Economic Consequences of High Value Currency

NPR This is the Indicator from Planet Money. I'm Waylon Wong. And I'm Patty Hersch, a plan to create a new two hundred fifty dollar note adorned with the visit of President Donald Trump has attracted a lot of criticism and opposition. And it's complicated, the Federal Reserve, the Treasury, and the Secret Service would need to agree for it to happen. And then there's the idea that the note would depict the president . This would contraven a law that prohibits the likeness of any living person from appearing on U. S. currency, bonds or securities. So Congress would need to approve, too. But there's one area of opposition that hasn't received much attention, the idea that a two hundred and fifty dollars note would be a gift to criminals . Drug dealers, arms smugglers, people traffickers, money launderers, they all love to use large denomin ation notes. On today's show, we'll look at how they use them and how minting a two hundred and fifty dollars note could really, really help one type of criminal in particular. Spoiler alert, tax dodgers. Damn tax dodgers. To be clear, the idea of creating a two hundred fifty dollars note is not President Trump's, at least not officially. He has been notably silent on the matter. Yeah, the public face of the plan is Representative Joe Wilson of South Carolina. He's given three reasons. First, to celebrate two hundred fifty years of American independence . Second, to lionize Mr. Trump , didn? Y'est he say something like the most valuable bill for the most valuable president? Yes, he did. And the third reason he gave for the new note is to compensate for the erosion of value of the hundred dollars bill, the largest bill that we print in America today. And he's not wrong about that last part. Ken Rogoff is a professor of economics at Harvard University and former chief economist at the International Monetary Fund. He also just wrote a book called Our Dollar Your Problem. Hundred is not worth what it used to be . What was a hundred dollar bills, probably worth closer to eighty dollars now compared to just six or seven years ago, but nevertheless, they're not something most people use every day. Certainly not in the US. Americans use cash in only about fourteen percent of financial transactions these days, and yet there are more physical dollars in circulation than ever. That's according to Oliver Bullow, he writes about financial crimes. He's the author of the book's Money Land and everybody loves our dollars. If you look at the value of US dollars in circulation, it's doubled every decade as long as I've been alive. Almost entirely of that doubling has been made up by a hundred dollar bills. There were twenty years ago, just over five billion of them. Now there's almost twenty billion of them. The Federal Reserve estimates that the majority of those hundreds are held outside of the U. S., so if Americans aren't using them, who is? Why is there so much demand for cash money despite the fact that ordinary people aren't using it is something that I think is explainable , essentially entirely by its use by criminals The only real useful purpose for a high denomination bill is if you want to move a lot of value in a small space at one time. And the only people that want to do that really are criminals. Well, the Fed might not agree with him entirely about that. Back in twenty seventeen, a Fed economist called Ruth Judson looked at the high number of hundred dollars notes held by foreigners. She said it's hard to assess how much US currency is used exclusively for criminal trans actions. I mean, dollar popular with ordinary people all around the world, you know, people who can't trust their governments or banks. And US hundreds are a bit like gold. People buy them believing they'll hold their value. But Ken Rogoff says criminals do love big notes. So people they hide it in safe, they hide it in their walls. I'm not making this up. There's tons of police evidence on this. You know, the hundred dollars bills, you can fit conveniently in a little corner, depending on how many of them you have . And you have twenty dollars bills even, you need five times as much space. They're five times as heavy. I mean, that may sound that's ridiculous. No , it's a big deal . It's why they are so popular. And they're popular despite the rise of cryptocurrency. That's because there's no blockchain attached to a hundred dollars bill, which makes cash even more anonymous than crypto. Oliver Bullo says criminals are using them both in tandem. And it's not an either all . You have great synergy between the users of cash to commit criminality and the users of crypto. They just swap one for the other So you have a real useful degree of acceptance on the street level and convenience on the international level. Governments have cottoned onto the fact that big notes can help criminals, and with one or two notable exceptions, most are steering clear of size these days. The Europeans stopped printing their five hundred euro note, the famous bin Laden, by twenty nineteen. Singapore quit printing its ten thousand Singapore dollar note, that's more than seven thousand US by the way in twenty fourteen. Here in the US, we considered getting rid of the hundred dollars note back in the seventies , but Ovara says there's one big reason we didn't. The two point four slightly more than two point four trillion dollars outstanding of US dollar banknotes is a two point four trillion dollars interest free loans of the United States . If you take that away , then they're going to have to find that money from somewhere else and they're going to have to pay interest on it. So let me explain how this works. Do you have a hundred dollars bill on you, Wayland? Of course you don't . It's not a problem. All US dollar bills have this written on them, written on the top there, federaler Rveese N.ot This means that it is a promisory note, an IOU issued by the central bank of the United States. You give the government a hundred dollars worth of stuff or work, and in return the government gives you this note. The government holds your hundred dollars worth of whatever and pays no interest on it, while you use the paper as a currency . Which is pretty nifty, right? Yes. It's no wonder, as Ken Rogoff says, that printing dollar notes is an irresistible business for the US government. They're good for the treasury because they don't pay interest . Whereas if they borrow on the market, you know, right now the ten year interest rate's four and a half percent. So they're not paying any interest. They like that. But Ken says it's penny wise and pine foolish for the government to keep issuing these large denomination notes. A lot of the people who are using the hundred dollars bills aren't paying any taxes or as much taxes. And that's a much bigger number . That's right. It's not just drug dealers and money launderers who like big notes. Tax dodgers love them too. Damn tax dodgers. Tax evasions very large in the United States, the IRS estimated it was around a trillion dollars a year . The tax evasion swamps what they're getting from printing the notes. In other words, we lose way more money from tax evasion each year than we make from printing new curren cy. As a result, if they could, both Ken and Oliver would stop the government printing hundred dollars bills tomorrow. They say it would be the single most effective thing the US government could do to fight financial crime. And Ken says it wouldn't make that much difference to most Americans. The average person , many, many surveys show doesn't use them that much. And yeah, sometimes somebody says to me, Oh , I pay my caretak er with hundred dollar bills or I pay my trainer with one hundred dollars bills, but you know, okay , I'm not trying to be judgy about it, but obviously the point of it is they're not report ing it in taxes. If we took them away , tax collections would go up. Enforcement would be easier. It's not just doing the deal. It's hiding the money, putting it into circulation, I mean, all of these things. The creation of a two hundred and fifty dollars note would be a big mistake, Ken says. I mean, sure, it would certainly beat out those Europeans with their two hundred euro note, and it might net the US government more money on the front end . Yeah, but it would make enforcement of financial and other crimes much more difficult and tax crimes in particular. A two hundred fifty dollars note would make it easier to dodge tax simply because cash transactions are easy to make anonym ous, and it's a lot easier to transact in cash if you're using large notes. Ken doesn't believe this note will come to pass for a variety of reasons, but if it did, he says the government would end up losing a whole lot of tax money on the deal, and that would be really bad for America. America two hundred and fifty. I've just been yelling that indiscriminately at every mention of America . This episode was produced by Angel Carreas with Engineering by Cue Lee, who was backchacked by Sierra Juarz, Kicking Canon is our editor, and the indicator is a production of NPR.