When was the last time you carried a briefcase of $100 bills around with you? Unless you’ve become America’s newest Walter White or you’re reenacting 50 Cent’s “Money” music video, it’s probably been incredibly rare to have more than a few $100 bills in your possession in the first place. With the rise in mobile banking and the move of financial transactions online in greater measure, some experts argue that the only real need for large amounts of cash is for illegal means. However, others argue that getting rid of large currency could be the downfall of greater financial freedoms.
Large denominations make up a majority of cash in the market, even if most people don’t carry them in their wallets. According to the Los Angeles Times, about 77% of the U.S. cash in circulation is in $100 bills, even though typical Americans don’t have more than a few $20 bills at their fingertips. Of all the banknotes in circulation, the 500 Euro note accounts for about 30% of it – which is why most conversations center around quitting not only the $100 bill, but other large currencies like the 500 euro note and the 1,000 Swiss franc.
Stop cash production, stop crime payments
Cash, ironically enough, does not leave a paper trail, while online financial transactions most definitely do. “By eliminating high denomination, high value notes we would make life harder for those pursuing tax evasion, financial crime, terrorist finance and corruption,” argues Peter Sands in a paper for Harvard’s Kennedy School. Sands goes on to write that a common underground nickname for the 500 euro bill is the “Bin Laden,” which could suffice as ample proof many high currency notes have been tainted by less-than-honest means.
In the paper, Sands points out that transporting cash for laundering, bribes, or other illicit payoffs would become much more difficult if shadow operations were forced to use smaller denominations. The weight of $1 million in $20 bills, for instance, weighs about 110 pounds and would require about 4 standard briefcases – arguably more than one mule could transport alone. “In $100 bills, the same amount would weigh roughly 22 pounds and take only one briefcase. A single person could certainly do this, but it would not be that discrete. In 500 euro notes, the $1 million equivalent weighs about five pounds and would fit in a small bag,” Sands writes.
Sands’s argument is backed by colleague and former U.S. Treasury Secretary Larry Summers. “I’d guess the idea of removing existing notes is a step too far. But a moratorium on printing new high denomination notes would make the world a better place,” Summers wrote in an op-ed for The Washington Post.
The argument for doing away with larger notes is already at the forefront of economic policy in Europe. “There is a pervasive and increasing conviction in the world of public opinion that high denomination banknotes are used for criminal purposes … It’s in this context that we are considering action,” said European Central Bank president Mario Draghi, who confirmed in February the ECB is seriously considering doing away with the 500 euro bills.
The case for keeping currency
While some experts agree that trashing large bills would be a logical first step in hindering crime operations, others believe the move would do little to stop underground actions but would jeopardize freedoms for law-abiding citizens. As the L.A. Times points out, virtual currency and gift cards are just two of the non-cash ways people are exchanging payment for illicit activity under the table. “The argument that eliminating the $100 bill will automatically reduce crime is, at best, suspect,” argues Nicholas Colas of the brokerage firm Convergex. Where there’s a will, there’s a way, and underhanded people are always going to find a way to conduct their business.
In the worst case scenario, those who argue against canning large bills say it’s a slippery slope to becoming a cashless society once the larger denominations are axed. And when normal, everyday people have no choice but to have all their “money” in the bank for wireless transactions, and no hope of physical withdrawal, it gives federal regulators more power to manipulate the economy – and your wallet.
Manipulation with negative interest rates
The Federal Reserve already changes interest rates to encourage spending – low interest rates give you little return on savings, but allow you to make big purchases with lower interest rates. But interest rates are pretty much at zero already, meaning to stimulate more action, the powers that be would have to enact negative interest rates. If that were to happen, you could basically pay a fee to the bank for holding your savings – or be situationally convinced to spend it to take advantage of every cent you earn, pumping more money into the economy.
Countries like Switzerland, Sweden, and most recently Japan have begun using sub-zero interest rates in desperate attempts to stimulate their economies, but it’s an unproven and shaky economic trend. It’s great if you’re looking to secure a mortgage rate, but not so wonderful if you’re hoping to see your investments grow. In the case of savings it would actually be better to hide it under your mattress, but good luck sleeping well when you have to find a place for thousands of $20 bills instead of larger currencies.
Of course, we’re a long way from wallets with no cash at all. But even practically speaking, a world without $100 bills would be inconvenient for more than just the Walter White wannabes. According to a study conducted by the Federal Reserve Bank of Boston, about 22% of people carry $100 or more in their wallets on a typical day. For those people who do carry $100 bills, they make up about 18% of the value.
If a person is carrying between $100 and $399 in cash, there’s a 25% chance that at least one of those bills will be worth $100. As the cash value goes up, so does the probability of finding $100 bills in the wallet. This is common sense: It’s a lot more convenient to carry five $100 bills than it is to carry 25 $20 bills in your wallet, in order to have the same amount of money on you.
The price we pay
Both camps are suggesting there’s a price to pay, either for keeping or nixing the $100 bill and other large currencies. “We face an acute threat from well-financed terrorism, most notably ISIS. Anything that helps disrupt such activity must be a priority,” Sands argues in the conclusion of his paper. But on the other side, combatting terrorism is the price to pay for economic choice and freedom. “Cash is a vehicle for freedom…In a free society, criminality may be part of the price we pay for liberty. There are means other than eliminating cash – less effective but also less threatening to personal liberties – to expose the shadow economy,” Stephen G. Cecchetti and Kermit L. Schoenholtz write in Money, Banking, and Financial Markets.