Would eliminating the $100 bill really cut crime?

Discussions about tampering with the coins and bills of U.S. currency traditionally have focused on doing away with the penny, that disrespected and almost worthless copper-colored filler of mason jars in your attic.

Lately, however, the debate has recalibrated to the highest end of the currency ladder, the $100 bill. The idea is that the century note has become the value storehouse of choice for criminals and terrorists, who find it convenient for laundering funds, transporting resources across national boundaries and hiding illicit gains from the eyes of police and tax authorities. 

There are so many legitimate ways of making and receiving payments in the modern world, argues Peter Sands of Harvard's Kennedy School of Government in a recent paper, that "high value notes are arguably an anachronism. ...They play little role in the functioning of the legitimate economy, yet a crucial role in the underground economy. The irony is that they are provided to criminals by the state."

Is there a "compelling case" for withdrawing big bills from circulation, or at least placing a moratorium on their further issuance? That's what former U.S. Treasury Secretary Lawrence Summers, vouching for the work of Sands, his Harvard colleague, argued in an op-ed article a couple of weeks ago.

Izabella Kaminska of the Financial Times acknowledges that "in a world plagued by low productivity, inequality, negative interest rates and deflation, the idea that something as simple as a physical cash ban might magically turn things around is, understandably, a tempting proposition."

However, she says wisely, "perhaps things aren’t as simple as that."

Let's take a look.

Start with the argument in favor of killing off high-denomination bills, which include the 500-euro note (worth about $544 in U.S. dollars) and the 50-pound note in Britain (worth about $70). Sands' judgment echoes a condemnation issued last year by Andy Haldane, chief economist of the Bank of England, who trained his gun sights on all cash, not just high-denomination notes. His argument was that paper currency complicates the job of central bankers like those of the Band of England and the Federal Reserve, especially when interest rates are so low they can only go lower by turning negative -- that is, instead of paying to borrow money, you would effectively be paid to hold on to it.

Rates can only go so low before people realize that cash becomes more valuable the longer they hold it. "Hoarding cash may be inconvenient and risky," observed economist Kenneth Rogoff in 2014, "but if rates become too negative, it becomes worth it." If a severe economic slump occurred when rates were already low -- like now -- central bankers' only option for pushing rates lower to stimulate the economy would be to go negative, and they wouldn't want their ability to do so to be limited.

There's no disputing the assertion that cash is a preferred medium of exchange for the criminal element and underground economy. Cash businesses are renowned for their ability to evade taxes. The IRS, in its most recent assessment of the "tax gap" -- the discrepancy between what is owed by taxpayers on their income and what is collected -- placed the annual shortfall at about 17%. But almost all of that was for income from unofficial -- read "cash" -- sources. On wages and salaries reported on W-2 forms and withheld, only about 1% was misreported, the IRS said. For cash and other income not reported officially, the level was 56%.

Cash is easiest to transport illicitly, its critics say, particularly in large denominations. Sands calculates that $1 million in cash can be transported in a single briefcase, with space left over for a sandwich and a paperback book, if it's in $100 bills. If it had to be carried in $20 bills, it would require three and a half briefcases, which would make it hard to move using just a single currency mule.

Eliminating high-value bills would inconvenience almost no one engaged in legitimate commerce, it's said. Although big bills typically account for a huge share of total currency by value (77% of the total U.S. cash in circulation is in $100 bills), almost no one routinely uses them for workaday transactions. In part that's because many small businesses won't change them.

More often, they're totems brandished by the wealthy or privileged, who like having them in their billfolds for show. Like all other economic phenomena, this is relative; when I lived in Kenya in the 1980, the highest denomination of the local currency was the 500-shilling note, worth about $30. The notes were known on the street as "Pajeros," after the Mitsubishi Motors SUVs favored by European and American expatriates. Every note was crisp and clean, unlike the greasy and grubby lower-denomination bills used as legal tender by ordinary Kenyans. To change a Pajero, one usually had to take it to a bank, which wasn't always so willing to change it either.

But there's another side to the argument. "The argument that eliminating the $100 bill will automatically reduce crime is, at best, suspect," argues Nicholas Colas of the brokerage firm Convergex, quoted by Kaminska. The criminal element is smarter and more resourceful than the anti-currency camp makes out; if it's denied access to high-denomination currencies, it will find something else nearly as good.

Already numerous instruments are available -- everything from gift cards to virtual currencies. Gift-card issuers typically take steps to limit their use as currency, including fees and expiration dates, but they don't have to do so. There may not be that much distance between Amazon as a gift-card exchanger to Amazon as a central bank.

Users of high-denomination currency may be a special group, but in absolute terms not a small one. The Federal Reserve Bank of Boston estimated in 2014 that about 20% of American consumers carried $100 or more in their wallets, and of those, one in four carried at least one $100 bill, mostly for convenience. They're "easier to carry," the Boston Fed found, "than a fat wad of 20s, 10s, or lower denominations."

And for many consumers, the privacy afforded by cash is a virtue, even if one is engaged in a perfectly legal lifestyle. Electronic payment and banking systems are anything but secure, as anyone knows who has received an apologetic notice from a bank or retailer that its data system has been hacked. (And that's pretty much everybody.) 

And Stephen Cecchetti of Brandeis University and Kermit Schoenholtz of New York University observe, the privacy of financial transactions should be seen on balance as a virtue. "We are what we buy," they've written, "so protecting our privacy requires controlling information about our payments." That applies to residents of totalitarian government as well as those in open democracies. "Cash is a vehicle for freedom. Freedom from homicidal dictators as well as freedom from tax collectors. Ultimately, if someone is going to issue cash to protect these freedoms, it might as well be the government that collects the seignorage rather than a private agent." ("Seignorage" is the profit governments earn by issuing currency at face values in excess than the cost to produce the bills and coins.)

"All of this leads us to conclude that paper currency is at the heart of how we choose to organize our society," they write. "In a free society, criminality may be part of the price we pay for liberty." Paper money, they say, hasn't yet come close to outliving its purpose.

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