Anti-Paper Prophet: Comments on The Curse of Cash

Dollarization, Rogoff, negative interest rates, war on cash, zero lower boundKenneth S. Rogoff stands out as the advocate of restricting hand-to-hand currency who has argued the case most comprehensively and probably the most cautiously. I critically reviewed his recent book, The Curse of Cash, in the July 2017 issue of Econ Journal Watch. Here I summarize highlights from my review, taking some passages verbatim. I encourage anyone who is interested to read the review in full. But in this piece I also comment on Rogoff’s response to my review that appeared in the same issue of EJW. When I provide page numbers for quotations, they reference Rogoff’s book; otherwise Rogoff quotations are from his response to my review.

A Case Against Cash

Rogoff does not propose eliminating all cash. In developed countries, he would phase out over a decade or more only large-denomination notes: in the United States, for instance, first $100 and $50 bills and then $20 bills and perhaps $10 bills. For small transactions, he would leave in circulation smaller-denomination notes, although he considers eventually replacing even these with “equivalent-denomination coins of substantial weight” to make them “burdensome to carry around and conceal large amounts” (p. 96). To put this in perspective, $1, $2, and $5 notes comprise less than 2 percent of the value of U.S. notes, or a little over 3 percent if we add in $10 bills. For less developed countries, Rogoff concedes that it is “far too soon” to “contemplate phasing out their own currencies” (p. 205).

Rogoff hedges his case with caveats and tries to address obvious objections. Yet like most proponents of phasing out cash, his argument is two pronged. Because cash is widely used in the underground economy, he believes that the elimination of large-denomination notes would help to significantly diminish such criminal activities as tax evasion, the drug trade, illegal immigration, money laundering, human trafficking, bribery of government officials, and even possibly terrorism. He contends that suppressing such activities would have the additional advantage of increasing tax revenue. The second prong relates to monetary policy. Rogoff believes that future macroeconomic stability requires that central banks have the ability to impose negative interest rates not only on bank reserves but on the public’s money holdings as well.

The Underground Economy

With respect to the underground economy, Rogoff’s Curse of Cash offers no genuine welfare analysis, considering the benefits as well as costs of the underground sector.[1] He gives little attention to the potential deadweight loss from forcing what is productive but unreported activity from a marginal tax rate of zero into marginal rates as high as 30 to 40 percent. Indeed, he disregards any gains to consumers of illegal drugs (except for an offhanded admission that legalization of marijuana may be a simpler approach for at least that part of the illegal drug trade) and exhibits scant concern for the welfare of illegal immigrants (despite his favoring increased legal immigration). The one transition cost that Rogoff tries to quantify is the impact on low-income individuals, recommending that the government provide at the very least about 80 million free, basic electronic-currency accounts, with a total bill of $32 billion per year.

When Rogoff gets to bona fide predatory acts within the underground economy, such as extortion, human trafficking, and violence associated with the drug trade, he descends primarily into lurid anecdotes. He fails to give even crude quantitative estimates to buttress his claim that eliminating cash would curtail these activities. As for corruption and bribery, Rogoff admits that they are really serious only in poorer countries—precisely where he also concedes that a premature elimination of cash would have dire economic consequences. In his discussion of terrorism, he admits that eliminating cash would have at best trivial impacts.

Approximately 50 percent of United States currency is held abroad. Yet Rogoff simply ignores negative effects on the nearly dozen countries that have completely dollarized (including Panama, Ecuador, El Salvador, several island countries in the Caribbean and Pacific) or another dozen partially dollarized (including Uruguay, Costa Rica, Honduras, Bermuda, the Bahamas, Iraq, Lebanon, Liberia, Cambodia, and Somalia). This is just another instance of Rogoff’s avoiding a complete cost-benefit analysis. As Pierre Lemieux, in his review of The Curse of Cash, succinctly puts it: “the economist venturing into normative matters would normally attach the same weight to a foreigner’s welfare as to a national’s.”[2]

Nor can Rogoff demonstrate any increased revenue for the U.S. government from phasing out large denomination notes. Relying on IRS estimates of the legally earned but unreported taxes in 2006 and extrapolating forward to 2015, he puts the potential gains to the national government at $50 billion annually (or less than 0.3 percent of GDP), along with approximately another $20 billion gain for state and local taxation. Yet his most comprehensive estimate of the seigniorage the government would lose from phasing out cash is $98 billion, or over 0.5 percent of GDP. Add to that the $32 billion annual cost of free electronic accounts for the poor, and Rogoff has failed to make a credible case that his proposal would create a net gain for the U.S. government, much less a net benefit for society overall.

