Ken Rogoff has an interesting NBER Working paper "Costs together with Benefits to Phasing Out Paper Currency."
Ken would similar to acquire rid of newspaper currency inwards favor of all electronic transactions. I'm a large fan of low-cost electronic transactions using interest-paying electronic money. But I'm non create to surrender cash.
Ken has 2 basic points: The null jump , together with taxation evasion / illegal economy.
Zero bound
Many economists would similar the Federal Reserve to live able to laid a negative involvement charge per unit of measurement target , as a manner to farther "stimulus."
The conventional response is that this is impossible because of currency. As long as you--and to a greater extent than importantly , banks -- tin handle cash , which pays a null involvement charge per unit of measurement , the Fed can't impose a negative involvement charge per unit of measurement on bonds. In reality , belongings cash is expensive , fifty-fifty for banks , hence nosotros tin together with exercise come across slightly negative involvement rates on occasion. But to a greater extent than than -0.5% or hence would live difficult to sustain.
This has led to a break of creative proposals , which Ken summarizes
Let's locomote out aside the (dubious , inwards my view) claim that negative nominal involvement rates are the vital cure for our ailing economies , together with precisely focus on the enquiry whether eliminating currency volition allow it.
So , quiz enquiry for your economical classes: Suppose nosotros direct keep substantially negative involvement rates -- -5% or -10% , say , together with lasting a while. But at that topographic point is no currency. How else tin you lot ensure yourself a null riskless nominal return?
Here are the ones I tin retrieve of:
Now inwards each instance , you lot mightiness say this tin live changed. The IRS could turn down pre-payments for taxes , or accuse a negative involvement charge per unit of measurement or a punishment for pre-payment. Businesses similar a shot accuse penalties for belatedly payment , hence institutionally they could accuse penalties for early on payment.
But our legal together with fiscal organization deeply enshrines the correct to pay early. Imagine the string of courtroom cases inwards which consumers need their correct to pay rent , gas bills , etc. vs. landlords who won't allow them.
Politically , imagine the outrage at an sweat yesteryear the Federal Government together with Federal Reserve to enforce negative involvement rates -- to "take away people's money'' -- at a magnitude that matters -- 5% say , non v bp -- and to eliminate people's correct to handle cash to enforce that confiscation. You mightiness as good advise to accept away their guns , golden bars , together with stocks of canned food.
So , bottom line , nosotros cannot direct keep strongly negative nominal rates without a legal revolution essentially negative-indexing the entire economic scheme together with payment organization , together with upending centuries of police clit giving you lot the correct to pay bills at confront value.
The null jump is non precisely cash.
"Illegal" transactions , regulations , together with taxation evasion
Rogoff:
Though anonymity facilitates evasion of "good" taxes together with necessary regulations , the powerfulness to transact anonymously is an of import security valve that protects our economic scheme together with many others approximately the basis from a welter of "bad" taxes , laws , together with overly intrusive regulations. How much of each nosotros direct keep similar a shot , together with how desirable strict enforcement is depends on where you lot sit. I imagine opinions differ at Harvard vs. Cato or Mercatus.
Regulations may live to a greater extent than of import than taxes. Big companies together with wealthy people who pay most of the taxes inwards the US don't direct keep to cheat; they precisely hire skillful lawyers together with lobbyists. Monitoring transactions is an first-class manner to enforce compliance amongst all sorts of regulations. And nosotros plausibly direct keep to a greater extent than bad regulations than (even) bad taxes.
In the U.S. , eliminating cash would heavily touching on the poor. The U.S. has xi 1000000 undocumented immigrants , most working together with transacting inwards cash. It is probable that many readers of this postal service direct keep violated the extensive Federal together with State project laws or immigration laws , inwards their hiring of business solid assist , together with able to exercise hence yesteryear transacting inwards cash. Sub-minimum wage jobs would disappear without currency , as would many jobs available to ex-convicts together with others facing legal restrictions on their employment. What picayune entrepreneurship together with activity exists inwards many pitiful parts of inner cities survives on cash , yesteryear beingness able to evade non precisely taxes but onerous local regulations , occupational licensing restrictions , zoning restrictions , project laws , together with hence forth. Are you lot buying lights windows or toilets that violate zoning release energy or H2O laws? Not whatsoever to a greater extent than , you're not.
