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Sunday, October 2, 2016
Why Governments and Banks Want to Eliminate Your Cash
Why Governments and Banks Want to Eliminate Your Cash
In a new book called “The Curse of Cash”,
Harvard economist Kenneth Rogoff advocates removing from circulation
all cash with a denomination of greater than $10. In countries such as
Sweden, Canada and Italy, the government is already beginning to
discourage the use of cash. Almost everywhere in the world, a decreasing
share of transactions are being done with cash. Are we moving towards a
Surprisingly, despite the increasing use of
credit cards, cash holdings are about 8% of GDP, which is actually a
larger share of the US economy than a decade ago, indeed even larger
than 90 years ago.
The amount of cash in circulation (paper
currency and coins) is roughly $4500 for every man, women and child in
America. It is believed that roughly ½ that total is held overseas, but
even $2000/person would be a surprisingly large figure, far higher than
people admit to in government surveys.
Ironically, it is this
increasing popularity of cash holdings that helps explain why
governments are so anxious to discourage the use of cash.
Economists study cash holdings with a model that looks at the costs and
benefits of currency. Even back before 2007, people held fairly large
quantities of cash, despite the fact that perfectly safe assets such as
bank CDs and Treasury bills offered 3% to 5% interest. Of course cash
earns no interest, and if you hold large quantities in safe deposit
boxes, there’s even a small negative return on cash.
economists view the risk-free interest rate as the opportunity cost of
holding cash, what you forego by not choosing a more traditional
This helps to explain the recent surge in cash
holdings. Since 2008, the interest rate on safe assets has been close to
zero, and so there is no longer a substantial opportunity cost of
holding cash. When the cost of something declines, people demand more of
it. But what about the benefits of holding so much cash; why were cash
holdings fairly large even back in 2007, when interest rates were well
One clue is to look at currency in circulation by
denomination. The vast majority of currency (by value) is composed of
$100 bills. And yet in ordinary transactions, people tend to use smaller
bills, such as $1s or $20s. This is confirmed by the fact that small
bills wear out pretty quickly, and need to be replaced often with newer
versions at the Federal Reserve. In contrast, $100 bills wear out very
slowly, suggesting they are mostly hoarded, and used only infrequently
for transactions. So why is it that even back in 2007 most currency
consisted of $100 bills being held for long periods, when better
investments were available?
Cash has one big advantage over
other investments — anonymity. There is evidence that cash is often used
as a way of evading taxes. When people first hear about cash and the
underground economy, they often picture gangster films with drug dealers
swapping briefcases of cash. But the truth is often more mundane. Lots
of cash is hoarded by people in otherwise legal businesses, who are
simply trying to hide wealth from the IRS, or perhaps even their spouse.
When interest rates fall to zero, cash becomes an even more appealing
The anonymity of cash is what makes it appealing to
many people, but it’s also what makes it increasingly unpopular with
governments. They see cash as a way of evading taxes, as well as
facilitating drug dealing and other nefarious activities such as
terrorism. Cash withdrawals of over $10,000 must now be reported to the
government, and even a series of many smaller withdrawals of $3000 at a
time must be reported by banks, if the pattern is “suspicious”. This is
what sent former House Speaker Dennis Hastert to prison — withdrawing
about $3000 at a time, from his own bank account.
Of course one
problem with moving to a cashless society is the loss of privacy. If
you share my libertarian leanings, you might worry about the NSA being
able to find out about all of your purchases. Or a hacker might use
embarrassing purchases to blackmail you. But regardless of how you feel
about privacy, this seems to be the direction the world is moving.
It turns out that there is not one, but two reasons why governments are
becoming increasingly anti-cash. The second reason is much harder for
the average person to understand — the lure of negative interest
[M]onetary policymakers [have begun] to think about a
policy of negative interest on bank reserves... But one thing was
standing in the way — cash [because customers would move thier funds
from banks and hold them as cash if interest rates were significantly
negative.]. The zero lower bound, which might in fact be closer to
negative 1%, is the second reason why economists like Ken Rogoff have
suggested moving away from cash. In a cashless economy, the Fed could
push interest rates as far negative as they wish.