Economist argues for elimination of big bills from currency

September 14, 2016 by Colleen Walsh, Harvard University
In his latest book, “The Curse of Cash,” Ken Rogoff, the Thomas D. Cabot Professor of Public Policy as well as a professor of economics, argues that eliminating big bills could stymie black markets and crack down on tax evasion. Credit: Stephanie Mitchell/Harvard Staff Photographer

In his latest book, "The Curse of Cash," Ken Rogoff, the Thomas D. Cabot Professor of Public Policy, argues that the elimination of big bills could help stem crime and even aid countries trying to rebound from financial collapse. In a Q&A with the Gazette, Rogoff, also a professor of economics, outlined the reasoning behind what he calls a "less-cash society."

GAZETTE: What is the main premise of your book?

ROGOFF: Let's start by clarifying that my plan aims for a less- society, not for a cashless society, which I think would be a mistake into the foreseeable future. I would start by eliminating large notes—the $100 bill, the $50 bill—but envision eventually, after perhaps 15 years, also phasing out the $20 bill. The large notes do much more to facilitate crime and than they do to facilitate legal commerce and retail transactions. This fact is a dirty little secret among central banks and treasuries, and has been for a long time.

GAZETTE: How do such large notes facilitate crime, and how will their elimination help curtail that criminal activity?

ROGOFF: The big bills are just a lot easier to hoard, hide, store, conceal, count, and carry. A million dollars in $100 bills fits into a briefcase, and weighs only 22 pounds. With $10 bills, you would need full-size suitcase to cram in a million dollars and it would weigh 220 pounds. Hoarding and hiding large wads of cash also becomes proportionately higher. That sounds very crude, but it's a big deal. The big bills are a tremendous convenience for large-scale criminal enterprises, but unimportant for most ordinary retail transactions. "Breaking Bad" captured the issues rather well.

GAZETTE: You mentioned tax evasion. How will eliminating these big bills help the Internal Revenue Service?

ROGOFF: It is quite common to convert cash receipts on which taxes were never paid into large bills that can easily be hidden and stored. Large bills are also used for large-scale payments of "off-the-books" transactions. The IRS estimates around 15 percent of taxes on the federal level are never paid, adding up to perhaps $500 billion per year. State and local tax evasion is harder to estimate, but might add another $200 billion. The situation in Europe is almost surely worse; taxes are higher and tax compliance is lower.

GAZETTE: What would the process look like for getting rid of big bills and how long would it take?

ROGOFF: I have in mind 10 to 20 years, once the process gets going. It needs to be done slowly in case there are unintended consequences, though I try to anticipate a lot of the issues in the book. For example, one might worry that if, in the extreme, all paper currency were literally eliminated, the central bank might have difficulty controlling the price level because suddenly all government debt is electronic and starts to look the same. As I explain in the book, there is a good reason to believe this won't happen, and it is one reason of several that less cash is better than cashless.

GAZETTE: How would your proposal address the issue of low-income earners who might not use a bank account?

ROGOFF: I think it's important to provide for financial inclusion, just to make sure poor and very-low-income earners are not adversely affected. We need to provide free debit accounts, someday smartphones, to low-income individuals. There's a very simple way to do that, which I discuss in the book, which the Nordic countries have done and a lot of other countries are considering. The fastest way to get going is to start by giving free debit accounts to all poor and low-income earners who receive transfers from the government [Social Security payments, unemployment insurance, etc.]. It would not cost much, and the government would save a lot on issuing checks.

GAZETTE: What would happen in a "less-cash society" if there was some sort of meltdown of the digital systems that enable the modern, plastic banking system?

ROGOFF: The main point is that I am leaving $10 bills around, and according to the surveys most people don't have more than $100 or $200 in cash anyway. In the not-too-distant future, smartphone payments systems will be as ubiquitous as debit cards today and as long as cellphone towers have backup, they can still work. Anyway, [in a disaster] ATM machines might not work, nor will electronic cash registers in supermarkets that lack backup. And if they have backup, they can probably process bank cards. Most disaster-planning manuals also mention using checks in a crisis.

GAZETTE: How do you weigh concerns about the privacy that cash affords with the need to better adhere to laws and regulations in order to cut down on crime and tax evasion?

ROGOFF: My plan aims to strike a balance between the individual's right to privacy and the government's right to tax, regulate, and enforce laws. If you want to spend $1,000, it takes only 100 tens. Frankly, once in a great while, you can easily do a $100,000 purchase. If it's important to you, it will be absolutely doable. But for large-scale criminal enterprises and people who engage in wholesale tax evasion, it will be a major inconvenience; right now, the government makes their lives too easy.