H5N1 lot of "tax evasion" using currency consists of quite pitiful people evading the astronomical marginal taxation rates implicit inwards social programs. People on social security disability , together with medicaid , say , who would lose lots of benefits if they reported income , alternative upward a lot of spare money working for cash. Do nosotros actually desire them to obey all the rules strictly -- non function at all? Should the lookout adult man TV all 24-hour interval long?
I wrote almost the pernicious consequences of e-verify here. The basis inwards which the Federal Government must pre-approve every job strikes me as a nightmare. The basis inwards which the Federal Government is monitoring every transaction betwixt people to enforce who it thinks you lot tin together with can't hire is a worse nightmare.
In other parts of the basis , modest businesses together with project markets only business office at all yesteryear avoiding laws , taxes , or regulations. Estimates for Europe seat the "shadow economy" at to the lowest degree 20% of gross domestic product , together with a larger fraction of job specially for immature people. Values inwards the balance of the basis are probable larger. It's non obvious that eliminating cash together with cash transactions inwards Europe would heighten taxation revenue , rather than precisely lowering actual gross domestic product together with job yesteryear 20% or more.
There is almost $1.3 trillion currency outstanding , to a greater extent than than $3 ,000 per US citizen. 3/4 of it is $100 bills. Most is held abroad. You acquire the pic of who holds dollars together with why. US policy makers my retrieve all our taxes , rules together with regulations are benificent , but nosotros don't retrieve that of the balance of the world. Do nosotros actually desire to acquire rid of this security valve for Russian Federation , Argentine Republic , Venezuela , Republic of Cuba , the Middle East , together with hence forth?
If the U.S. were willing to allow anonymous electronic transactions , together with then nosotros could acquire rid of cash. But nosotros already direct keep lost a non bad bargain of the powerfulness to transact anonymously , together with the electrical current technological together with policy tendency is alone inwards the other direction. One used to live able to accept to a greater extent than than $10 ,000 out of banks at will; similar a shot such a withdrawal must live reported. Smaller cash transactions are voluntarily reported yesteryear banks nether fright of "know your customer" together with anti-terrorism regulation. Remember the glorious ending of the Shawshank Redemption , where the hero takes huge piles of cash out of a bunch of banks together with heads to the Mexican border? Forget it. And it's already beingness used politically: Justice is using know-your-customer rules deny legal but unfavored industries such as marijuana dispensaries together with payday lenders access to banking.
Treasury abolished bearer (anonymous) bonds inwards 1983 , amongst the switch to electronic book-entry holdings. Anonymous Swiss banking concern accounts are a thing of the past. The SEC , IRS , together with CFTC are none also happy almost bitcoin.
Liberty
More deeply , a basis inwards which the Federal Government tin discover every unmarried transaction made yesteryear every unmarried mortal together with firm , together with thereby reconstruct the size together with composition of every person's wealth , strikes me as an Orwellian nightmare. Among the rights to privacy , the powerfulness to brand an anonymous transaction , already severely hampered , cannot disappear totally.
Imagine the repercussions for political liberty if the Federal Government has a tape of every unmarried transaction. If a candidate for political business office in i lawsuit bought a racy journal , that tape is inwards authorities files. And i Lois Lerner or Edward Snowden away from a twitter feed. If a prominent political vocalism , or fifty-fifty an annoying economic science blogger , had a purchase somewhere inwards his or her history they did non desire made world , or that violated some nitwit police clit or regulation , they could speedily live silenced. Imagine what J. Edgar Hoover could direct keep done to the civil rights together with anti-war movements amongst the powerfulness to come across every transaction inwards the country.
Ken acknowledges this point:
"Controls are placed." Absolutely nosotros require controls , together with nosotros require them similar a shot fifty-fifty amongst currency. Let's add together some subjects together with active verbs here: Congress should locomote yesteryear clear stringent laws , amongst strong judicial oversight together with as strong penalties , on the limits of the government's collection together with purpose of information on fiscal ownership together with transactions.
