Peter Sands is a senior fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School and the former Chief Executive Officer at Standard Chartered Bank. Lawrence H. Summers, an occasional Wonkblog contributor, is the Charles W. Eliot university professor at Harvard and a former treasury secretary and director of the National Economic Council in the White House. Summers serves as an adviser or board member to a number of financial technology and payments companies.
Our advocacy for ending the printing of high denomination notes — first in a working paper by Peter and colleagues and, later in a post by Larry — have been attacked on the ground that this proposal represents an infringement on liberty (for example, see here and here). Most prominently, the Wall Street Journal concludes an editorial with the remarkable assertion: “Beware politicians trying to limit the way you can conduct private economic business. It never turns out well.”
There are two levels of illogic here. First, even the most ardent libertarian recognizes the need for antifraud statues, limits on what can be contracted, and requirements of tax withholding, so the general principle that government should not affect the conduct of private business is absurd.
Second, it is surely a stretch to assert that ceasing government’s active effort to circulate and print 500 euro notes or $100 bills constitutes a government infringement on the conduct of private economic business. Do the Journal editors believe that liberty was constrained by the U.S. decision in the 1960s to stop printing $1,000 dollar bills or to stop issuing bearer bonds? Surely it is not a government’s obligation to provide every means of payment or store of value that someone might choose to use. Nor, it should be emphasized, did the abolition of the $1,000 put us on any kind of slippery slope to monetary perdition.
Our advocacy for the elimination of high denomination notes is based on a judgment that any losses in commercial convenience are dwarfed by the gains in combatting criminal activity, not any desire to alter monetary policy or to create a cashless society. We take no position on the desirability of negative interest rates but are convinced by the arguments of JPMorgan, Miles Kimball and others that significantly negative rates can, if desired, be maintained without any limitation on currency through bank withdrawal fees. And we believe that for the foreseeable future there will be a role for cash in modern economies, though we would not be surprised if in many contexts its transactions costs come to exceed those of various electronic payment schemes.
No ATMs in Europe offer 500 euro notes and very rarely do American ATMs offer $100 bills, so we are highly skeptical that legitimate commerce for the vast majority of law abiding citizens will be impacted. Only the affluent will be affected at all, and we do not think that giving a grandchild five $20 dollar bills rather than a single $100 or tipping a caddy with three $50 bills is too great an inconvenience relative to the benefit of inhibiting criminal activity.
There are 30 U.S. $100 bills in circulation for every man woman and child, and more than 300 billion euro in 500 euro notes. As Peter’s paper documents, the vast majority of this currency is involved with activity that is at a minimum problematic, and often criminal. This inference for Europe is supported by the observation that high denomination note issuance relative to gross domestic product is nearly 20 times as high in Luxembourg, a traditional haven for illicit activity, relative to the rest of Europe.
We agree with the philosophical position of the Wall Street Journal that governments should do only what is necessary and that excessive government activity is dangerous. That is why we favor an end to the further printing of high denomination notes.