“Cash, I think in ten years’ time probably won’t (exist). There is no need for it…”
John Cryan, CEO of Deutsche Bank, at the World Economic Forum, Davos, Switzerland, January 20, 2016.
People have been saying for years that cash will disappear. So far, they have been spectacularly wrong. Over the past decade, the face value of U.S. dollar paper currency in public hands has doubled. Today, there is nearly $1.6 trillion in banknotes outstanding, more than 80 percent of which is in $100 bills (see chart)! In fact, there are thirty-nine $100 bills in circulation for each of the 326 million residents of the United States.
U.S. currency in circulation by denomination (face value, billions of U.S. dollars)
Before we get too carried away, we should say that had Deutsche Bank CEO John Cryan, cited above, been standing in Stockholm (rather than Davos) when he projected currency’s demise, and had he been talking narrowly about Swedish Kroner, he would have been on more solid ground. Over the same 10-year period during which U.S. banknotes doubled in face value, Swedish banknotes halved—a development that has caused concern among Riksbank policymakers.
But Sweden appears anomalous. In the euro area, currency outstanding has grown by 80 percent since 2007. The total of €1.4 trillion is more than €3,300 per resident, half of which is in bills of €100, €200 or €500 (see here). In Switzerland, currency has doubled and, as in the United States, nearly all of the growth is accounted for by increases in large-denomination notes: CHF100, CHF200 and CHF1,000. (Yes, the Swiss issue a banknote with a current value of roughly $1,000!). And, in Japan, where nominal GDP has barely moved, banknotes in circulation (mostly ¥10,000 notes) have nevertheless risen by 35 percent.
As an aside, we note that, during the first half of the 20th century, the Federal Reserve did issue $500, $1,000, $5,000 and $10,000 notes. These were discontinued in 1969, ostensibly because they were not in common use. This is almost surely true, as median annual family income was less $10,000 at the time. It seems unlikely that there was much (legitimate) use of these notes.
U.S. $10,000 note (series 1918; discontinued)
Returning to the present, why is 90 percent of the U.S. increase in circulation accounted for by $100 bills? One possible explanation is that, with nominal interest rates near zero, the opportunity cost of holding cash has dwindled, reducing the incentive to deposit rising inventories of cash in a bank. However, if this were the primary driver, many people would be encountering $100 bills with a significant frequency. Speaking for ourselves, we are not. (Perhaps this is a better explanation for developments in Switzerland and the euro area, where nominal interest rates have been negative for more than three years.)
The second, and more compelling, reason for the big increase in large-denomination notes is more troubling: it facilitates illicit activity. Money laundering, tax evasion, drug dealing, human trafficking, and a whole host of other criminal activities run on cash. Big banknotes are a convenient way to transfer funds anonymously with finality. A $100 bill weighs less than a gram, so $1,000,000 weighs roughly 10kg and is small enough to fit in a medium-size briefcase.
To put it simply, most of the U.S. currency in circulation is almost surely being used by criminals.
Notably, a large chunk of the 12¾ billion $100 bills is outside of the United States. Estimates of the share abroad range as high as three-quarters (see Linda Goldberg here and here, and Ruth Judson, here) Lower estimates, such as those of Edward Feige, suggest that the share is closer to one-quarter. The Financial Accounts of the United States (line 36 of table L.204) put the total value of U.S. dollar currency held outside the country at $676 billion. Assuming this is almost entirely in the form of $100 bills, it represents about one-half the number in circulation.
Regardless of who holds all this currency and whether the crooks are inside or outside the country, the growth is a significant source of revenue to the U.S. Treasury. How does the government obtain this seignorage? To get the notes into circulation, the Fed issues them as liabilities and buys Treasury securities that the public would otherwise have to buy. So, in this case, the government really is printing money and spending it!
The seignorage from providing these $100 bills (which cost 15½ cents to produce) is staggering. Over the past decade, revenue was a cumulative $700 billion, or 1.85% of total government expenditure since 2007. Not to belabor the point, but this is a number big enough to get the attention of U.S. legislators who are currently scouring the underbrush looking for federal revenue to offset tax cuts.
Should the U. S. Government be financed in part by an activity that facilitates criminal behavior? Or, should it stop issuing large denomination bank notes? In a recent book, Ken Rogoff argues that, since paper money facilitates tax evasion and a host of criminal activities, governments should get rid of everything bigger than the equivalent of a $10 note.
Making cash transactions more costly for criminals has great appeal. But, universal compliance among leading issuers of government fiat money is unlikely to be feasible. Without such compliance, crooks would just substitute one fiat currency for another. And, even if governments were to act in a coordinated fashion to halt large-note issuance, increasing costs will spur innovation in private payments, including increasing the use of one of the more than 1,000 cryptocurrencies out there.
Put differently, we see no feasible means to control criminality merely by limiting the official supply of anonymous means of payment. We would still need a way to stop the design and use of private digital substitutes as well. This is nearly impossible, as it would require a ban both on commercial transactions (Expedia and Microsoft now accept Bitcoin!) and on the provision of cryptocurrency clearing and transfer services by financial intermediaries. If either is possible, then criminals could use these alternative mechanisms to launder money (see here).
In an earlier post, we surveyed the various arguments for and against eliminating paper money. We noted that there is a clear tradeoff between people abusing the privacy afforded by cash payments and tyrannical societies exploiting the intimate knowledge of people’s payments for malevolent control. Our conclusion then (and now) is that—expressly because of its anonymity—cash is a foundation for freedom: freedom from dictators and from ideological censors. And, 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. That is, we not only believe, but also hope, that John Cryan will be proved wrong.
However, the desire to preserve cash as a means of anonymous payment leaves open the question of whether we have hit the right balance in the tradeoff between protecting privacy and battling criminality. Are our governments providing notes in denominations that are too large, and issuing too much cash as a result? In May 2015, the ECB halted the production of €500 notes, something the United States did half a century ago. Would it really be so bad if governments eliminated everything that was bigger than a $20, €20, CHF20, or ¥2,000 note? Aside from the legislators who will need to replace the lost seignorage, and from the crooks whose costs will rise, we suspect that few would complain.