Substitutes together with a chilling ending:
H5N1 global treaty banning currency together with anonymous transactions...I tin come across the pitchforks now.
To live clear , this is a skillful essay , together with Ken brings upward all the of import points. My disagreement hither is precisely sentence on the importance of some considerations -- "good" taxation together with regulatory evasion , "good" anonymity , the importance of anonymity for political liberty -- relative to others -- seignorage (trivial inwards my catch , of import inwards Ken's) for example.
Ken would similar to acquire rid of newspaper currency inwards favor of all electronic transactions. I'm a large fan of low-cost electronic transactions using interest-paying electronic money. But I'm non create to surrender cash.
Ken has 2 basic points: The null jump , together with taxation evasion / illegal economy.
Zero bound
Many economists would similar the Federal Reserve to live able to laid a negative involvement charge per unit of measurement target , as a manner to farther "stimulus."
The conventional response is that this is impossible because of currency. As long as you--and to a greater extent than importantly , banks -- tin handle cash , which pays a null involvement charge per unit of measurement , the Fed can't impose a negative involvement charge per unit of measurement on bonds. In reality , belongings cash is expensive , fifty-fifty for banks , hence nosotros tin together with exercise come across slightly negative involvement rates on occasion. But to a greater extent than than -0.5% or hence would live difficult to sustain.
This has led to a break of creative proposals , which Ken summarizes
Willem Buiter.. has discussed ... devices for paying negative involvement rates on currency... stamp taxes... (currency would remain valid only if it were regularly stamped to reverberate taxation payment). ... Mankiw (2009) points out that the cardinal banking concern could effectively taxation currency yesteryear belongings lotteries based on series numbers , together with making the “winners” worthless.Ken goes on to the ultimate version of this idea: acquire rid of cash all together together with displace alone to electronic transactions.
Let's locomote out aside the (dubious , inwards my view) claim that negative nominal involvement rates are the vital cure for our ailing economies , together with precisely focus on the enquiry whether eliminating currency volition allow it.
So , quiz enquiry for your economical classes: Suppose nosotros direct keep substantially negative involvement rates -- -5% or -10% , say , together with lasting a while. But at that topographic point is no currency. How else tin you lot ensure yourself a null riskless nominal return?
Here are the ones I tin retrieve of:
- Prepay taxes. The IRS allows you lot to pay as much as you lot desire similar a shot , against hereafter taxes.
- Gift cards. At a negative 10% charge per unit of measurement , I tin invest inwards almost $10 ,000 of Peets' java cards alone. There is similar a shot patently a hot secondary marketplace seat inwards gift cards , hence large values together with resale could accept off.
- Likewise , stored value cards , subway scheme cards , stamps. Subway cards are anonymous hence you lot could resell them.
- Prepay bills. Send $10 ,000 to the gas companionship , electrical companionship , telephone company.
- Prepay rent or mortgage payments.
- Businesses: prepay suppliers together with leases. Prepay reward , or at to the lowest degree pre-fund benefits that workers must rest employed to earn.
Now inwards each instance , you lot mightiness say this tin live changed. The IRS could turn down pre-payments for taxes , or accuse a negative involvement charge per unit of measurement or a punishment for pre-payment. Businesses similar a shot accuse penalties for belatedly payment , hence institutionally they could accuse penalties for early on payment.
But our legal together with fiscal organization deeply enshrines the correct to pay early. Imagine the string of courtroom cases inwards which consumers need their correct to pay rent , gas bills , etc. vs. landlords who won't allow them.
Politically , imagine the outrage at an sweat yesteryear the Federal Government together with Federal Reserve to enforce negative involvement rates -- to "take away people's money'' -- at a magnitude that matters -- 5% say , non v bp -- and to eliminate people's correct to handle cash to enforce that confiscation. You mightiness as good advise to accept away their guns , golden bars , together with stocks of canned food.
So , bottom line , nosotros cannot direct keep strongly negative nominal rates without a legal revolution essentially negative-indexing the entire economic scheme together with payment organization , together with upending centuries of police clit giving you lot the correct to pay bills at confront value.
The null jump is non precisely cash.