True, other developed countries without a foreign demand for their currency have much lower rates of seigniorage than the U.S., and therefore government losses if those countries eliminated most cash would be less severe. The relative size of the underground economy in other countries, whether rich or poor, is also almost universally larger than in the United States. Indeed his cited estimates of the underground sector as a percentage of reported GDP for some of these countries—including developed countries such as Greece (25 percent), Italy (22.3 percent), Spain (19.6 percent), and Portugal (19.5 percent)—suggest that this is where a large fraction of their ordinary citizens live and survive. Rogoff states that the GDP “share of Europe’s shadow economy is more than double” (p. 63) that of the U.S., and he admits that this probably stems from higher tax levels and more burdensome regulation in Europe. But rather than reaching the obvious economic conclusion that the deadweight loss in Europe from inhibiting these activities would therefore be considerably larger than in the U.S., Rogoff merely touts “the benefits of phasing out paper currency” in Europe “in terms of higher tax revenues” (p. 89).

Negative Interest Rates

The second prong of Rogoff’s argument is that it would facilitate imposition of negative interest rates. The reasoning is as follows. When an economy sinks into a depression, the central bank should stimulate aggregate demand by lowering interest rates. But if interest rates are already extremely low, in what is alternately termed the ‘zero lower bound’ or a ‘liquidity trap,’ central banks are constrained in their ability to do this. Central banks can charge a negative interest rate on the reserves that commercial banks and other financial institutions hold as deposits at the central bank, and some are already doing so. If the monetary authorities push negative rates too far, however, the public can just flee into cash with its zero nominal return. Banks can also do the same by replacing their deposits at the central bank with vault cash. Elimination of cash would close off this way of avoiding negative rates, making negative rates truly comprehensive and effective.

The term ‘negative interest rates’ actually obscures somewhat the nature of what Rogoff contemplates. If negative rates can be extended to the general public, they in effect represent a direct tax on the public’s monetary balances, since most cash would be gone. Negative rates thus reverse the causal chain of traditional monetary theory, which focuses on the money stock. To the extent monetary expansion increases spending, it causes higher inflation with its implicit tax on money. Negative interest rates, in contrast, would explicitly tax money in order to cause increased spending with higher inflation.

I will not repeat here my extended discussion of why I believe that a policy of negative rates is not needed and would not work. Readers can find that in my review. Nor will I delve into one of the best parts of Rogoff’s book: his penetrating criticisms of fashionable alternatives for dealing with the zero lower bound, including a higher inflation target, forward guidance, fiscal policy, and dual-currency schemes. I simply point out that the problem vanishes once one thinks about monetary policy in terms of money rather than interest rates. Milton Friedman’s well-known thought experiment about a helicopter drop of money demonstrates this, as does Ben Bernanke’s writings on Japan’s experience with low interest rates, before he became chairman of the Federal Reserve.[3] If the economy needs monetary stimulation, the central bank through merely buying assets that genuinely increase the base of outside money can ultimately end up owning everything in the entire economy—except that sometime before it has done so, people will certainly start spending and drive up inflation.

Rogoff rejects this solution to the zero lower bound because he assumes it requires coordination with fiscal policy. But this assumption is simply wrong. Although we can imagine circumstances in which a desired monetary expansion would exceed the supply of Treasury securities available for open-market purchases, central banks can purchase and have purchased other financial assets or made other types of loans. The Fed has already purchased mortgage-backed securities, and other central banks have extended their acquisitions still more broadly, some even purchasing equities. Though far from ideal, such rare, limited, and temporary expansion of central-bank involvement in credit markets, if needed, would be less invasive than an untested, all-embracing money tax.[4]

The Public-Choice Dimension of a War on Cash

Not only are the positive arguments that Rogoff makes for confining currency to small denominations extremely weak, but his proposal also raises serious political-economy concerns that he hardly addresses and seems largely oblivious to. Even if the phasing out of all but small-denomination notes would accomplish what Rogoff has failed to convincingly substantiate, a marked reduction in crime, would it still be desirable? Not necessarily. Even when gains appear to be greater than losses, we should still hesitate about policies that punish or severely inconvenience the perfectly innocent. Lemieux has most trenchantly made this point:

Criminals are probably more likely than blameless citizens to invoke the Fifth Amendment against self-incrimination, or the Fourth Amendment against ‘unreasonable search and seizures.’ … But that is not a valid reason to abolish these constitutional rights.

These are necessary institutional constraints on State power, not just protecting the innocent but proscribing barriers that protect a free society more generally.