Admittedly, I get a lot of the pushback from people who use cash to avoid paying taxes, and resent any suggestion that they should pay their fair share like everyone else. "The government will just waste the money." Maybe, but a better way to look at it is that when one group is avoiding taxes, other people have to pay more. Lastly, a lot of people think criminals can just substitute into other transaction media like gold, uncut diamonds, or cryptocurrencies. But none of these alternatives is remotely as liquid as cash, and having to use them to do all your business is costly. People engaged in and tax evasion want to spend their incomes like everyone else, and as long as the government is vigilant in regulating alternative anonymous transaction media—say by restricting banks from accepting them, or making them difficult to use in retail establishments—they will hardly fill the void left by big bills.

Explore further: Why the EU's tax probe of Apple and others is raising US ire

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3 / 5 (2) Sep 14, 2016
And if they have backup, they can probably process bank cards.

No they can't, because low income individuals don't get credit and have to use chip & pin "electron" cards which verify the account balance, and when the internet is down or congested they can't process payments.

It happens often that the network connection is just stucky and people spend 5-10 minutes just waiting in line for the transactions to process. That's why I always carry cash. The other reaon is to avoid the store surveillance where they collect and itemize your purchase history.

A third reason is government taxation overreach, double dipping etc. beyond anyone's "fair share", because the individuals have ultimately very little say in how much tax they have to pay.

Fourth reason is, sometimes the tax officals or government will confiscate your money away arbitrarily, or even take money that is not yours eg. emptying your child's bank accounts for the taxes they claim you owe.
3 / 5 (2) Sep 14, 2016
a better way to look at it is that when one group is avoiding taxes, other people have to pay more

Actually they don't, because the government doesn't have a (legal) mechanism for covering the difference. They can only do so by jacking up the tax rates in general, but that is not the fault of the people who use cash, but the fault of the government for being greedy.

It's saying "You don't pay as much as we want, so we'll make these other people pay". Is it your fault? Of course not.

Often it is the case that lowering taxes would increase tax revenue because prices go down and the market goes up, but such wisdom is lost to bureaucrats.

The problem is that governments are trying to maximize tax revenue by finding the highest rate they can tax before the revenue starts dropping: public spending tends to expand to the amount of tax money available, and never shrink even when the market does, so the government always ends up overtaxing the market.
3 / 5 (2) Sep 14, 2016
So, small scale tax avoidance, such as buying a car off your neighbor in cash, is the only means the little guys can have any say on their personal tax rate. That's just "realpolitik" - when the government is becoming an unreasonable burden on the population, the people start to "cheat" to keep on living.

Corporations of course have voided themselves out entirely by different arrangements.
3 / 5 (4) Sep 14, 2016
Or they could wait a few years until a $20 bill is worth $10. Seriously, inflation would hasten the elimination of cash entirely and the encouragement of bartering for crime and tax evation as well as normal transactions.

There could even be websites for swapping goods and services, and a standardized ranking system for equivalence similar to the currency exchange markets.

Something else that AI will make possible.

Anybody feel ambitious?
2.3 / 5 (3) Sep 14, 2016
Actually they don't, because the government...
Eikka... gonna call BS. If you live in an area where 10-20% of the economy is 'submersed' (ie cash-only, non-declared transactions), be it construction workers or drug dealers, that 10-20% of tax revenue that now has to come out of my tax-paying pocket for schools, hospitals, roads, etc, etc. This idea of removing larger bills from circulation as a deterrent for tax evasion is based proven results where it's been implemented.
3 / 5 (2) Sep 14, 2016
Well of course I should listen to myself and search first.

-But of course the scale could change, and a universal method of valuation be developed.
2.3 / 5 (3) Sep 14, 2016
Certainly one of the most inane (if not insane) articles I have ever had the displeasure to peruse.
not rated yet Sep 15, 2016
that 10-20% of tax revenue that now has to come out of my tax-paying pocket for schools, hospitals, roads, etc, etc.

When tax evasion at that level is common from large corporations to private individuals, there's something more fundamentally wrong in the society.

I would say, if you're in that situation the problem is not the people who bypass the government by evading tax, but the government that has become corrupt and useless and has lost the trust of the people. It is very likely that should the people actually pay their taxes, no schools or roads would be built and the government would indeed just waste the money.

Point in case: Greece's government tightening the tax thumbscrew, cutting pensions and welfare, and then immediately buying multi-billion arms deals off of Germany the moment they got a bit of cash from the bailout.

Would it make any difference if the Greeks didn't have 500 euro bills? Very unlikely, because the government is broken.
not rated yet Sep 15, 2016
Or they could wait a few years until a $20 bill is worth $10

At 2% inflation it would take 35 years.

In any case, a €500 or $500 bill is not such a liquid asset as the article claims it to be. Ever tried to pay something in a store with one? It's hard to break a hundred.

