Transaction Costs in a Less-Cash Society

us-500-frn-1918-fr-1132d

Hey, remember that time we got rid of thousand-dollar bills, and won the war on drugs?

How bout that time we discontinued five-hundreds, and ended both money laundering and tax evasion?

Just kidding. We didn’t reduce financial crime after discontinuing the $10,000, $5,000, $1,000, or $500 bills, but maybe we weren’t thinking small enough. After all, we have seven denominations left to go.

In a recent book called The Curse of Cash, former IMF chief economist Kenneth Rogoff describes a new master plan. …the author is none too happy with me right now, so I’m just gonna paste a chapter excerpt and let him explain it to you in his own words. (In the interest of time, I only typed in the first sentence of every paragraph.)

PHASING OUT PAPER CURRENCY

The largest-denomination notes, which are by far the most problematic, should be phased out first. In the case of the United States, the largest bills are the $50s and $100s.

A gradual phaseout of large notes could take a couple decades, but there are faster approaches.

The time period of the exchange would need to be determined, but for the sake of concreteness, one idea would be for the process to give people 2 years to use private banks, and longer (say, 7 years) to use regional central bank offices.

The process by which the Eurozone countries exchanged legacy national currencies (e.g., the deutsche mark, the French franc, the Italian lira) for euro notes and coins provides helpful elements of a blueprint.

Smaller notes would be allowed to circulate indefinitely, say, for at least the first two decades of the overall transition. A final stage, optional but recommended, is to eventually require that even the small bills be turned in, either for electronic money or for the newly minted $5 and $10 coins.

The idea of shifting from small bills to coins is to discourage substitution.

The inspiration for going back to the future on coinage comes from ancient China, where coins were made of iron and other heavier base metals, rather than gold and silver, arguably accelerating the transition to paper.

Excerpt From: Kenneth S. Rogoff. “The Curse of Cash.”

It’s always good to draw inspiration from China, paradigm of monetary policy. During the Song Dynasty (960-1279 AD), most Chinese provinces didn’t have access to gold and silver ores. Not enough to mint coins for the entire population, anyway. Even copper was scarce. The ministers of the Chinese Financial Agency minted coins out of iron and lead because they had no better material.

It took four kilograms of iron coins to purchase one kilogram of rice. Merchants eventually began issuing their own private paper money because hauling around heavy coins was too damn inconvenient.

The purpose of money is to decrease transaction costs, not increase them — Remember?

But hey, I get it, we can’t put a price tag on fighting financial crime. Nor should we dismiss the intangible additional benefits, for that matter. How do we dollarize wealth redistribution? The magic of negative interest rates? Rent protection for the banks? An inescapable tax on savings? Surely the minor inconvenience of transacting in coins is worth the collective benefit of reintermediating everything?

Ordinary people engaged in legal, tax-compliant and regulatory-compliant transactions would hardly miss the big notes, at least according to extensive evidence that central banks and other researchers have accumulated.

As an ordinary compliant law-abiding citizen, I concur. A weekly grocery bill for the average US household is $196. My family spends a little bit more because we live in an expensive city and one of us has special needs. But still, $196 is only about ten pounds worth of quarters. Maybe only five pounds denominated in those future $10 coins. Quite manageable, really.

Except that by the time this master plan is complete, a basket of groceries won’t cost $196. It’ll cost more like $196,000,000,000,000. That’s fine, I’ll just hitch a tumbril to the back of my Ford Escape.

See Also:
The Cashless Society Is a Creepy Fantasy –Bloomberg
A Less-Cash Society, Not a Cashless One –Bloomberg

One thought on “Transaction Costs in a Less-Cash Society

  1. Awesomeness as usual with cool humour in the end.

    I really like cash personally, even though Papa Wells lets me conveniently drop checks into the hands of its flirtatious tellers. Sometimes when I want to do things quicker, I go to the issuing bank and just ask them to cash it. A ink thumbprint, a scan of my ID later, as well as a fee that is not explained (and sometimes waived, once again mostly based on flirtation, albeit of the account opening variety and not of the ‘hey baby, you’re so much cuter than the Automated teller’ variety) and I have cash. It’s pretty neat, you almost feel like you’re robbing the place legally when you hear various high ups talking about getting rid of cash all together.

Leave a Reply