Has Cash Become More Trouble Than It's Worth?


You probably know people who have already quit using cash. I do. They pay their bills electronically, and pay for items purchased at stores with debit cards (or prepaid cards, or credit cards, or any number of alternatives like Apple Pay or Google Wallet).

Those people are making their choice based on what's best for them, but maybe society would be better off if people didn't have the choice. At least, that's what Kenneth Rogoff thinks. He's sure enough to have gone to the trouble of writing a book called The Curse of Cash to lay out why he thinks so, and to suggest a path to a (nearly) cash-free society.

Personally, I'm not convinced.

Rogoff's First Problem: Corrupt Transactions

That scale issue is what Rogoff wants to solve. Using $100 bills, you can fit $1 million in a briefcase. (You've no doubt seen the iconic aluminum Zero Halliburton case in movies. Its dimensions allow that much money, in new or used bills, to fit perfectly.) Drug lords, money launderers, human traffickers, gangsters, and corrupt businessmen can make and receive large payments in a form that's hard to detect and hard to track.

Rogoff's idea is that getting rid of large bills will make illegal payments much harder. Your average corrupt government official, Rogoff figures, is going to be a little less interested in taking a bribe if he's going to need a dolly to cart off a steamer trunk full of $10 bills. And if he does take the bribe, it's going to be so cumbersome to move, store, and spend the money as to make it a lot easier to catch him.

The idea that getting rid of large bills will reduce crime, and make criminals easier to catch, is not new. There were $500 and $1,000 bills in regular circulation in the U.S. until 1969, when President Nixon ordered them withdrawn for just that reason. There are still old bills in those denominations around, but they're mostly in the hands of collectors — and tend to sell for well over face value. They're still worth face value at a bank, but any that get deposited get sent to the Federal Reserve to be destroyed.

(Note that with those pre-1970 large bills, we're talking big money. Adjusted for inflation, a briefcase full of $1,000 bills in 1969 would have been worth the equivalent of well over $65 million in 2016.)

Rogoff isn't the only one thinking along these lines. Just a few months ago the European Central Bank announced their decision to get rid of their €500 banknote, on the grounds that it "could facilitate illicit activities."

For most of the past ten years a briefcase full of €500 bills would have been worth at least $6.5 million, although just at the moment it's only worth $5,520,350.

Even after phasing out the €500 banknote, Europe will still have a €200 banknote, worth about $220, so the euro will still come out ahead in the "biggest bribe in the smallest case" competition. (Although behind the $1,000 Singapore banknote, worth over $700, and the 1,000 Swiss franc note, worth over $1,000.)

Rogoff's plan would see the elimination of both the $100 and the $50 bills, followed eventually by the elimination of the $20. (Still later, he'd like to see the $5 and $10 replaced with coins hefty enough to be very unhandy for anyone carrying around more than $60 or so the average person has in his wallet right now.) These changes would make high-dollar cash payments almost impossible.

To enable all this, he'd like to see a few changes, the biggest of which would be the creation of subsidized bank accounts and debit cards that would be free to poor people. (The government has been moving in this direction for a while, with things like the Direct Express card. It's only good for receiving payments of federal benefits at the moment, but it — or the now common prepaid cards — could work for this purpose with modest tweaks.)

Rogoff's Second Problem: Negative Interest Rates

Rogoff's second reason for getting rid of cash has to do with the way the Federal Reserve operates.

The Federal Reserve adjusts interest rates with the goal of keeping prices stable while maximizing employment. They have some rules of thumb to guide them as to what the appropriate interest rate should be. Sometimes — such as the whole past seven or eight years — those rules of thumb have suggested that rates should be negative.

Negative rates are hard to make stick as long as cash exists. If your bank account would pay a negative interest rate — in other words, charge you a fee to hold your money — obviously you're just going to withdraw your money and hold it as cash.