Indeed, one could argue that the underground economy is often a more effective check on government abuses than voting itself. Would alcohol prohibition in the U.S. have been repealed without widespread evasion by countless Americans? Would the U.S. be belatedly moving to marijuana legalization without the escape mechanism of the underground economy? Obviously none of these considerations excuse human trafficking and other forms of violence or brutality that are also within the underground economy. But one should be very cautious about drastic government impositions that indiscriminately impinge on almost the entire population, no matter how deplorable the outrages they are intended to diminish.

Rogoff’s faith in government is so strong that he evinces no discernible unease about possible abuse of his proposed interventions. Consider the battery of ancillary coercive regulations that he thinks might be vital to ensure the success of his proposal:

  • aggressive inducements to get people to turn in their cash (expiration date on large notes, restrictions on the maximum size of cash payments, and charges for very large deposits of small bills);
  • strict regulation of cryptocurrencies, such as Bitcoin and Etherium;
  • “more forceful steps…to pull the plug on money market funds” (p. 86);
  • lowering cash limits on anti-money-laundering regulations;
  • redoubling of “efforts to discourage” prepaid cards “as an alternative for moving large sums anonymously” (p. 97); and
  • banning “large-scale currency storage” or imposing “a tax on storage over a certain amount” (pp.160–161).

He goes on to predict that “[t]o the extent that new approaches to financial transactions are developed to evade government efforts to root out their sources, they will be met with a stiff hand” (p. 214). After all, “it is hard to stay on top of the government indefinitely in a game where the latter can keep adjusting the rules until it wins” (208). Rather than considering this government capacity a chilling concern, Rogoff enthusiastically embraces it.

Rogoff’s Response to My Review

Rogoff’s response to my review is quite respectful. He clearly wishes to encourage a civil dialogue on this question. Indeed, much of his response consists of amplifying details of his proposal. He does accuse me of “polemic exaggeration” because I titled my review “The War on Cash,” but that hardly seems unwarranted given that the title of his book is The Curse of Cash. More important, Rogoff’s response exhibits a shift in emphases in order to make his proposal appear still more tentative than in his book. Thus, he includes “many years of discussion and analysis” before any “advanced democracy is likely to start down the less cash-road.” And he pushes the “ultimate move to coins only (which I throw out as a very long-run idea . . .)” to “a time frame on the order of half a century or more.” He also shifts his geographical emphasis by conceding that

the case for pushing back on wholesale cash use is weaker for the United States than for most other countries, first because perhaps 40 to 50 percent of all U.S. dollars bills are held abroad, and second because the U.S. is a relatively high tax-compliance economy thanks to its reliance on income taxes for government revenue.

However these shifts introduce some additional tensions into Rogoff’s case. By admitting that phasing out cash is less of a priority for the U.S. than for other countries, especially those with high levels of tax evasion, he in essence is saying that his scheme is least needed where it is least onerous to implement and most needed where it is premature or dangerous to impose. After all, the most serious levels of tax evasion occur in less developed countries, such as Brazil and India. To be fair, Rogoff’s response still confines his focus to relatively advanced economies. He specifically mentions Greece and Italy, where he reports the underground economy as equaling about 25 percent of GDP. But phasing out large denominations in an economy in which unreported cash transactions lift the economy’s total output by as much as one-fourth strikes me as obviously drastic, even if the transition is slow.

By adding emphasis to how slowly he is willing to implement his proposal, Rogoff also undercuts the urgency he has attached to overcoming the zero lower bound, which in his book he characterized as having “essentially crippled monetary policy across the advanced world for much of the past 8 years” (p. 4). Indeed, if he is really willing to wait “at least a couple decades” for the phasing out of large denomination notes, why not just rely on market processes and technological innovations already in play to achieve a less coerced transition? Rogoff even predicts in his response that “the use of cash in the U.S. in legal tax-compliant transactions will be well under 5 percent ten years from now and probably only 1-2 percent twenty years from now, and that is assuming no change in government policy on cash [emphasis mine].”

Rogoff attempts to answer my charge that his welfare analysis fails to consider the economic benefits of productive underground activity by reiterating his speculation that “if the government is able to collect more revenue from tax evaders, it will . . . collect less taxes from everyone else” (p. 217). As he explained in his book, “if taxes can be avoided more easily in cash-intensive businesses, then too much investment will go to them, compared to other business that have higher pre-tax returns” (p. 59). This is of course correct as far as it goes. But it depends entirely on Rogoff’s expectation that any tax changes from eliminating large-denomination notes will be absolutely revenue neutral. This is a strong assumption seemingly at odds with the politics of taxation. Does he really believe that if phasing out cash brings in more tax revenue, governments are going to graciously reduce tax rates in order to ensure that the total bite out of the economy remains constant? This represents yet another instance of Rogoff assuming the perspective of a central planner and naively ignoring any public-choice considerations.

