The Curse of Cash: An interview with Kenneth Rogoff (Part II)


This is the second installment of a two-part interview with economist Kenneth Rogoff on his new book, The Curse of Cash. Read the first part here.

Your new book advocates a “less cash” society, phasing out all paper currency notes over (roughly) $10, and in due time even replacing those notes with large coins.(You observe that notes of $10 or less account for only 3% of the US currency supply). How will getting rid of the vast majority of all paper currency help central banks fight financial crises?

KR: It will allow central banks to engage in much more aggressive stimulus with unfettered and open-ended negative interest rate policies, without running up against the “zero lower bound” on interest rates, a bound that exists because cash pays a zero return that any bond has to match. There are other ways to stimulate the economy at the zero bound, some quite elegant, but phasing out cash is simplest and more robust solution. If only large bills are phased out, people could in principle hoard smaller ones, but the cost is far greater (allowing rates to be much more negative), and in extreme circumstances, the government can place other restrictions on redepositing cash into the banking system.

How do negative interest rates work?

KR: The idea behind negative interest rates is simple: they give money that has been hibernating in the banking system a kick in the pants to get it out into the economy to stimulate demand thereby pushing up inflation and output. If successful, negative interest policy could end up being very short-lived because as demand and inflation rise, so too will market interest rates. In other words, if there were no obstacles, central banks could use negative interest rate policy to push down very short term interest rates, but at the same time longer term interest rates would actually rise because people would start to again expect normal levels of inflation and inflation risk. If you are worried about your pension then, on balance, this would be a very good trade.

Are negative rates the main reason to phase out cash?

KR: There are other very clever ways to introduce negative rates without phasing out cash, and the book explains these at length, with one especially clever idea in having its roots in the practices of the Mongol empire of Marco Polo’s time. In any event, the case for drastically scaling back paper currency is very strong even if the central bank is proscribed from setting negative rates. That would be mistake, as negative rates are a valuable tool. In any event, because phasing out cash opens the door wide to negative rates, it makes sense to treat the two topics in any integrative fashion as we do in this book.

Haven’t the early returns on negative interest rates been mixed?

KR: Some central banks have tiptoed into negative interest policy already, but they can only move so far before investors start to hoard cash, hampering the effectiveness of negative interest rates. If negative interest rates were open-ended, central banks could decisively shift expectations without necessarily having to go to extreme lengths.

Aren’t negative rates bad for financial stability?

KR: Not necessarily, because open-ended negative rate policy would allow central banks to turbocharge out of deflation, so that the low interest rate period would be relatively short-lived. The existing regime, where rates have been stuck at zero for many years at a time, likely presents far more risk to financial stability.

Is expanding the scope for negative interest rates really worth the trouble if the next big financial crisis isn’t expected to occur for many decades?

KR: Well, first of all, the next major financial crisis might come a lot sooner than that. Besides, the option of negative interest rates might matter even for the next “normal” recession if the general level of world interest rates remains as low as it has been in recent years. Clearing the way for open ended negative interest rate policy would not only help make monetary policy more effective, it would clear that air of a lot of dubious policy suggestions that would be extremely damaging in the long run. Too often, the zero bound is used as an excuse to advance politically motivated policies that might or not be a good idea, but should be evaluated on their own merits.

Kenneth S. Rogoff is the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund. He is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton).  He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. Rogoff resides in Cambridge, Massachusetts.

The Curse of Cash: An interview with Kenneth Rogoff


What if cash is making us poor?

Called a “fascinating and important book” by Ben Bernanke, The Curse of Cash by leading economist Kenneth Rogoff argues that cash is making us poorer while fueling a corrupt underground economy on a global scale. Even as advanced economies are using less paper money, the amount of cash in circulation is on the rise, a reality Rogoff says feeds terrorism, tax evasion, and human trafficking, among other nefarious activities. Rogoff’s case for eliminating most paper currency is sure to stir serious debate. Recently we asked him to comment on his book and the reasons for his position.

Why do you think paper currency can be a “curse?”

KR: The big problem with paper currency is that a large part of it is used to facilitate tax evasion and a huge spectrum of criminal activities, including drugs, corruption, human trafficking, etc. Most people don’t realize the sheer scale of currency outstanding, over $4200 for every man, woman and child in the United States, with 80% in 100 dollar bills. The vast bulk is unaccounted for; it is not in cash registers or bank vaults. The phenomenon is the same across virtually all advanced economies. The dollar is not special in this regard.

Won’t the government be losing out on huge profits from printing currency?

KR: Yes, governments delight in being able to pay for things by printing money, and the United States government earns tens of billions of dollars each year by doing so. But tax evasion, which is widely facilitated by the use of cash to hide transactions from authorities, costs government far more, in the hundreds of billions for the United States alone, and far more for Europe. If phasing out most paper currency reduces tax evasion and crime by say, 10%, the government should at least break even, and the overall gains to society will be far larger. This is not a quixotic attempt to end all crime and tax evasion, but simply the observation that earning profits by printing large denomination notes is penny wise and pound foolish, a point I first made in an academic paper almost two decades ago.