"Illegal" transactions , regulations , together with taxation evasion
Rogoff:
Paper currency facilitates making transactions anonymous , helping conceal activities from the authorities inwards a manner that mightiness [!] assist agents avoid laws , regulations together with taxes. This is a large divergence from most forms of electronic money that , inwards regulation , tin live traced yesteryear the governmentIndeed. The cardinal feature of currency is anonymity of its possession together with of the transactions it facilitates. Though transactions aren't that closely monitored similar a shot , the figurer revolution is making it to a greater extent than together with to a greater extent than possible. And Ken is explicitly proposing fifty-fifty more: that the IRS together with regulatory agencies volition actively purpose their powerfulness to monitor electronic transactions to enforce "laws , regulations together with taxes."
Though anonymity facilitates evasion of "good" taxes together with necessary regulations , the powerfulness to transact anonymously is an of import security valve that protects our economic scheme together with many others approximately the basis from a welter of "bad" taxes , laws , together with overly intrusive regulations. How much of each nosotros direct keep similar a shot , together with how desirable strict enforcement is depends on where you lot sit. I imagine opinions differ at Harvard vs. Cato or Mercatus.
Regulations may live to a greater extent than of import than taxes. Big companies together with wealthy people who pay most of the taxes inwards the US don't direct keep to cheat; they precisely hire skillful lawyers together with lobbyists. Monitoring transactions is an first-class manner to enforce compliance amongst all sorts of regulations. And nosotros plausibly direct keep to a greater extent than bad regulations than (even) bad taxes.
In the U.S. , eliminating cash would heavily touching on the poor. The U.S. has xi 1000000 undocumented immigrants , most working together with transacting inwards cash. It is probable that many readers of this postal service direct keep violated the extensive Federal together with State project laws or immigration laws , inwards their hiring of business solid assist , together with able to exercise hence yesteryear transacting inwards cash. Sub-minimum wage jobs would disappear without currency , as would many jobs available to ex-convicts together with others facing legal restrictions on their employment. What picayune entrepreneurship together with activity exists inwards many pitiful parts of inner cities survives on cash , yesteryear beingness able to evade non precisely taxes but onerous local regulations , occupational licensing restrictions , zoning restrictions , project laws , together with hence forth. Are you lot buying lights windows or toilets that violate zoning release energy or H2O laws? Not whatsoever to a greater extent than , you're not.
H5N1 lot of "tax evasion" using currency consists of quite pitiful people evading the astronomical marginal taxation rates implicit inwards social programs. People on social security disability , together with medicaid , say , who would lose lots of benefits if they reported income , alternative upward a lot of spare money working for cash. Do nosotros actually desire them to obey all the rules strictly -- non function at all? Should the lookout adult man TV all 24-hour interval long?
I wrote almost the pernicious consequences of e-verify here. The basis inwards which the Federal Government must pre-approve every job strikes me as a nightmare. The basis inwards which the Federal Government is monitoring every transaction betwixt people to enforce who it thinks you lot tin together with can't hire is a worse nightmare.
In other parts of the basis , modest businesses together with project markets only business office at all yesteryear avoiding laws , taxes , or regulations. Estimates for Europe seat the "shadow economy" at to the lowest degree 20% of gross domestic product , together with a larger fraction of job specially for immature people. Values inwards the balance of the basis are probable larger. It's non obvious that eliminating cash together with cash transactions inwards Europe would heighten taxation revenue , rather than precisely lowering actual gross domestic product together with job yesteryear 20% or more.
There is almost $1.3 trillion currency outstanding , to a greater extent than than $3 ,000 per US citizen. 3/4 of it is $100 bills. Most is held abroad. You acquire the pic of who holds dollars together with why. US policy makers my retrieve all our taxes , rules together with regulations are benificent , but nosotros don't retrieve that of the balance of the world. Do nosotros actually desire to acquire rid of this security valve for Russian Federation , Argentine Republic , Venezuela , Republic of Cuba , the Middle East , together with hence forth?
