Both sides can win in the cash war

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Both sides can win in the cash war

The so-called war on cash has been getting a lot of airtime in recent days. On one side of the battleground are European Central Bank President Mario Draghi and former U.S. Treasury Secretary Lawrence Summers, calling for the abolition of high-denomination banknotes to (they say) combat crime. Opposing the plan are skeptics who fear it will lead to abolishing cash altogether. There’s a way, though, to reconcile the differences enough that both sides can claim a win.

Summers wants a global agreement among countries “to stop issuing notes worth more than say $50 or $100.” Draghi is considering outlawing the 500-euro note, which is “being viewed as increasingly an instrument for illegal activities.” Lurking in the background is the uncomfortable fact that the negative interest rate policies - NIRP for short - being used to stimulate growth in many countries are undermined by physical currency. The authorities can levy a charge on your bank account to encourage you to spend the money you keep there; they can’t do that to the money under your mattress.

Blogger and former Congressman David Stockman, who was Ronald Reagan’s director of the Office of Management and Budget in the 1980s, typifies those who mistrust the motivation for eliminating large-denomination bills. Here’s what he had to say in an article this month titled “Why the Keynesian Market Wreckers Are Now Coming for Even Your Ben Franklins”:

“In short, there is one reason alone for the sudden campaign to abolish large denomination bills. It is a necessary predicate for the imposition of NIRP. That is to say, it would pave the way for central bank-mandated confiscation of the wealth and savings of millions of American citizens in the pursuit of a cockamamie theory that would bring about the final destruction of honest price discovery and financial discipline in the Wall Street casino.”

You don’t have to be a libertarian with a secret bunker full of tinned food and guns to see that Stockman has a point. Why now? Why is Draghi suddenly hot and bothered about a 500-euro note that’s been in circulation since 2002? The Wall Street Journal’s editorial board was similarly suspicious in a Feb. 17 article:

“Politicians and central bankers fear that holders of currency could undermine their brave new monetary world of negative interest rates. Why wouldn’t they eventually ban all cash transactions much as they banned gold and silver as mediums of exchange?”

So here’s a modest proposal to resolve the argument. Go ahead and withdraw the big-ticket notes with, say, six months’ notice to allow legitimate hoarders to cash them in. Existing money-laundering laws should ensure ill-gotten gains can’t be transferred to the banking system, trashing the value of any nefarious cash piles held by drug dealers and the like.

Then, reintroduce the high-denomination notes with new designs - and let it be known that the same exercise will be repeated at random intervals in the future. That way, those who want to enjoy the freedom to store bundles of cash won’t have their civil liberties curtailed, while the bad guys will be deterred from amassing piles of currency that could become worthless to them at any moment.

The plan would work only if the grand coalition envisaged by Summers were able to coordinate the move among all countries. Switzerland, for one, says it’s not considering getting rid of its 1,000-franc note, worth about $1,000 or almost twice as much as the highest denomination euro bill. But if (and it’s a big if) the opponents of big bills are being honest about the limits of their ambitions, withdrawing and then reissuing the notes would punish the criminals without trashing ordinary citizens’ freedom to build physical nest eggs.

*The author is a Bloomberg View columnist and member of the editorial board.

by Mark Gilbert
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