Wednesday, May 28, 2014

Kiss Your Cash Goodbye

Ken Rogoff wants to abolish paper money (FT, gated but free).

Has the time come to consider phasing out anonymous paper currency, starting with large-denomination notes? Getting rid of physical currency and replacing it with electronic money would kill two birds with one stone.

First, it would eliminate the zero bound on policy interest rates that has handcuffed central banks since the financial crisis. At present, if central banks try setting rates too far below zero, people will start bailing out into cash. Second, phasing out currency would address the concern that a significant fraction, particularly of large-denomination notes, appears to be used to facilitate tax evasion and illegal activity...

Of course tax evaders, other crooks, terrorists and guys who just don't want their wives to know what they are up to would hate it. My guess is that these people, especially the first category, have too much political power to let it happen.

Rogoff suggests that we start with large bills.