The simplistic assumption of revenue neutrality ignores a host of other complications as well. Recall that phasing out cash will reduce government seigniorage, so it is not clear how large the tax gains would be, if any at all, even for countries less reliant on that source of revenue. As for the Eurozone, The Curse of Cash (p. 84) cites estimates of seigniorage as high as for the U.S. Moreover, seigniorage, arising from an implicit tax on cash balances, already bears more heavily on underground, cash-intensive businesses. Phasing out cash not only changes both the level and type of taxation that these unreported, productive activities would pay, but also could subject them to burdensome regulation that imposes costs without generating revenue. This concern is particularly acute for countries like Greece and Italy. A genuine welfare analysis should carefully weigh all of these complications.

Regarding the 50 percent of U.S. currency held abroad, Rogoff repeats an assertion that he made in his book:

while there are many reasonable uses of the $100 bill abroad, it is indisputably popular with Russian oligarchs, Mexican drug lords, illegal arms dealers, Latin American rebels, corrupt officials, human traffickers, etc., and of course North Korean counterfeiters. In the book, I argue (conservatively) that foreign welfare should be thought of as a wash.

My review points out that Rogoff offers no quantitative evidence for this bold claim, and even if it were remotely close to accurate, it would still ignore the poor outside the United States who rely on dollars.

Given that we have only guesses based on anecdotes about alternative uses of dollars abroad, it certainly is appropriate for me to quote a contrasting view from a friend who read both my review and Rogoff’s response:

Based on my experience with overseas relatives $100 bills are also favored by ordinary citizens seeking a refuge from their own country’s unstable currency. They have no use for smaller bills, as they don’t use dollars for ordinary transactions. Dollars, for them, are a way of protecting their savings from the vagaries of the local currency. They aren’t familiar with all the denominations of US currency and would not be confident that smaller bills were genuine but they know what a $100 bill looks like and are comfortable with it.

Rogoff, however, remains willing to overlook welfare impacts on foreigners, whether they be potential illegal immigrants or overseas users of dollars. He declares:

The Federal Reserve and U.S. Treasury, not to mention Congressional decisionmakers, certainly do not directly take into account foreign welfare. The long-established approach to studying international trade and finance issues has always assumed that national authorities take into account national welfare, and that coordination and cooperation are needed to achieve a global social optimum. This is the right way to think about the problem, and my discussion is completely consistent with it.

Maybe for a politician pandering to voters but for an economist? This nationalistic bias is one of the critical flaws in Rogoff’s overall approach.


Rogoff raises many other interesting issues in his response, and trying to cover them all would make this article much too lengthy. His arguments are generally sophisticated and sometimes challenging, even when I disagree with him or believe he hasn’t adequately addressed my concerns. Our most fundamental difference remains our analysis of the State. Rogoff unreflectively adopts what Harold Demsetz characterizes as the “nirvana” approach to public policy. This makes him far more optimistic than is justified about the overall benevolence and competence of governments, particularly in developed countries. He thus oversells any advantages from his scheme and ignores or understates the myriad disadvantages. And it is he who bears the burden of proof for such an extensive reshaping of monetary systems, no matter how cautiously or slowly implemented.


[1] Larry White made this point with respect to advocates of eliminating cash generally in a previous Alt-M article.

[2] Pierre Lemieux, “Banning Cash: This Time is Not Different,” Regulation, 39 (Winter 2016-2017): 51

[3] Milton Friedman, “The Optimum Quantity of Money” in The Optimum Quantity of Money and Other Essays (Chicago: Aldine, 1970), pp. 1-67; Ben S. Bernanke, “Japanese Monetary Policy: A Case of Self-Induced Paralysis,” in Japan’s Financial Crisis and Its Parallels to U.S. Experience, ed. by Ryoichi Mikitani and Adam S. Posen, (Washington, D.C.: Institute for International Economics, 2000), pp. 149-66; and “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” remarks before the National Economists Club, Washington, D.C., November 21, 2002; George Selgin anticipated Bernanke’s argument in a 1999 unpublished paper, “Japan: The Way Out,” reprinted at Alt-M.

[4] George Selgin has written on ways to make open-market operations more flexible and efficient using competitive auctions, see here and here.

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