Despite that issue, several central banks are experimenting with negative interest rates. So far, it's been working okay. If interest rates are only slightly negative, it's not worth it to go to the hassle of handling the cash, finding secure storage, insuring it, and so on. But what if the rules of thumb say that interest rates should be very negative? It would be worth it to rent a big vault and hire a bunch of armed guards, if the alternative was to pay several percent negative interest on $1 billion.

If there were no high-denomination bank notes — nothing bigger than a $20 — then pulling your money out of the bank and stashing cash in a vault simply wouldn't be an option. You'd be stuck taking whatever negative rate the central bank decided was appropriate.

Rogoff, who spent a good chunk of his career working at the Federal Reserve, thinks that would be great.

Going Cash-Free — Or Not

Rogoff's book deals pretty well with the practical issues of switching over, although he punts on a few. In particular, he figures that the infrastructure to make person-to-person payments with immediate settlement — the electronic equivalent to handing someone a $20 bill — will be created soon enough.

Cash Is Good at What It Does

However, the fact remains that there are plenty of problems cash solves very well. If you want to sell something that I want to buy, and if I have cash on hand to pay for it, we can execute the transaction without any third-party support. We don't need cards or a machine to read them. We don't need power or an Internet connection. We don't need a financial institution. We don't need a procedure to handle failures of any of those things.

Large denomination bank notes are quite handy for transactions modestly bigger than what we usually carry in our wallets. My wife and I have twice sold an old car, each time for a few hundred dollars. One buyer showed up with a few $100 bills, which I was able to quickly verify and easily count. The other buyer showed up with a few dozen $20 bills, which made completing the transaction much more of a production. (Just counting a few hundred dollars in $20s is a non-trivial undertaking for people without much experience doing so, let alone verifying that they're not counterfeit.)

Most of the other details, where cash seems more convenient than some cash-free alternative, are effectively dealt with in Rogoff's book. It's full of points to flesh out his proposal, even if he fails to acknowledge some of my personal issues, such as the value of bank notes as works of art, and their value as archetypal objects of yearning.

Leaving those trivial issues aside, there's still one big issue that keeps me from being on board with his proposal, which is that it traps everyone in a banking system controlled by the government — a government that is very likely to use the same tools they use currently (such as freezing bank accounts) in ways that will turn out to be vastly more coercive than they are now.

Cash Keeps You Free

Currently, if the government freezes your bank accounts, you lose the use of most of your money. The government isn't supposed to do this in a punitive fashion — it's just to make sure you don't abscond with the money before things get sorted out. But of course it is terribly punitive, and you're probably going to try pretty hard to sort things out with the government as quickly as possible.

Think how much worse things would be if it weren't just your savings that were frozen, but also your ability to make transactions. Right now if your accounts are frozen, you at least have the theoretical option of putting your finances on a cash basis. If there were no cash, you could literally find yourself starving in the dark because you couldn't buy groceries or pay your power bill.

Rogoff, I suspect, would wave that problem away as something that could be easily fixed administratively: There would be rules that would keep the government from freezing your bank accounts so severely as that, along the lines of the rules that already exist for garnishing your wages — transactions under certain amounts or for certain purposes would be allowed.

For me though, that's putting a huge amount of faith to put in those rules and the people overseeing them. After all, fundamental rights have been (and are still being) seriously infringed on the grounds that certain people were "suspected terrorists." Since access to a transaction account isn't currently viewed as a fundamental right, the threshold for limiting such access would be much more easily crossed. Who would object to freezing the accounts of suspected drug lords and suspected human traffickers? But why would it end there? Surely suspected tax cheats are bad people, and suspected deadbeat dads as well. What about people suspected of being behind on their student loans? (The government can seize most of your money for almost any debt you owe the government, but money from Social Security is safe — unless you're behind on your student loans.)

Knowing I have the option to put my finances on a cash basis is a source of considerable comfort to me.

Yes, the circumstances that mean I can put my finances on a cash basis if I need to also mean that criminals can put their finances on a cash basis. I'm willing to accept that, even if Rogoff isn't.

I like the fact that cash money just works, without depending on any infrastructure. It's one reason I've long suggested that you carry some cash.

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