A Surfeit of Cash

An influential economist wants to phase out paper money, writes John Hajek.   

Suggesting that governments phase out cash is bound to rub some people up the wrong way—and not just the Pablo Escobars and John Gottis of the world, whose bread and butter comes from the ability to keep wads upon wads of the stuff concealed in the most creative of places.

Most of us tend to think that cash is the only real money. Whatever changes hands when we click ‘transfer’ or tap our debit cards is just a stand-in for real sheets of paper, or, in some cases, polymer plastic. What’s more, most of us have a strong sentimental connection to the feel, smell, and symbolism of physical currency.

This might explain the withering reviews of Kenneth Rogoff’s The Curse of Cash in online rating forums like Amazon and Goodreads. Amateur reviewers generally gush or damn, but with this book, the pendulum appears to have swung very much in the latter direction.

But the criticism is probably unfair. To explain, Rogoff argues in The Curse of Cash that governments should phase out paper currency, beginning with large denomination notes, leaving smaller notes and coins in circulation until such time that ‘universal financial inclusion’ is achieved (equipping everyone with debit cards and smartphones) and until contingency arrangements can be made for disasters and emergencies.

Rogoff’s reasons for proposing this are manifold. He argues the widespread use and acceptance of an anonymous and untraceable medium such as cash gives rise to everything from tax evasion and corruption to racketeering, human trafficking, and the drug trade.

But the scourge of crime not withstanding, Rogoff touts an even bigger perceived benefit. Without cash, central banks could stimulate economies by setting negative nominal interest rates once people no longer have the option of simply holding cash and at least guaranteeing a zero per cent nominal return on their savings.

Never overly ambitious, Rogoff is quick to concede that this will be a major readjustment (hence the proposal of maintaining small notes and coins indefinitely), but he cites the examples of Scandinavian countries significantly reducing their use of cash in an effort to prove his policy realistic. He also admits that paper currency is not without its benefits, such as its ability to shield citizens from the monetary connivances of corrupt governments. Moreover, Rogoff acknowledges that the downsides that he ascribes to paper currency can be upsides depending on one’s values and on one’s own circumstances. For example, Rogoff argues that one benefit of mostly eliminating cash would be that illegal immigrants could no longer work and live in their adopted country under the radar, but notes that ‘what one person sees as illegal immigration, another might see as an escape mechanism for those fleeing from persecution and extreme poverty’.  

The Curse of Cash is also replete with qualifying expressions, like ‘reduce’, ‘more likely’, and ‘improve’, instead of ‘eliminate’, ‘certain’ and ‘cure’, which adds a refreshing level of nuance that is often lacking in books with a policy agenda. Rogoff repeatedly acknowledges that his prescription is by no means a panacea to the scourges of bribery and organised crime.

Yet Rogoff does prove beyond a reasonable doubt that his prescription would at least be a blow to the ‘underground economy’. It is true that bribes can be paid in luxury goods, and that digital money laundering is by no means impossible, but criminal activities would not be so cash intensive if cash were not the most favourable medium of exchange for black market organisations. As Rogoff points out, there is a reason why authorities found more than $200 million in cash when they arrested Mexican drug lord ‘El Chapo’ Guzmán at one of his houses in February 2014—and not $200 million dollars worth of Rolex watches or Steinway & Sons pianos. Cash, particularly in its large denominations, provides a combination of value density, un-traceability, and liquidity that nothing else can match. One can only imagine how much of The Sopranos would have never unfolded if mobsters could only accept their weekly protection money via PayPal.

Moreover, Rogoff points out that ‘$1.34 trillion dollars of US currency is held outside bank—$4200 for every man, woman, and child within the United States.’ He adds that 80 per cent of this cash is in $100 notes. As it is fairly inconceivable that each four-person family has over $16,000 dollars in cash stuffed under mattresses for emergencies, Rogoff is probably right to suspect that some of this is greasing the wheels of the black economy.

The El Chapo affair is just one of many shocking yet amusing examples of malfeasance aided and abetted by paper currency. Rogoff recalls the example of a highranking Chinese general charged with accepting bribes in return for military promotions who had so much cash in his house that the government needed twelve trucks to haul it away, and the fund-raising officer for the governing party of Montreal (where the construction industry is notoriously corrupt) who had so much cash stuffed in a safe in his office (including Canadian $1000 notes) that he needed help forcing it shut. These anecdotes follow a general account of the origins and evolution of paper currency, a term that Rogoff deliberately uses to include coins and polymer plastic notes. There are plenty of interesting historical factoids, as well as some basic exposition of why, until the development of electronic payment and checking, cash ‘wiped the floor’ with any alternative: Portability, uniformity, divisibility, density of value, and its provision of an elegant solution to the ‘double coincidence of wants’ problem.

Criminal activity notwithstanding, Rogoff hangs his hat mostly on the ability of monetary authorities to set negative nominal interest rates once investors can no longer take refuge in cash as a ‘zerointerest, anonymous bearer bond’. His discussion of how central banks have treated the zero lower bond until now is a lot to digest, but then again, it is an inherently complicated subject.

More than that, it is in this section that Rogoff makes the most problematic assumptions about his audience. While many Keynesians might embrace the newfound potential for negative real interest rates, many others—especially exponents of the Austrian school – would think giving central banks this capability would be destructive and immoral, allowing the state to further siphon off individuals’ hard-earned cash balances. In this case, Rogoff’s flagship argument may come across to many as a huge drawback of phasing out cash.

But Rogoff anticipates this objection, and counters that central banks are perfectly able to debase currency under the status quo by printing money. However, this raises another question: If central banks can already debase currency, and therefore set negative real interest rates, whereby nominal interest remain positive but lower than the rate of inflation, what is so essential about negative nominal interest rates? Rogoff does not seem to explicitly answer that question.

Similarly, the aforementioned ‘black economy’ covers not just human trafficking, but also the employment of teenagers to wash cars, shovel snow or tutor younger children, and there are many perfectly legal purchases that people would prefer to keep anonymous for personal reasons. Those of a libertarian mindset might object to the government’s newfound ability to track, regulate, and intrude on every small ‘off the books’ transaction in our lives.

Early on in the book, Rogoff asks ‘where does one draw the line between the government’s right to enforce laws and the public’s right to privacy?’ but, perhaps fairly, he seems to always come down on the side of enforcing laws. If you come down on the same side, and see the value of negative nominal interest rates, the case put forward in this book is pretty iron clad.

But suppose, for the sake of argument, that this book were read by a libertarian who not only recoils at the prospect of currency debasement, but also perceives the public as greatly overburdened with the yoke of taxation and bureaucracy. Such a person, while appreciating that this would make life harder for serious crooks, might not be 100 per cent convinced.