Should the US Slowly Phase Out the $100 Bill?
Last November, Indian Prime Minister Narendra Modi shocked the country by banning the use of all 500- ($7.50) and 1,000-rupee ($15) notes, effectively removing over 85 percent of India’s currency in circulation. Modi said that the ban was intended to curb corruption, tax evasion and the flow of counterfeit money, as well as disrupting terrorist organizations. By December 30, people had to deposit their banned bills in bank accounts, or exchange them for the new bills the government was printing.
But, the Indian government didn’t print enough replacement notes in time for a smooth change, creating a cash shortage that disrupted large sectors of the economy. In response, Indians started switching to electronic payments faster than had been anticipated. Modi’s bold move will likely accelerate India’s push towards digital payments, - a major long-term benefit.
In a recent Washington Post article - What the U.S. can learn from India’s move toward a cashless society, - academic and writer Vivek Wadhwa noted that India has built a digital payments infrastructure that’s enabling it to skip two generations of financial technologies. When it comes to digital payments, India may be actually leapfrogging the US, based on practical innovations, hard work, and, - necessity being the mother of invention, - the urgent need to step up to a major problem, - a decade ago, nearly half the Indian population had no identification whatsoever.
Wadhwa explained that “When you are born in a village without hospitals or government services, you don’t get a birth certificate. If you can’t prove who you are, you can’t open a bank account or get a loan or insurance; you are doomed to be part of the informal economy - whose members live in the shadows and don’t pay taxes.” He then described some of the key steps taken by the Indian government to address this problem.
Universal digital identities: In 2009, the government launched the Aadhar project, aimed at providing a digital identity to everyone based on an individual’s fingerprints and retinal scans. “As of 2016, the program had issued 12-digit identification numbers to 1.1 billion people.”
Bank accounts: The next challenge was to provide everyone with a bank account. The government opened 11 payment banks, “which can hold money but don’t do lending. To motivate people to open an accounts, it offered free life insurance with them and made them a channel for social-welfare benefits. Within three years, more than 270 million bank accounts were opened, with $10 billion in deposits.”
Digital payments: Then it launched Unified Payment Interface, a simple way for individuals to transfer money directly to each other with their mobile phones. “All you do is to download a free app and enter your identification number and bank PIN, and you can instantly transfer money to anyone - regardless of which bank he or she uses.”
Two top American economists have recently suggested that the US should seriously consider variations of Modi’s bold move. At a panel on Ending Corruption at the World Economic Forum 2017 annual meeting in Davos, Joseph Stiglitz, - Columbia University professor and Nobel Prize-winning economist, - said that phasing out currency and moving towards a digital money economy would, over the long term, have “benefits that outweigh the cost.”
The secrecy havens that the Panama Papers exposed in 2015 served to confirm the existence of a “global framework for both corruption and tax evasion and tax avoidance” that “provides incentives for people to engage in this activity as they can get the economic returns and then enjoy the benefits of those returns.”
“I believe very strongly that countries like the United States could and should move to a digital currency,” added Stiglitz, “so that you would have the ability to trace this kind of corruption. There are important issues of privacy, cyber-security, but it would certainly have big advantages.”
In September of 2016, Harvard professor Kenneth Rogoff published The Curse of Cash. Has the time come for advanced economies to start phasing out large-denomination notes?, asked Rogoff in the book’s introduction. He argued that, on balance, the answer is yes for two main reasons.
The first is similar to the reasons given by Modi and Stiglitz, namely that large, anonymous cash transactions contribute significantly to tax evasion and criminal activity. Cash primarily fosters growth in the underground economy, not the legal one.
But, in addition, “phasing out paper currency is arguably the simplest and most elegant approach to creating the path for central banks to invoke unfettered negative interest rate policies should they bump against the zero lower bound on interest rates. Treasury bill rates cannot fall much below zero precisely because people always have the option of holding paper currency, which at least pays zero interest.”
Rogoff offers a few interesting statistics. There’s a record $1.4 trillion worth of US currency in circulation, - $4,200 for every man, woman, and child in the United States. The $100 bill accounts for almost 80% of this cash supply. The situation is similar with other advanced-country currencies like the 500-euro note (about $540 at present), the 1,000-Swiss franc note (a little over $1,000), and the 10,000-Yen note (about $90). A million dollars in $100 notes fits nicely in a 22-pound briefcase; a million dollars in €500 notes can be carried in a purse.
In his book, Rogoff offers a plan for phasing out large notes over time. The plan is guided by three key principles:
- Any plan should be adopted very gradually to allow for mid-course corrections when unexpected problems arise. It might start by slowly, - over a decade or two, - phasing out the $100 and $50 bills, and perhaps later even the $20 bills.
- Ordinary citizens should be able to use cash to make reasonable-size anonymous purchases, while making it more difficult to engage in large cash payments. Small notes, - $10 and below, - should be left in circulation indefinitely. The goal is a less-cash, not a cashless economy.
- Reforms must be sensitive to the needs of low-income households, especially those that are unbanked. They should be offered free debit accounts, which could also be used for government transfer payments, as is already being done in Denmark and Sweden.
“Phasing out cash is not a free lunch…,” writes Rogoff in the books’s final section. “[P]aper currency has some special qualities which at present no other transaction medium quite duplicates: near total privacy, near instantaneous clearing of transactions, robustness to power outages, and of course, deep penetration into social consciousness and culture. But if one looks more deeply, it becomes apparent that the virtues of paper currency open the door to many vices… The massive quantities of cash circulating today, and especially large-denomination notes, are a huge public policy problem that needs to be urgently discussed, not taken as an immutable fact of lie.”