Are you arguing for phasing out all paper currency?

KR: No, for the foreseeable future, I am proposing a “less-cash” society, not a cashless society. My plan would leave smaller notes, say $10 and below, for an indefinite period. This will help mitigate concerns about privacy, power outages, and the continuing convenience of cash in some small scale transactions. Over the very long run (perhaps several decades), moderately heavy coins would be substituted for small bills to make it even more difficult to transport and conceal large quantities. This last piece is inspired by the experience of ancient China, where paper currency was introduced in part because lower-grade metals were used in coinage, and it proved burdensome to carry large amounts over long distances.

Are you advocating digital currencies such as Bitcoin instead of cash?

KR: Private digital currencies are, in fact, a complete non sequitur, though of course they need to be regulated. Drastically scaling back currency was already a good idea two decades ago when I first wrote on the topic. Credit cards, debit cards, checks and electronic transfers have long been far more important than cash in the legal economy for larger transactions. Today, the role of cash is dwindling even for smaller transactions.

If we get rid of most paper currency, won’t criminals and tax evaders find other ways around the system?

KR: Of course, but there are good reasons why cash is king in the global underground economy. There are other ways to launder money and hide income, but they do not offer the same safety or universal acceptance as cash.

Aren’t most dollars held abroad anyway?

KR: Overwhelmingly, the evidence is no, at least half of all dollars are held inside the United States, still more than $8000 per four-person family.

Do other countries have the same issue with huge amounts of currency outstanding or is the dollar unique?

KR: The US is no way unique, virtually every advanced country has a massive currency supply, some even larger than the United States. And in virtually all cases, the vast bulk is in very large denomination notes. Japan, for example, has issued over 50% more cash per capita than the US, with over 90% of it in 10,000 yen notes (roughly equivalent to the US $100 bill). T

What will happen to the poor in your “less-cash” society?

KR: The poor are not the ones accounting all the 100 dollar bills, but they are the ones suffering the most from crime and who stand to benefit the most if the government were more effective at collecting tax revenues. To facilitate financial inclusion, my plan calls for providing free basic debit card accounts; several other countries have already done this.

What about privacy from the government?

The continuing circulation of small bills will ameliorate privacy concerns to some extent.  The basically philosophy of this approach is that it should remain convenient for individuals to keep modest-size transactions completely private from the government, but for large transaction, the government’s right to tax, regulate and enforce laws trumps individual privacy considerations. I am making this argument on pragmatic, not moralistic grounds.  The current system just makes it too easy to do repeated large-scale illicit trades in cash with big bills.  Even after big bills are gone, there will still be many ways for ordinary citizens to conduct one-off high-value transactions with a significant degree of privacy.  These alternatives, however, are typically inferior to cash for repeated large-scale transactions, as risk of detection rises proportionately.

What about power outages, hurricanes, etc.?

KR: Again, the continuing circulation of small bills mitigates the issue. Other payment mechanisms, including via cell phones, are rapidly becoming more important in the aftermath of storms anyway, and there are a variety of backup technologies such as checks. In a sufficient profound power outage, ATM machines and cash registers will not work either, and the government will have to airlift cash and script regardless.

How will reducing the role of cash help deal with illegal immigration?

KR: Without paper currency, it would be vastly more difficult for employers to pay workers off the books, and sub-market wages. It would be more difficult for employers to avoid making social security tax contributions and to skirt labor laws. Phasing out paper currency is a far more humane way of channeling immigration through legal channels that some of the draconian methods being proposed, such as building giant walls and barbed wire fences. Remarkably, no one in the heated political debate on immigration seems to have quite realized this. Of course, any substantial phase-out of paper currency would take place of a very long period, perhaps 10-15 years, giving a long runway for policy to help existing immigrants.

If the US gets rid of large denomination, won’t other countries just fill in the void and supply their large notes to the world underground economy?

KR: The gains from reducing domestic tax evasion and crime still should make it a big win, even though the US would forgo profits earned from supply the global underground economy, including for example, Colombian rebels, Russian oligarchs and Mexican drug lords. Europe might profit if the euro becomes more popular, but frankly Eurozone countries have much larger underground economies than the United States, and thus even more incentive to phase out paper currency. By the way, foreign notes will hardly fill the void in the United States underground economy. There are already strict reporting requirements on banks and financial firms, and there already exits limits on taking cash in and out of the country. Any alternative currency that cannot easily be spent and recycled in the legal economy will be costly to use and sell at steep discount.

Is it realistic to think cash will ever get phased out?

KR: In fact, the Scandinavian countries are already far along the path, and have successfully negotiated many of the practical concerns that have been raised, for example now to give money to indigent individuals on the street. Sweden is particularly far along. Several countries, including Canada, Sweden, the European Central Bank and Singapore have already taken action to phase out their largest denomination notes, very much in response to concerns about their role in tax evasion and crime.

Part 2 of this interview with Kenneth Rogoff will appear tomorrow.

Kenneth S. Rogoff is the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund. He is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton).  He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. Rogoff resides in Cambridge, Massachusetts.