In a recent book, The Curse of Cash: How Large-Denomination Bills Aid Crime and Tax Evasion and Constrain Monetary Policy, distinguished economist Kenneth Rogoff argues, exactly as the book’s title says, that large-denomination paper money, cash, has a corrosive social impact, and that such forms of cash should be eliminated. My first response to this idea was to be reminded of a brief section in Kurt Vonnegut’s Breakfast of Champions where Vonnegut’s alter ego science fiction author Kilgore Trout produces a story that Vonnegut outlines as follows:
“[Trout] wrote a novel about an Earthling named Delmore Skag, a bachelor in the neighborhood where everybody else had enormous families. And Skag was a scientist, and he found a way to reproduce himself in chicken soup. He would shave living cells from the palm of his right hand, mix them with the soup, and expose the soup to cosmic rays. The cells turned into babies which looked exactly like Delmore Skag.
‘Pretty soon, Delmore was having several babies a day, and inviting his neighbors to share his pride and happiness. He had mass baptisms of as many as a hundred babies at a time. He became famous as a family man.
‘And so on.
‘Skag hoped to force his country into making laws against excessively large families, but the legislatures and the courts declined to meet the problem head-on. They passed stern laws instead against the possession by unmarried persons of chicken soup.’
That’s just how Rogoff’s elegantly argued and meticulously detailed thesis strikes me – a misplaced remedy that treats the symptoms rather than the cause. And Rogoff makes some telling points: as the FT puts it ‘Even as people in advanced economies are using less paper money, there is more cash in circulation—a record $1.4tn in US dollars alone, or $4,200 for every American, mostly in $100 bills. And the US is hardly exceptional. So what is all that cash being used for? The answer is simple: a large part is feeding tax evasion, corruption, terrorism, the drug trade, human trafficking, and the rest of a massive global underground economy.’ So I’ll start right there, the crime (taking that term to cover ‘tax evasion, corruption, terrorism, the drug trade, human trafficking, and the rest of a massive global underground economy’) issue.
Does Rogoff seriously believe that criminals will give up their gigantically profitable activities just because large-denomination bills become unavailable? From the criminal perspective it looks like a prima facie storage problem: ten times the physical space needed if ten dollar bills replace hundred dollar bills as the largest denomination available. Ten briefcases rather than one for a million dollar deal. Filling a van for a ten million dollar deal. Use diamonds or precious metals and we are back in single briefcase territory. This is not, by any stretch of the imagination, a crime-defeating obstacle. It won’t make a war on drugs any easier to win.
Rogoff considers the issue of diamonds and precious metals, but takes comfort in the thought that trade in these commodities is better-regulated and more traceable than movements of cash. Does he imagine that high-level criminals do not already have these bases covered? With all the wealth available to them it takes minimal effort and expertise to set up ‘front’ operations to launder illegitimate cash. These facilities are already in place, and more will be put in place as the need arises.
Of course, it’s just as well that Rogoff’s target is large denomination bills. The Access to Cash Review Interim Report , Is Britain ready to go cashless? shows that, despite the increasing use of cards and electronic payments, approximately eight million (17%) of people say cash is an economic necessity. However, resistance to Rogoff’s prescribed changes might come in a more sinister form. It is a matter of convention to regard the illegal ‘underground economy’ as somehow separate from the ‘legitimate’ economy, running in parallel, feeding off, but separate. Rogoff’s book has this as a hidden assumption: fix an anomaly in the legitimate domain and cripple activity in the dark, underground domain. This is an assumption that needs to be questioned, and questioned quite radically. The authority that I recommend in so doing is Catherine Austin Fitts. Work carefully through her primer, Narco-Dollars for Beginners, and think again about whether Rogoff’s ‘fix’, if it stood any chance of success, would ever be permitted by the gatekeepers who control action against the underground domain. The uncomfortable truth is that the financial status quo is highly dependent on a silent, unacknowledged detente between the legal and the illegal, a secret treaty between the forces of light and darkness.
So then, what of the other half of Rogoff’s case, the contention that the volume of cash is so great that it constrains monetary policy by making negative interest rates impracticable? The argument is straightforward: nobody will want to make a bank deposit or buy a treasury bill thereby losing a percentage of their money if they can hold cash instead. On this question I have little doubt that Rogoff is right, but once again, I would question a critical assumption on which his prescription is based. If monetary policy is the only policy tool available, then his argument holds. But it isn’t the only policy tool available. Fiscal policy can be used instead. Indeed, the impotence of interest rate adjustment in a given set of circumstances might be the strongest of clues to the effect that an alternative course should be taken. I have long regarded the Keynesianism/Monetarism debate to be a false dichotomy, one based on political prejudice rather than economic pragmatism. After all, history shows that when things go seriously wrong and crises call for radical action, Keynesians become Monetarists and Monetarists become Keynesians. When the place is on fire the political flavour of an exit becomes irrelevant. To contemplate the very need for a historical anomaly like negative interest rates really does feel like an indication that policymakers should look elsewhere for a solution.
Suggesting that such an eminent economist’s ideas might amount to economic illiteracy is a non-trivial call. Indeed, there may be much more to Rogoff’s view on negative interest rates than I am prepared to admit. However, there is one thing of which I am reasonably certain: while Rogoff may know more about economics than I do, I know more about crime than he does.