as part of its 1934 series.  Gold Certificates were, however, used only for transactions between the various Federal Reserve banks.

[2] Back of the envelope time:  educated estimates of the value of the huge cash block that drug kingpin Walter White kept in a rented storage locker in Albuquerque, New Mexico, on the popular TV series Breaking Bad, range from $40 to $80 million.  Let’s take the midpoint of $60 million.  An interior-access climate-controlled storage locker in Albuquerque with “state of the art security” that is large enough to store that block (let’s say 10’x12’) currently runs around $1800 per year.  That makes the storage cost only 0.0033% per year, one-thirtieth of 0.1%. The cost to rent a safety deposit box in a bank is of course much higher per unit volume.

[Cross-posted from]