Under the Rogoff plan, people would not have the option of converting their demand and saving deposits into Federal Reserve Notes unless they wanted to carry away bushels of $1, $5 and $10 bills, and any large cash withdrawals would be prohibited. The Fed would then “be free to drive rates as deep into negative territory as they needed in a severe recession.” Doing so, however, would further reduce bank profitability and thence bank lending, which in turn would undermine any recovery.
Negative rates penalize savers and encourage risky investments; they are not a panacea for real economic growth. Zero and negative interest rates have not stimulated private investment, but they have increased leverage, jeopardized pension funds and encouraged government profligacy. Any wealth effects from higher asset prices are temporary and will largely disappear when rates return to normal. A crusade against cash would limit the range of choices open to individuals, thus attenuating economic freedom and increasing uncertainty.
The real danger in Rogoff’s plan is that while it is aimed at limiting cash transactions, it may supply a precedent for even more draconian measures that increase the size and scope of government and virtually destroy financial privacy. The war on cash could then turn into yet another futile yet destructive crusade.
Money is property, and in a free society, the function of government is to protect persons and property. In 1792, James Madison, the chief architect of the U.S. Constitution, wrote, “Government is instituted to protect property of every sort; as well that which lies in the various rights of individuals, as that which the term particularly expresses. This being the end of government, that alone is a just government, whichimpartially secures to every man, whatever is his own.” Depriving people of the right to keep and use larger denomination bills, which are legal tender, would further erode what F. A. Hayek called “the constitution of liberty.”
Of course, money today refers to pure fiat money, not the commodity money that the framers of the Constitution had in mind. A $100 bill is convertible into nothing more than a freshly minted Federal Reserve Note stamped with the same denomination or some other combination amounting to $100. One unintended consequence of Rogoff’s plan, were it implemented, may be to cause a popular uproar against the Fed’s monopoly on currency — and thus incentivize the search for alternatives to government fiat money.
Instead of turning to social engineering and central bank manipulation of interest rates, Rogoff and others supporting his plan would be better off focusing on the true causes of slow growth, crime and corruption. Thinking of ways to increase, not decrease, economic freedom — and to restore limited government and sound money under a just rule of law — would offer a brighter future for freedom and prosperity than waging a war on cash.