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If you open up your wallet, you probably have an assortment of $1, $5, and $10 bills — and maybe a few $20 bills. You almost certainly don’t have a thick stack of $100 bills.
Yet statistics show that $100 bills account for a large majority of the value of cash in circulation. There is $1.38 trillion worth of cash in circulation; $1.08 trillion of this is in the form of $100 bills. If you do the math, that works out to 34 hundreds in circulation for every man, woman, and child in the United States — even though a normal American rarely carries even one.
Of course, this cash isn’t evenly distributed. No one knows exactly who has all those large bills because physical cash, by its nature, is hard to track. Studies suggest that's precisely its appeal, and consequently most C-notes are used for a variety of illicit purposes — tax evasion, drug dealing, bribery, and so forth — both in the United States and overseas.
Harvard economist Kenneth Rogoff believes that the solution is to get rid of cash. In a new book, he argues that abolishing $100, $50, and perhaps even $20 bills will seriously inhibit crime and tax evasion while doing little to hamper legitimate commerce.
We spoke on the phone in early October. The transcript has been edited for length and clarity.
Timothy B. Lee
You call your new book The Curse of Cash. What is the curse of cash and what should we do about it?
Kenneth Rogoff
There's a lot more cash out there than we really need for the legal economy. A big chunk of the cash that the US, the eurozone, Japan, other advanced countries have printed is floating around in the world underground economy. It’s facilitating drug trafficking, human trafficking, extortion, money laundering. It also plays a role in illegal immigration.
My recommendation is not to get rid of cash. It is not to go to a cashless world. It's to get rid of the big bills, which don't have an important use in normal transactions. And I propose doing this very slowly over a long period. I go as far as to get rid of the $20 bill, though we could debate that.
I'm trying to interfere as little as possible with ordinary uses while making it as hard as possible to hide and launder money, which is why the $100 bill is so popular.
I also have a proposal for financial inclusion: providing debit cards just to protect low-income people from adverse effects. They are not the ones mainly using the $100 bills anyway.
Timothy B. Lee
There’s a ton of cash in circulation, and in your book you say that no one knows for sure who has it and how it’s being used. But just to help readers understand this issue, could you give us your best guess about who has it and why?
Kenneth Rogoff
At least half of $100 bills are held abroad. The Fed used to think they were almost all held abroad, but we now know that's not true. In fact, when you look at cross-country comparisons, it seems that a lot of them must be held at home.
It's a really hard to know to apportion it between tax evasion and crime, but I'm guessing that of the ones that are held domestically, 75 percent or 80 percent are for tax evasion and crime. The Fed has tried to demonstrate that there's a lot in legal usage, and they can't.
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Other countries have done studies. The British did this very detailed study and found these massive hordes of cash being used in illegal activity. A lot of $100 bills are used by Mexican drug lords. Columbian FARC rebels use them a lot. Oligarchs in Russia hold them a lot. In China they're used a lot by wealthy people to do transactions off the radar.
Some of that we might say is doing a public good. But it’s hard to say that about Mexican drug lords.
The Bank of Canada produced a report recently showing a very large supply is unaccounted for and they found it in places like construction contractors' basements.
Timothy B. Lee
Let’s take construction companies as an example. Why specifically would a construction company hold so much cash, and what are they doing with it?
Kenneth Rogoff
The construction industry is an area where people do a lot of payments off the books. There’s a lot of hiring undocumented workers. There’s some avoidance of regulation and some avoidance of taxes.
In Boston, it used to be the case that there were sites you could show up and get hired for certain types of daily construction work. They were undocumented workers.
I actually favor a broad amnesty program for existing illegal immigrants. One of the objections to amnesty is that you open the floodgates for more people to come in. Right now the payments from employers in cash are the big magnet, maybe it wouldn't be as extreme as it is now.
Timothy B. Lee
What about concerns that phasing out large bills would hurt poor people, many of whom prefer to deal in cash? You’ve proposed giving debit cards to everyone, but low-income consumers haven’t always had good experiences with debit card systems.
Kenneth Rogoff
Other countries manage to deal with this fairly straightforwardly. Nordic countries give everyone who gets government transfers free debit accounts. It's very inexpensive.
But more broadly, I think the idea that this is bad for poor people has it backward. The tax evaders are at the upper part of the income distribution. Payment recipients, like cleaners, don’t owe taxes. And if they’re paid under the table, then when they reach retirement age and try to get their Social Security, there isn't any. This is not something that favors poor people.
Also, crime falls disproportionately on the poor communities. So it is an important question and a tough question.
Timothy B. Lee
In addition to the crime-fighting benefits, you argue that phasing out large bills will make monetary policy more effective by allowing the Fed to boost the economy by setting negative interest rates. You argue that negative rates could be necessary if interest rates stay at their current low level, and you worry that people could defeat negative rates by stockpiling $100 bills in warehouses.
The thing I wonder about here is: Wouldn’t it be simpler to just set a higher inflation target? What really matters for monetary policy is inflation-adjusted interest rates. So if the Fed raised its inflation target from 2 percent to 4 percent, then a nominal interest rate of zero would be equivalent to a real interest rate of -4 percent — which seems like it should provide the Fed with plenty of breathing room. This seems like it would be simpler and less controversial than trying to phase out cash so we can force people to accept negative interest rates.
Kenneth Rogoff
The biggest argument against changing the inflation target is that it will confuse the heck out of people. If Federal Reserve chair Janet Yellen and European Central Bank President Mario Draghi had a press conference and said, “we told you that 2 percent is nirvana but now it's 4 percent. We're sorry about our mistake,” I think it would be very hard to anchor those expectations.
I think you could literally have a financial crisis out of that. And then who believes the 4 percent target?
A subtle but really important argument that Stan Fisher has made is if you have 4 percent inflation, you’ll have more inflation indexing. People will change wages and prices more often. And in theory if prices and wages change all the time, monetary policy does nothing. So it's perfectly possible that you raise the inflation target to 4 percent and then you need all of it because monetary policy is less effect.
Another problem is that the distortions caused by a higher inflation target are pretty substantial. Let's suppose people don't change prices more often. Then when it comes time to make a change, you're going to make a much bigger change. So there will be larger economic distortions.
