The Case for Cash

Asian Development Bank Institute 19th Annual Conference

2016

Jamie McAndrews
Wharton Financial Institutions Center
December 2, 2016

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank
Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of
the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with
ADB official terms.
Ken Rogoff, in a series of papers and in his recent book, The
Curse of Cash, makes the following argument:

High-denomination cash has a few benefits:

-reduces transactions costs by eliminating the "double
coincidence of wants" problem, especially for poor people
-seignorage
-some other assorted benefits related to anonymity and
liberty.
High-denomination cash has two main costs
-it facilitates crime
-it prevents deeply negative interest rates
Policy conclusion
-eliminate high-denomination cash over a long period
-work to provide more financial inclusion for poor
Results
-less crime, and
-with negative interest rates, shorter recessions.
SURVEY
Condoms:
Were society to restrict free condom distribution programs
that employ counseling or other communication efforts to
improve acceptability, the evidence is reasonably
abundant that there would be an increase in unsafe sex
and the prevalence of sexually transmitted diseases.

Clean needles:
Evidence on the effects of needle exchange programs
suggest, in contrast to the deterrence hypothesis, that
they do not lead to increased injectable-drug use, but that
they do decrease the rate of infection with HIV
It is a fallacy to conclude that because
someone doesnt have a $100 bill in their wallet,
they would not be harmed by a restriction on
the supply of $100 bills.
High-denomination cash provides a convenient and
anonymous source of payment for all (including criminals).

Without high-denomination cash, criminals would resort to

other means of payment.

Barter
FX
Jewels and precious metals
Inflated invoices a form of debt

Without the use of high-denomination cash, the act of

payment by the criminals must be secret, as payment is illicit
or criminal itself.

Historically, Debt precedes Money

Suppose that criminals use inflated invoices.

Who enforces the debt?

Organized Crime

Organized criminal firms specialize in extortion, bribery

to ensure police inaction, financing for distribution and
sale of contraband, and enforcement services.
Furthermore, there will be an increased demand for
inflated invoices from legitimate businesses.

Organized crime is well-placed to supply the debt

instruments, such as invoices from legitimate businesses,
that could be used as substitutes for cash in criminal
transactions more generally. To obtain those invoices,
organized criminal firms could engage in extortion, one of
their specialties. Coercing legitimate firms to purchase
inputs at inflated prices from the criminal organization is a
common activity in organized crime.
How realistic?

Organized crime typically withdraws from illicit activities

when they are legalized.

protection of liquor wholesalers fell precipitously after

the repeal of Prohibition
transactions with bookmakers declined following
legalization of off-track betting
protection of New York Citys brothels subsided
following relation of penalties for solicitation and
procurement offenses in 1967.
In contrast, introduction of state usury laws in the period
1910-1920 significantly increased organized criminal
activity in illicit credit markets
Like sexually-transmitted diseases or diseases transmitted
via dirty needles, the subornation of legitimate business by
organized crime to obtain debt instruments for payment in
illicit activities is a cost that would harm individuals not
associated with the original criminal activity.

Schelling (1971):

those who dislike corruption, especially when it is

centralized and regularized by large monopoly
organizations that can build corruption directly into our
institutions, rather than leave it to gnaw away at the
edges.
Financial Inclusion

Rogoff suggests that the government should offer

universally available debit accounts to the population.

Why tie this to the discontinuance of the unbankeds most

used financial instrument?
Negative rates McAndrews (2015): many frictions with
negative rates

Similar nominal frictions exist for inflation.

We should not expect that all the nominal frictions

associated with negative nominal policy rates would be
overcome more quickly that those that contribute to
resource misallocation under persistent inflation on the
expectation that society may occasionally employ negative
rates to combat a recession.

So, costs and benefits of low rates limits how low a country
would wish to go.
Suppose we accept Rogoffs contention that crime would
fall.

But the type of crime selected would expand organized

crime, supported by violence, threats of violence, and
the subornation of legitimate businesses.

The policy does not help the poor and unbanked.

There are limits to how deeply negative rates should go.

I conclude that we should not eliminate high-denomination

notes in the U.S.