The Curse of Cash

Professor Rogoff doesn’t like cash, at least high currency bank notes. He’s written a whole book explaining why they should be withdrawn from circulation. To be fair, he restricts the idea to developed or mature economies with strong financial institutions. It’s a subject he’s passionate about and been writing on for over two decades. His main gripe is that cash, especially large denomination bills like the US$100 or the Euro500, are not used by regular folks for everyday transactions, but rather hoarded by criminal and terrorist groups as the illicit proceeds of human smuggling, drug trafficking, arms dealing, and the like. Removing physical cash from the system would go a long way to disrupting those operations. Frankly, I have my doubts.

Paper money has always aided and abetted organised crime. Rogoff estimates that 80% of US cash in circulation is in US$100 bills. This is equivalent to US$4200 per man, woman and child in the United States, or US$16,800 for a couple with two children. It doesn’t take much to work out that very few people hold this amount of cash on hand in US$100 notes. So where are all these banknotes?  A great deal of it is sloshing around in the underground economy, especially high denomination notes like the US$100, which are used far more for illegal than legal activities. The most serious drawback is that it facilitates massive tax evasion. It’s why governments and monetary authorities devote such considerable effort in creating ingenious new cashless currency systems. Denmark and Sweden lead in this race. Like Rogoff, I’d love to light a bonfire under organised crime. However, while burning US$100 notes might temporarily dent organised crime, I suspect they’d find clever ways around it.

Song China was the birthplace of paper money. Italian explorer Marco Polo was so dazzled by it he described it as a form of alchemy. For those who print it, it surely is. It costs the Federal Reserve 12.3c to produce a US$100 bill. Making money (legally) is lucrative. Cash has so many virtues, small wonder it’s lasted so long. It’s a convenient, portable, durable medium of exchange and during periods of low inflation, it serves as a reliable store of value. But Rogoff believes paper money reached its use-by date long ago. Electronic currency will eventually replace it. Curiously, the appearance of debit and credit cards late last century, and digital money (e.g., Bitcoin) more recently, have done nothing to dent the huge expansion in paper currency around the world, especially since the 2008-2009 financial crisis.

The main concern I have with Rogoff’s proposal to phase out paper (and polymer) notes is the potential privacy problems associated with electronic money. Great strides have already been taken to create the financial architecture to ensure privacy. Major security improvements and technologies are constantly being developed. Distributed-ledger technology in Bitcoin and Ethereum is a major step in that direction. However, no electronic payment or currency system can guarantee individual privacy in the same way that physical cash can. Cash is anonymous and very hard to trace. As Dostoyevsky wrote, “money is coined liberty”. This is no mere quibble in an age where government surveillance capabilities are daunting. Edward Snowden’s revelations, need I remind you.

The cashless society that Rogoff envisages serves another important monetary policy objective, especially during severe economic downturns like the 2008-2009 crisis. Cash is akin to a zero-interest anonymous bearer bond: it has no owner or history linked to it, and it’s valid whoever holds it. As such, cash acts as a constraint on how far monetary authorities can lower interest rates during economic slumps. If the yield on financial assets or bank deposits falls to zero, there is little incentive to hold them because cash is equally attractive. However, if the bond yield were to fall below zero – that is, it becomes negative, no one will want to hold them, and bond holders will sell bonds and hold cash.  As a result, cash hampers monetary authorities in setting negative interest rates during financial crises. Rogoff goes to great lengths explaining the allure of negative interest rates: “A good case can be made”, he argues, “that open-ended negative interest rate policy would have been extremely helpful in the depths of the financial crisis”. I disagree, however.

I fail to see how negative interest rate settings will necessarily revive economic activity. A few countries (Japan, Sweden, Denmark) have recently slipped into negative interest rate territory and not one has yet shown any sign of economic uplift. Who’s to know whether banks and other financial institutions will lend out the money and not hoard it to shore up their businesses? Who’s to know whether consumers will want to embark on a spending spree if they believe the deflation has further to run? Who’s to know what the optimal negative interest rate is in the event of a major downturn? Is it –2% or –4%? Rogoff can’t provide any empirical evidence for this supposition because there are no available data. And finally, why should savers be coerced into spending or penalised by subsidising borrowers. The whole notion of negative interest rates can be likened to a government-orchestrated swindle of those who manage their economic affairs prudently by those who don’t.

At a time when public confidence in central banks still hangs on a razor’s edge, a policy that so blatantly forces savers to compensate borrowers is tantamount to a betrayal of the public trust.

I came away from Rogoff’s book feeling rather irked. Not because I disagree with what he says; in fact, I concur with much of what he sets forth. But I’m greatly bothered by the erosion of individual privacy and the moral economy in his proposals and arguments. He believes that safeguards can satisfactorily address these matters. I hope he’s right, but I have strong doubts. Still, the march toward increasingly cashless societies or less-cash societies is inexorable, and so I’d encourage anyone interested in the subject to consult Rogoff’s stimulating, well-written and persuasive book.


Kenneth J. Rogoff. The Curse of Cash. Princeton, New Jersey: Princeton University Press, 2016


Mark Donoghue has held faculty appointments at the Australian National University, National University of Singapore and the University of Notre Dame (Australia). He is currently on the faculty of the Singapore University of Social Sciences. He has published extensively in the field of the history of economic thought and is the author of Faithful Victorian: William Thomas Thornton, 1813-1880 (Palgrave, 2016).

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