Financial Times – Kenneth Rogoff (Harvard): “Time to Phase Out Paper Money”

May 29, 2014

Kenneth Rogoff, the professor of Economics at Harvard, writing in Financial Times, poses the question “Is it time to consider the phasing out of paper money?” Kenneth Rogoff is the Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard. Any opinion expressed by Rogoff has to be taken extremely seriously as from 2001-2003, he served as Chief Economist and Director of Research at the International Monetary Fund. Rogoff’s treatise Foundations of International Macroeconomics (joint with Maurice Obstfeld) is the standard graduate text in the field worldwide, and his monthly syndicated column on global economic issues is published regularly in over 50 countries.

Writing in Financial Times, in an article titled: Paper Money is unfit for a world of high crime and low inflation, Rogoff argues that abolishing physical currency would achieve currency’s two important objectives. First, it would eliminate Zero Bound on policy interest rates that has acted to handcuff central banks since the financial crisis. At the moment, if central Banks set interest rates too low, in an attempt to stimulate growth, people simply move their money into cash. Secondly. phasing out large denomination notes would make it difficult for criminals to conduct their business; it is believed that a high proportion of large denomination notes are in the hands of criminals. Large denomination notes  facilitate tax evasion and illegal activity.

Rogoff points out:

“Yes, there are some important arguments in favour of the status quo. These include a likely loss of seigniorage revenue – the profit central banks make by printing money – even if anonymous paper currency is replaced with purportedly anonymous electronic government currency. Even though central bank “profits” are turned over to national treasuries, the ability to skim off expenses without having to beg can help insulate central banks from political pressures. But the real costs to governments would be much less than the loss of seigniorage revenues might indicate, because they would gain revenue by making tax evasion more difficult. There would also be savings from crime reduction.”

There is also the argument that there are occasions that people may wish to remain financially anonymous in regard to certain transactions, Someone may wish to pay a prostitute, they may wish to buy marijuana, these transactions may lead to illegal activity at the moment but may not be illegal in the future.

It is accepted that a certain percentage of high denomination notes circulate internationally, however, we would be naive as a society if we believed that all of this money is circulating within a legal environment.

“Without going into gory detail, in both the eurozone and the US there is roughly $4,000 in circulation for every man, woman and child, and it is not easy to find. In Japan the figure is almost double that. In the US and Japan, more than 75 per cent of currency is held in the largest denomination notes, the $100 bill and the Y10,000 note”.

In the EU, there is an even larger range of high denomination notes available. When Joaquín “El Chapo” Guzmán was arrested recently, he had a room containing $200Million. It is estimated the amount of high denomination notes in circulation within the underground or illegal community, is at least 7 to 8% of GDP within the US and would be significantly higher in Europe.

“Of course, if governments could credibly issue an anonymous electronic currency, the problem of the zero bound would still be solved and central banks could keep pushing their product. Even if this outcome is feasible, however, it is hardly desirable. Note that if governments do stop issuing anonymous currency, then they would probably have to ensure that the private sector did not proffer a Bitcoin-like substitute. Otherwise, illegal activities would proceed unabated, and the government would forfeit even the small inflation tax revenue it gets now. Finally, a shift away from anonymous paper currency would ideally involve co-operation among governments. Perhaps the right place to begin is by phasing out large denomination notes. This might be enough to accomplish the main objectives. It is time to consider whether paper currency is vestigial, or worse.”

When someone of the heavyweight credibility of Kenneth Rogoff queries the future of physical currency, the world should sit up and listen. The questions he poses are interesting and relevant. Whether we are ready, as a society, to make so momentous a change or not remains to be seen. It is interesting that someone as influential as Rogoff has posed the question, it is also interesting that he has posed the question in an organ as substantial, as conservative, as influential, as the Financial Times.

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Last modified (UTC): May 29, 2014 18:38

Tags: Bitcoin
PJ Delaney @P.J. Delaney@delboyir

Masters in Public Administration, Bachelors in Mgt., I live in Ireland, I have a bit of a background in Economics and lots of opinions on everything else.