Is cash a curse?

September 15, 2016
Pat Heller

Kenneth S. Rogoff is the former chief economist at the International Monetary Fund and now a Harvard professor. His latest book, titled “The Curse of Cash,” has just been released.
Rogoff identifies two reasons why the use of cash should be completely banned. First, it would deter criminal activity. Second, it would then be easy for central banks to impose sizeable negative interest rates for those parties holding monetary balances.
The author repeatedly complains that the outstanding U.S. currency and coins in circulation amounts to $4,200 per resident of the country, though he admits that there is no hard data on where this cash is located. I believe his claimed lack of knowledge on this subject to be deceptive.
Because of his previous affiliation with the IMF, he already knows that a sizeable percentage of this is held by central banks as reserves – for which he could obtain hard data – as well as other foreign individuals and entities. Therefore, the amount actually held by Americans is much smaller, though the correct quantity really should not matter in defending or attacking his thesis.
It seems that Rogoff simply has an obsessive hatred of circulating cash. Early in the book he writes, “What is remarkable about the huge demand for cash is that it persists and grows despite the proliferation of alternative payment mechanisms.”
In particular, the author objects to cryptocurrencies when he wrote, “At the end of the day, governments will not lightly tolerate financial transactions that protect anonymity of criminals and terrorists … To the extent that new approaches to financial transactions are developed that evade government efforts, they will be met with a stiff hand.”
While I agree that banning the use of cash would make life more difficult for illegal drug dealers, paying illegal workers off the books and other criminal activities, being able to use anonymous cash payments also provides privacy, individual freedom and protection against overbearing government. Let me share three examples of which I have personal knowledge.
Years ago, I helped an old man liquidate the last of a hoard of European gold coins. He told me the original hoard was kept in a cookie jar in the kitchen of a Jewish ancestor’s home in the Netherlands at the time the German army swept through that country in 1940. The family escaped with little more than the gold coins. Eventually, the use of the gold coins as a widely accepted anonymous form of payment enabled many members of the extended family to avoid death in the gas chambers and escape from German-occupied lands.
In my company’s store in the 1980s, we sold pure gold bars to a number of newly arrived Southeast Asian refugees. Every one of them confirmed to me that they used gold to save their lives by paying for their escape from the oppressive governments in their homelands. In their minds, living in America did not automatically mean that they were safe from the prospect of ever again needing gold to buy their way to freedom.
I am friends with a number of individuals working for a non-profit scientific organization, which was located in California in the 1980s. A county official thought the entity was engaged in criminal activity and raided the facility. Six individuals on the premises were arrested and all computers, financial records and checkbooks were seized. The vice president of the organization had not yet arrived for work. When alerted of the raid and arrests, he went to the entity’s safe deposit box to withdraw five South Africa gold Krugerrands that had been received as a donation. These coins were used for the down payment for an attorney. Eventually, all charges were dismissed and the organization won every legal dispute except for one of the countersuits seeking reimbursement of legal fees. Because of the scandal of this raid, the county official was soundly defeated in his re-election campaign.
I acknowledge that the use of circulating cash can facilitate criminal activity. But I consider it far more important that people be able to protect their privacy and to use cash to protect themselves against government oppression.
Rogoff’s contention that central banks need the ability to impose negative interest rates, where those providing money to others are repaid with a smaller amount than they initially gave out, is a highly controversial subject among economists. The original need to create money thousands of years ago was a free market innovation to facilitate trade, not something initially imposed by governments. In my mind, which some may considered extreme, the free market and not the government should determine what is used for money, what forms it may take (physical or electronic), produce any circulating cash and set interest rates at equilibrium levels.
For the benefit of society, the assault against the use of cash, of which Rogoff’s book is the latest salvo, needs to end.
Follow up on the last two columns:
My previous two columns listed available resources to foster Young Numismatists and for using money to enhance education. One kind reader sent me an email with a valuable idea. He had obtained some materials from his district’s Federal Reserve Bank, including small bags of macerated (shredded) currency. If seeking materials to hand out to potential new collectors or students in schools, be sure to investigate what might be available from your district’s Federal Reserve Bank.