Should We Kill The $100 Bill?

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Today's newsletter is adapted fromMoney: The True Story of a Made-Up Thing, a new book byPlanet Moneyco-host Jacob Goldstein.

Since the coronavirus pandemic hit, it feels like cash has disappeared. We shop online when we can. We avoid paper money because lucre seems filthier than ever. And nobody wants to go into that tiny, airless ATM room to get cash.

But!

Since the pandemic hit, the amount of paper dollars in the world has actually increased. There is now $2 trillion in paper dollars out in the world — roughly $200 billion more than there was at the start of the year. This bump was partly driven by pandemic panic, but not entirely. For years, as our daily use of cash has declined, the amount of paper money floating around has grown faster than the overall economy. And it's largely hundreds. There are more $100 bills than ones — enough to give every person in America $4,000 in hundreds.

Where is all that money? What are people doing with it? Nobody knows exactly. It's just pieces of paper out in the world! But we do have some ideas. People in developing countries are keeping their life savings in hundreds to protect themselves against unreliable local currencies and shaky banks. Also, lots and lots of people are using lots and lots of cash to evade taxes and to traffic in drugs, people and stolen merchandise.

This spring, to take just one example, stores in Southern California closed. We knew that. But a number of them, we also learned, were fronts that drug dealers had been using to launder their money. That left dealers with the problem ("problem") of huge piles of cash. In April, federal agents in Los Angeles seized millions of dollars in cash from alleged dealers in just a few weeks.

Ken Rogoff, a Harvard University economist, argues we'd be a lot better off if there were less cash in the world. A lot less. He argues that getting rid of 100s — and, for that matter, 50s — would let normal people go about their cashy business. (He also thinks the government should subsidize bank accounts for people who don't have them.) And, he says, getting rid of big bills would make it much less convenient to move around very large sums of paper money. This would effectively raise the cost of using cash to commit crimes.

Rogoff also points to another less intuitive benefit of getting rid of big bills. It could help the U.S. recover faster from economic crises by making it easier for the Federal Reserve to goose the economy by setting negative interest rates.

Here's why: At moments like the one we're in now, people hoard money because they're scared. But when everybody hoards money at once, the economy collapses. The job of the Federal Reserve is to fight that hoarding instinct by lowering interest rates. Lower interest rates make it less appealing to hold money and more appealing for businesses to borrow to invest and hire workers.

In response to the current crisis, the Fed has lowered short-term interest rates to zero. The economy is still in bad shape and unemployment is still high, but the Fed can't push short-term interest rates much lower.

This is where big bills come in. Interest rates below zero would mean people who had money in the bank would lose a little money every month. So if the Fed tried to push rates much below zero, people could just go to the bank and take their money out in cash.

The problem here, according to Rogoff, isn't ordinary people with a normal amount of money in the bank. He says we should promise small depositors that they will never have to face a negative interest rate. The thing we really care about here is the same thing we care about with cash-related crime: the small number of people and institutions holding huge sums of money.

"We're not looking to get grandma getting a negative interest rate," Rogoff told me this summer. "What we're really looking at is financial firms, pension funds, insurance companies ... holding tens of billions of dollars. And we don't want them bailing out of the system, storing their money in cash in a mountain in Pennsylvania."

Even without eliminating big bills, central banks in Europe and Japan have pushed interest rates to a fraction of a percent below zero, with mixed results. If we got rid of big bills, Rogoff says, the Fed could push much further, to something like negative 3%. That would be a huge incentive for those massive institutions hoarding lots of money to put it back into the economy rather than stashing it somewhere.

Some people have argued that the very idea of negative rates would distort markets and freak everybody out so much that negative rates are not worth trying. Jerome Powell, the Fed chair, has said the Fed is not considering negative rates at the moment. But in the next crisis or the one after that, negative rates might help jolt the economy out of a slump, driving down unemployment and making almost everybody better off. Plus, would it be so bad if it were just a little harder to make money from crime?

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