There’s a new weapon proposed to fight the war on drugs, the war on terrorism, and the war on illegal activity in general. Former Treasury Secretary Larry Summers is among those pushing to ban the $100 and $50 bills.
Some skeptics believe the real reason to ban this currency is a desire for the government to have a better understanding and control over our behavior and our economy. Before FDIC rules and during a time of great distrust the United States Treasury printed $500, $1,000, $5,000 and even $10,000 bills. Cars and even homes would often be purchased with cash, as mortgages, car loans and other modern financial conveniences simply weren’t available. Because most large transactions are electronic today (anybody close escrow on a home for all cash recently?), there is not a need for these larger bills. Credit cards, personal checks and electronic payment have further reduced the need for hard currency.
So why should anyone be concerned that the government is considering eliminating the $50 and $100?
Eliminating large currency would encourage savers to use ecommerce and eschew cash transactions that cannot be traced. The increase in electronic commerce would allow the government to analyze and review transactions. Sales tax, income tax, payroll tax and other tax revenue sources couldn’t easily be avoided by using e-commerce.
Then there’s the Federal Reserve issue. Negative interest rate policy already instituted in Europe and Japan does not work if you allow savers to store their wealth in large currency. When central bankers try to encourage borrowing and spending by charging to keep deposits at the bank, savers can simply store large bills under their mattress (or more likely in a safe). In fact we are seeing this behavior play out in Japan. The Finance Ministry in Japan announced it has to print 17% more of the highest denomination banknote this year. One economist estimates that cash in private homes in Japan grew to by $46 billion last year to a total of $367 billion.
It is hard to stimulate the economy, the goal of negative interest rates, if savers are stuffing cash into safes at home.
So what do you do?
A highly credentialed author of a paper proposing the elimination of large currencies recently wrote, “Introducing negative interest rates would create a powerful incentive to hold deposits in cash, most likely in higher denominations. Eliminating high-denomination notes, so that saving in cash was more inconvenient, would mitigate this problem.”
By eliminating large denomination currency, could our Federal Reserve Bank preemptively deal with this potential obstacle to negative rates that we may face in the future? A $20 bill is a high enough denomination for most consumers. A growing number of transactions are electronic and the younger generation seems to prefer it that way. It is interesting to note the benefits to our government official’s nonetheless.
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