If the U.S. were willing to allow anonymous electronic transactions , together with then nosotros could acquire rid of cash. But nosotros already direct keep lost a non bad bargain of the powerfulness to transact anonymously , together with the electrical current technological together with policy tendency is alone inwards the other direction. One used to live able to accept to a greater extent than than $10 ,000 out of banks at will; similar a shot such a withdrawal must live reported. Smaller cash transactions are voluntarily reported yesteryear banks nether fright of "know your customer" together with anti-terrorism regulation. Remember the glorious ending of the Shawshank Redemption , where the hero takes huge piles of cash out of a bunch of banks together with heads to the Mexican border? Forget it. And it's already beingness used politically: Justice is using know-your-customer rules deny legal but unfavored industries such as marijuana dispensaries together with payday lenders access to banking.
Treasury abolished bearer (anonymous) bonds inwards 1983 , amongst the switch to electronic book-entry holdings. Anonymous Swiss banking concern accounts are a thing of the past. The SEC , IRS , together with CFTC are none also happy almost bitcoin.
Liberty
More deeply , a basis inwards which the Federal Government tin discover every unmarried transaction made yesteryear every unmarried mortal together with firm , together with thereby reconstruct the size together with composition of every person's wealth , strikes me as an Orwellian nightmare. Among the rights to privacy , the powerfulness to brand an anonymous transaction , already severely hampered , cannot disappear totally.
Imagine the repercussions for political liberty if the Federal Government has a tape of every unmarried transaction. If a candidate for political business office in i lawsuit bought a racy journal , that tape is inwards authorities files. And i Lois Lerner or Edward Snowden away from a twitter feed. If a prominent political vocalism , or fifty-fifty an annoying economic science blogger , had a purchase somewhere inwards his or her history they did non desire made world , or that violated some nitwit police clit or regulation , they could speedily live silenced. Imagine what J. Edgar Hoover could direct keep done to the civil rights together with anti-war movements amongst the powerfulness to come across every transaction inwards the country.
Ken acknowledges this point:
H5N1 dissimilar type of declaration against eliminating currency relates to civil liberties. In a basis where society’s mores together with customs evolve , it is of import to tolerate experimentation at the fringes. This is potentially a real of import declaration , though the job mightiness live mitigated if controls are placed on the government’s purpose of information (as is done say amongst taxation information) , together with the job mightiness also live ameliorated if modest bills popular off along to circulate"Experimentation at the fringes" agency anyone who bought booze inwards prohibition , or pot inwards the final 50 years , or sought world office. Campaign finance police clit is already a political cesspool. Imagine what it volition await similar when a rogue prosecutor tin come across every transaction. I'm non certain that's a fringe.
"Controls are placed." Absolutely nosotros require controls , together with nosotros require them similar a shot fifty-fifty amongst currency. Let's add together some subjects together with active verbs here: Congress should locomote yesteryear clear stringent laws , amongst strong judicial oversight together with as strong penalties , on the limits of the government's collection together with purpose of information on fiscal ownership together with transactions.
Substitutes together with a chilling ending:
Last but non to the lowest degree , if whatsoever Earth attempts to unilaterally trim down the purpose of its currency , at that topographic point is a opportunity that some other country’s currency would live used inside domestic borders. Even if that opportunity is non not bad for a Earth similar the U.S.A. of America , at that topographic point is even hence the loss of revenue from unusual users of currency (many of whom may live engaged inwards surreptitious or illegal activities inside their ain borders , fifty-fifty if non inside US borders). Thus , whatsoever sweat to eliminate large-denomination currency would ideally live taken upward inwards a treaty that included at the real to the lowest degree the major global currenciesVenezuela together with Argentine Republic acquire along on dollars. Don't live hence certain the opportunity is non not bad for the US. Bitcoin , though real imperfect inwards a lot of dimensions , shows the strong need for anonymous transactions together with wealth holding. We could acquire to purpose Euros pretty fast.
H5N1 global treaty banning currency together with anonymous transactions...I tin come across the pitchforks now.
To live clear , this is a skillful essay , together with Ken brings upward all the of import points. My disagreement hither is precisely sentence on the importance of some considerations -- "good" taxation together with regulatory evasion , "good" anonymity , the importance of anonymity for political liberty -- relative to others -- seignorage (trivial inwards my catch , of import inwards Ken's) for example.
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