Harvard Economist: US Should Phase-Out All Currency Larger Than $10 Bills

By Barbara Hollingsworth | September 16, 2016 | 11:24 AM EDT

Harvard Economics Professor Kenneth Rogoff. (Harvard University)

 

(CNSNews.com) – The Unites States should phase-out all denominations of the U.S. dollar larger than a $10 bill to thwart money launderers and tax evaders, Harvard economist Kenneth Rogoff told attendees at a Council on Foreign Relations event this week in Washington, D.C.

“Cash is not used in ordinary retail transactions. It’s used by tax evaders and in a lot of crime of all types, including drug trafficking, human trafficking, extortion, racketeering, you name it,” said Rogoff, a member of the economic advisory panel of the Federal Reserve Bank of New York and author of The Curse of Cash.

“Cash is being used less and less in ordinary transactions,” Rogoff pointed out, noting that the average middle-class American holds about $150 in cash, compared to more than $100,000 in total assets.

“Cash is nothing,” he said.

Rogoff envisions a gradual phase-out of bills larger than $10 over a 15-to-20 year period “to deal with the unintended consequences” of moving to a cashless economy, and scoffed at those who fear the government would then be able to monitor every transaction.

 “If you don’t trust the government and all your money is in cash, you’re pretty stupid,” he said.

According to the Federal Reserve, there were 38.1 billion Federal Reserve notes in circulation last year. An order to print 7.1 billion more in 2017 worth $209 billion has been submitted to the U.S. Bureau of Engraving and Printing. The order includes 2.4 billion $1 bills and 1.5 billion $100 bills.

“There are 11.1 billion $100 bills in circulation, and about 75% of them are held in other countries, in part because the U.S. dollar is the dominant international reserve currency,” according to the Wall St. Journal.

Noting that many of the $100 bills in circulation are used for “illegal activities abroad by Mexican drug lords, Colombian rebels and Russian oligarchs,” Rogoff argued that the “wholesale elimination” of high-denomination bills would mostly affect organized criminals and tax evaders. 

“Every transaction inevitably leaves a trail. Cash doesn’t,” he said.

(AP photo)

“Big [cash] purchases are dirty money,” the Harvard economist stated. “Cutting crime by 5 percent would be a good trade. And if the government can collect 15 percent of taxes that it is not getting, you could cut everybody’s taxes."

The Nordic countries have already reduced cash transactions to about 5 percent of the total, he noted. The impetus to go cashless in Europe was terrorism. “Something bad could spark things here, too,” he said.

But Dr. Louise Shelley, director of the Terrorism, Transnational Crime and Corruption Center at George Mason University, pointed out that many criminals use “trade-based money laundering,” such as exchanging banned elephant ivory for Chinese imports.

CNSNews.com asked Shelley if eliminating most cash – which Rogoff said he did not recommend for developing markets and emerging economies – would stop terrorist groups and other criminals from laundering money.

“You have to be kidding!” she replied. “They [terrorists] are at the forefront of inventing new methods and refining old methods of trade-based money laundering. Illicit trade has exploded with the Internet.”

In May, Shelley testified before Congress that such illicit trade makes up an estimated 8 to 15 percent of the global economy and “is growing in almost all identified categories,” providing funding for terrorist groups and drug cartels.

“But this illicit trade does not exist in a vacuum. It is supported by banks, it is supported by law firms, it is supported by professional services that write contracts, that develop contracts, and help mask the illicit trade,” she testified.

 “You can hide money in a shell corporation in Delaware, no questions asked,” agreed Porter McConnell, director of the Financial Transparency Coalition. “It’s so easy to do. It’s actually quite easy to move billions.”

Criminals and terrorists use phony invoices, inflate prices of intangible intellectual property, and other tricks to launder money, McConnell told CNSNews. “This stuff is such a bigger game than cash. You can’t move billions of dollars in a briefcase.”

Rogoff also argued that reducing the amount of cash would also give the Federal Reserve another monetary policy tool because it would eliminate the current constraints on cutting interest rates.

“My basic take is that it’s a good idea to get rid of big bills, period, over the longer term,” Rogoff said, especially since U.S. banks may follow the lead of Switzerland and Sweden at some point and “effectively use a negative interest rate policy.”

“Cash is in the way because if you charge a relatively large interest rate to hold money,” large institutional depositors such as pension plans and insurance companies “will take it out,” he explained.

“Right now, central banks are at a loss about what to do about monetary policy. European banks are looking at negative interest rates. We need to be able to do something,” he said, adding that “central bankers are doing a lot of things more dangerous, such as buying 20 percent of the corporate bond market in the next round.”

Rogoff added that he was not worried that criminals would just switch to alternative currencies such as gold or Bitcoin (“which is not really anonymous”) if most cash transactions were eliminated.

 “There are creative ways to do anything, but you can only use them [alternative currencies] sometimes,” he said. “The government can just say to the banks and retail stores: ‘You can’t take that’,” he explained.

CNSNews asked Rogoff how people could get their money out of a failing bank if large denominations are phased out.

“If the bank wants to give you the money, it can do so with an electronic transfer,” he replied, adding that "we still insure deposits up to $250,000.”

But not everybody at the event was convinced that phasing-out currency was a good idea.

Routine cash-based transactions not only ensure privacy, but protect people from credit card and financial fraud as well as identity theft, Marc Rotenberg, president of the Electronic Privacy Information Center, pointed out, adding that "the greatest abuser of cash is the government, which sent pallets of cash to Iraq to pay out money without accountability."

Related: Terrorism Expert: ‘Radicalized Criminals’ Pose New Terror Threat to Europe, US