This essay is a summary of previous articles on war on cash and the elimination of paper cash. Different authors have varying views on use of large cash denominations and the impact of eliminating paper cash in the economy.
The war on cash and the impact of elimination of paper currency Lawrence White (1) referred to war on cash as some set of policies using the authority of governments to destroy the use of paper currency. The goal of this initiative is to encourage use of credit card and bank accounts so that law enforcement and tax authorities can trail money. Additionally, the initiative aims at raising the cost of storing cash to enable central banks to lower nominal rate to less than zero. The proposers of war on cash want to create a cashless society whereby all transaction leave an audit trail that can be used by law enforcement and to avoid tax evasion. The opponents of war on cash, on the other hand, see the move as one that is war on financial privacy. The law on cash is also aimed at assisting on the war on drugs as criminals and drug dealers are mostly associated with use of large amounts of cash. The war on end of cash is also looking to end large denomination currency notes for they are mostly used by tax evaders, money launderers, human traffickers, drug dealers and terrorist among other criminal groups. However, opposes of war on cash have stated that non-criminals also use large denominations of cash for they are convenient especially in purchasing vehicles and holding vacation money efficiently. Despite large denominations of cash being associated with criminal activities, in Italy, cash in transmission increased by more than quadrupled since the introduction of euro currency, yet there have been no any claims of increased criminal activities. In this war against cash, four main tactics are being used. First is the abolishment of high-denomination banknotes. Second is the placement of maximum legal worth on cash payments. Third is the requirement for affirmations from any party holding a cash volume more than the identified value through national border and lastly, requiring banks to notify authorities of any deposit or withdrawal of cash above the specified value. Lawrence White (2018) advises both supporters and opposes of war on cash to evaluate whether the war is for public interest or for private interest of law enforcement and tax authorities.
In another article, Lawrence White expounded on the collateral damage of a war on cash whereby, he analyzed the findings of different researchers who had varying results. In his article, Lawrence White (2) noted that majority of US cash in transmission cannot be accounted for. Additionally, the drug business is cash intensive at all levels hence making it one of the largest holders of cash. The author continues to note that eliminating large notes has minimal downside on the economy because it plays limited role in legitimate economy. This is because the legitimate cash holders represent a small percentage while the largest is held by criminals. The ordinary citizens who hoard cash are said to do so because they are uncomfortable with the surveillance of their activities in the bank while some fear banking system will collapse due to occurrence of natural disaster.
While some authors argue that the welfare lost by legally acquired cash will be minimal, others state that it will create large inconveniences because securely hoarding any amount in $10 bills instead of $100 bills needs a safety deposit box 10 times larger.
Supporters of large cash denominations state that it is useful to the economy although there is no proof for this declaration. However, a report conducted in San Francisco Fed found that cash is held and used by most consumers irrespective of age and income. The study also found that cash was the most or second most used mode of payment and was unrelatedly to household income and cash was also used to make more than 8% of all payments of $100 or more. A similar study in Europe found that regular people store cash for emergencies and usually hold even the largest denomination notes. These findings, therefore, rule out the previous ones where large denominations of cash were associated with illegal activities.
Kenneth Rogoff evaluated the advantages and disadvantages of phasing out paper currency. Among the advantages, he found that presence of paper currency creates difficulty for central banks to reduce interest rates to negative especially at these periods of steady inflation rates which have forced interest rates down. Thus limiting central banks from responding to large deflationary shocks. Moreover, paper cash is anonymous money which is a tool for enabling tax evasion and illegal activity. With paper currency, transactions are anonymous which helps conceal activities from the government hence acts as an agent of law avoidance, regulations and taxes.
Despite the two disadvantages, eliminating paper currency could lead to some detrimental impacts such as seigniorage. Money supply in United States increased by $30 billion per year before the financial crisis. However, after the crisis, the increase was about $79 billion every year a trend which was similar to other big advanced economies. The trend however occurred since paper currency is anonymous and substituting it with non-anonymous electronic money could cause a decrease in demand which can only be absorbed by treasuries. Additionally, it is not clear how eliminating paper cash would affect transaction cost. Retailers are forced to pay businesses such as MasterCard and Visa for credit card services. Using paper currency, on the other hand, entails the cost of protection against theft and pilferage. The other important impact of eliminating paper currency is that it could interrupt common social agreements for using money. For instance, there would be a massive decline in demand for debt.
Conclusion
The impact of eliminating paper cash requires more research for there are conflicting findings. While some researchers find that it will lead to lack of central bank control on interest rate, others have found that it can cause decrease in request for debt which would be detrimental to the economy. Therefore, further research is needed one that will give conclusive finding on impact of eliminating paper cash and how to solve the limitations.
Works Cited
Rogoff, Kenneth. "Costs and benefits to phasing out paper currency." 2014, Rogoff__2014__-_Costs_and_Benefits_to_Phasing_Out_Paper_Currency.pdf.
White, Lawrence H. "The Curse of the War on Cash." Cato Journal, 2018, pp. 1-12, Lawrence__2018__-_The_Curse_of_the_War_on_Cash___Cato_Institute.pdf.
White, Lawrence H. "More Evidence of the High Collateral Damage of a War on Cash." 2018, Lawrence__2018__ _More_Evidence_of_the_High_Collateral_Damage_of_a_War_on_Cash___Cato___Liberty_2.pdf.