It's difficult to pay your bills in cash these days, so you need to take your money to a bank, at which point they'll ask where did you get that suitcase of bills and report you to the IRS.
5 / 5 (1) Sep 15, 2016
35 years
Well if we are entering a period of decline like the 1st decade of the 21st century, then we'll see it halve again in 10 years.

And this is a real possibility.

"There are two main factors that could trigger a U.S. dollar collapse. China could achieve reserve currency status for the yuan, undermining the relevance of the U.S. dollar and U.S. stock markets could crash. Again."
5 / 5 (3) Sep 15, 2016
I want all the benefits of living in a modern society, but I think I should be allowed to determine what those benefits are and how much they cost, because my opinion is more important than the filthy plebes who vote for programs I don't like

- Eikka (paraphrased)
3 / 5 (2) Sep 15, 2016 which point they'll ask where did you get that suitcase of bills and report you to the IRS.
a very naive and US-centric statement. Your argument has not swayed my opinion.
1 / 5 (1) Sep 18, 2016
Given the damage the government has done to the value of a dollar, the argument can be made that the $500 and $1000 notes should be printed again.
5 / 5 (3) Sep 18, 2016
If the governments can get rid of cash then they have 100% recorded knowledge of your every action. They might just as well implant a RFID chip in every citizen.

The paranoid part of my brain thinks that the Western governments are purposely importing terrorists in order to justify 100% public surveillance of their citizens. "It's for your own safety!"
not rated yet Sep 18, 2016
The large notes do much more to facilitate crime and tax evasion than they do to facilitate legal commerce and retail transactions

I dunno. Looking at the largest company the cashless way of transferring money is WAY ahead in the tax evasion and (by all legal standards) crime department. What is called 'organized crime' or terrorism is tiny compared to what goes on in the 'legal' sector.
5 / 5 (1) Sep 18, 2016
In the US you are innocent until proven guilty. Yet, under the guise of a war on drug dealers, a police officer can confiscate any cash he finds on your person for the slimmest of reasons. You then have to prove that the money was not acquired through illegal activity. It is very hard and costly to prove a negative. The government uses drugs as a tool to increase it's power.
5 / 5 (1) Sep 18, 2016
One last little thing, When your money is in the banking system you have no rights to it unless the government wishes you to have it. They can limit your withdrawals any time they wish. They can tax it with negative interest rates at any time and you have no say, not even a vote.
not rated yet Sep 18, 2016
As part of the "War on Terror" we have already given the US government the power to read every email and text. Computers record and listen to every phone call. The possibilities of abuse are endless with a corrupt government.
not rated yet Sep 19, 2016
I want all the benefits of living in a modern society, but I think I should be allowed to determine what those benefits are and how much they cost, because my opinion is more important than the filthy plebes who vote for programs I don't like

- Eikka (paraphrased)

The public votes for representatives, not programs - the "plebes" voting has no influence on the particular programs the representatives and non-voted bureaucrats then institute. The voters have no direct power over common matters.

However, government spending is nearly half the GDP of a typical western nation, which means a great deal of the population votes for more spending to gain more out of plain self-interest, and so the government has to tax more to spend more, or borrow money which creates inflation, which is taxation by the back door.

Over time that automatically leads to overtaxation, and the people who aren't on the recieving end of it have no option but to start evading taxes
3 / 5 (2) Sep 19, 2016
In the US for example, government spending is about 41.6% GDP which means that cutting spending for either party is a political suicide. If you touch pensions, welfare, medicare, military, anything - so many people are going to be affected that you'll lose the next elections. That's why even the republicans can't actually do anything because a spending cut would swing the vote around to the democrats who -will- spend more, and then tax more.

So the spending goes up and up, and the taxes go up and up, except for the rich and the corporations and other political bedfellows, such as those who recieve subsidies.

It's a tragedy of the commons type of situation that leads to the destruction of the working middle class which isn't recieving any direct subsidy, welfare or tax cut, and is expected to pay all the tax for the poor who don't pay it, and the rich who won't pay it anyhow.

So is it really wrong to evade tax by cash and "make the other guy pay"?
1 / 5 (1) Sep 19, 2016
Technology has raised the standard of living of western economies by vast amounts. The problem is that we have not figured out how to employ the people who were displaced by it. The availability of welfare has shattered the family unit and made working males almost redundant. When 70% of black children are born to unmarried females it is pretty easy to guess why there is so much poverty in that community.
not rated yet Sep 19, 2016
$500 and $1000 notes should be printed again.

Good point. Inflation makes the lesser bills almost worthless in the long run.

And I certainly dislike the way my spending habits are being tracked via my bank-movements. What I spend my money on is nobody's business but mine.

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