The Curse of Cash: Book Review
Book
Reviews*
FINANCE & DEVELOPMENT, September 2016, Vol. 53, No. 3
Kenneth
S. Rogoff
The
Curse of Cash
Princeton
University Press, Princeton, New Jersey, 2016, 248 pp., $29.95 (cloth).
The
Johns—Law and Keynes—strove to defenestrate gold, and they rather liked fiat
paper. But advances in payment technology have always driven both new payment
media and monetary theory. Technology is such that physical media can now
mostly be abandoned in wired societies. In The
Curse of Cash, Kenneth Rogoff passionately presses the case that they
should be eliminated because the social ravages of paper currency far outweigh
the benefits.
If such a
plan is ever fully implemented, this book will have been at least its initial,
if not ultimate, blueprint. Meticulously written, it covers everything needed
for such a monetary reform. But the book is not excessively polemical. Rogoff
details almost all the arguments against tinkering with paper currency, then
labors to refute or defuse them.
The plan
allows for both macroeconomic reform and possibly massive confiscation of
illicit cash. Its boldness in these dimensions reminds me most of the
Colm-Dodge-Goldsmith Plan of 1946 for German monetary reform. But, to state my
doubts up front, given that precursor, I am skeptical that it can ever be
implemented without an occupying army or a totalitarian regime that forecloses
the issuer’s geopolitical aspirations.
Critiques
against today’s currency denominations have become a cause célèbre for senior
academic economists. Foremost, high denominations are the lifeblood of the
underground economy. At a minimum, Rogoff and others want to eliminate large
denominations like $100, €500, and Sw F 1,000 notes.
Eliminating
paper currency would have numerous desirable effects, including reduced tax
evasion for high-volume cash and off-book businesses and unreported wages.
Terrorists, human traffickers, drug dealers, gunrunners, corrupt politicians,
and dictators would risk confiscation of their cash or at least disruption of
their activity.
What of
lost privacy in personal transactions? That ship has already sailed in a
society with ubiquitous video surveillance, U.S. National Security Agency snooping,
and massive data gathering by social media and other hackers. Will the illicit
activities simply find alternative mechanisms? What of the socially positive
uses of underground cash? People in egregiously run economies would lose an
avenue to escape hyperinflation. A large unbanked population needs physical
money, and people need cash when power outages disrupt electronic transactions.
To address
these objections, Rogoff suggests workarounds. He compiles evidence that the
social gain to currency elimination would outweigh the loss, but concedes that
it is a judgment call. A relentless prosecutor, he loads the indictment with
every conceivable crime: paper currency is a vector for disease!
But he
neglects a crucial rationale for high denominations. Great-power currency and
financial instruments play a dual role: they are tools of economic and
financial policy and conduits of geopolitical power. There is tension between
them. Maintained at great economic cost, the euro makes little sense outside
the geopolitical sphere. Disadvantaging itself economically, the dollar system,
including paper currency policies, has focused ever more on geopolitical goals.
For example, to overthrow the Taliban, U.S. agents delivered blocks of $100
notes to mercenary tribal armies to get them to switch sides. Stanford
University economist and former Treasury Under-Secretary John Taylor has
recounted how the United States flew in bales of $100 notes to pay the Iraqi
bureaucracy prior to currency reform. Sometimes dictators are paid to support
the interests of high-denomination issuers. If the United States and Europe
eliminated their currencies, they would have to buy even larger planeloads of
100 yuan notes for such national security operations. This is enough to
convince me that paper denominations high in real value will endure.
Even the
European Central Bank’s plan to stop issuing €500 notes will do little to
reduce the outstanding stock in the near future and seems geared to increase
it. On a contrary tack, the United States ceased issuing denominations higher
than $100 in 1969 to preclude their illicit use. Subsequent inflation has
increased by sevenfold the weight of $100 notes needed to service a kilo of
cocaine. Inflation is doing Rogoff’s work without requiring explicit action!
But if a
logistical headache for money launderers is Rogoff’s true goal, why not simply
increase the physical dimensions of high-denomination notes without jumping
through the flaming hoop of elimination? Before 1929, U.S. currency was 40
percent physically larger than it is now. Restoring that size or making it even
larger would instantly work the wonders of decades of inflation. The iron law
for subverting illicit economies: a percentage increase in physical note size
is equivalent to the same percentage increase in the price level.
Peter
Garber
Senior
Adviser, Global Markets Research
Deutsche Bank
Deutsche Bank
*Original source: IMF Website
Blog Post No: W2448/26112016
Blog Post No: W2448/26112016
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