Bethany McLean is a financial investigative journalist and a contributing editor at Vanity Fair.
There are some things that are so woven into the fabric of our existence that we never pause to think about them. Cash is one of those things. But in “The Curse of Cash,” economist Kenneth Rogoff argues that we’d be better off without it. In fact, he writes that “the massive quantities of cash circulating today . . . are a huge public policy problem that needs to be urgently discussed, not taken as an immutable fact of life.” The great accomplishment of his book is that his arguments are convincing.
Of course, the history of cash reveals that it isn’t immutable at all. Rogoff does a quick romp through it, from Marco Polo’s discovery of paper currency when he traveled to Asia, which “stunned Europeans as some form of alchemy,” to how new ideas about currency helped enable Alexander the Great’s empire, to the inflation that has destroyed empires when governments have debased their currencies.
And we all know that money is changing today, from the proliferation of debit cards to options such as PayPal and Google Wallet. So it might be logical to surmise that the use of cash is declining. One of the many surprising facts in Rogoff’s book is that it is not. Cash transactions account for only about 14 percent of the total by value, and yet, Rogoff writes, “demand for most advanced-country paper currency notes has been rising steadily for more than two decades.” As of the end of 2015, there was “$4,200 floating around for every man, woman, and child in the United States.” The vast bulk of that was in $100 bills.
Here’s another strange thing about cash: No one knows where all of it is. Rogoff cites estimates that some 60 percent of U.S. dollars are held abroad. Another way of thinking about it is that on a global basis, at least half of the outstanding cash is in the underground economy. “Cash plays a starring role in a broad range of criminal activities including drug trafficking, racketeering, extortion, corruption of public officials, human trafficking, and, of course, money laundering,” as Rogoff writes. Not to mention terrorism. (This is why Rogoff, only half-jokingly, argues that what central banks do by creating money can be thought of as reverse money laundering: Sending clean money into the world that can then be used for dirty purposes.) Cash also enables tax evasion, which Rogoff estimates costs more than 3 percent of gross domestic product in the United States and probably much more in Europe. And if wages couldn’t be paid in cash, well, that would help address the issue of illegal immigration.
All of this helps explain why Rogoff argues that the costs of cash aren’t worth the benefits, despite the fact that the benefits are considerable. Probably the biggest is “seigniorage”: the government’s ability to print money that costs nothing but can be spent at face value. In the United States, Rogoff says, siegniorage profits have averaged 0.4 percent of GDP annually in recent years. But he says that getting rid of cash still makes sense, economically speaking, because the loss of that revenue is “likely cancelled out by indirect benefits due to higher tax revenues from the underground economy, not to mention all the ancillary benefits in terms of crime reduction.”
That said, in Rogoff’s view, all of this is something of a sideshow. The real reason to end the era of cash is that it would enable central banks to cut interest rates all the way into negative territory, as some, such as the European Central Bank and the Bank of Japan, are already trying to do. The existence of cash makes it difficult to take rates far into negative territory because, of course, savers would hoard cash rather than accept a negative rate. Rogoff writes that “paving the way for unfettered and fully effective negative interest rate policy ought to be thought of as a major collateral benefit of phasing out paper currency,” because “it would certainly put countries in a much better position to deal with the next financial crisis and it would be very helpful for freeing up monetary policy in ordinary recessions in a low interest rate world.”
It’s true that some might see negative rates as “unholy,” but Rogoff argues that giving central banks the flexibility to take rates into negative territory is like giving a golfer the powerful swing required to get out of a sand trap. There are certainly risks. But he thinks a short burst of negative rates is probably less dangerous than a decade stuck at the zero bound.
One of the most appealing aspects of Rogoff’s books is that he doesn’t shy away from questions and doesn’t write with an artificial surety. He’s willing to write, “We just don’t know.” Indeed, we don’t know whether rates will remain stuck near zero, and we don’t know how bad that is for monetary policy. Nor do we know for sure what negative rates might beget. He writes, “The fact is that negative interest rates are still very much an experimental policy, and although they can work wonders in theory, no one can be sure what issues might arise in practice.” While Rogoff is clearly a believer in central banks and a skilled technocrat’s ability to manage the economy, he admits that they have been “blundering” at times.
He also tackles the obvious question: Do we really want to give governments even more power than they already have to debase the currency by giving ostensibly independent central banks the ability to facilitate negative interest rates? Here, though, his argument is not only a bit of a cop-out but a discouraging one at that. He writes, “The simple fact is that if a central bank wants to debase your money, it already has all the tools it needs for doing so and can make it happen pretty darn fast.” Which might be true, but the fact that central banks are already very powerful isn’t a compelling reason to make them more powerful yet.
Rogoff is an academic, and the book is not easy, breezy reading, particularly for lay people. But it’s clear and coherent, and even if you disagree with him in the end, chances are you’ll think a little bit differently about something to which most of us give no thought whatsoever.
By Kenneth S. Rogoff
Princeton. 283 pp. $29.95