I heard Rogoff interviewed on NPR (National Public Radio) and became intrigued by his book. He is a Harvard professor, former chief economist for the International Monetary Fund (IMF) and author of a bestseller on a history of financial follies. I went to Amazon and noticed that, out of 94 reviewers, 66% gave it a lowly 1 star. I looked at a number of these 1-star ratings and they seemed to be giving his book a low rating simply because they violently disagreed with what he was proposing — which is, first, the elimination of all paper bills larger than $10 or $20 and second, if that works, the subsequent elimination of all paper money (in order to then be able to impose negative interest rates). I did not purchase this book but I got it through the public library and I have read 98% of it (note comment on difficulty of reading below).
REACTION OF HORROR
My initial reaction, at first (like these other 1-star raters) was one of horror. Here is why I was (initially) horrified:
1. Total elimination of privacy for all monetary transactions: Currently, when I pay someone in cash, no one else knows except for the recipient. Under Rogoff’s (final) system, the smallest transaction would be recorded (by whichever bank processed my debit or credit card and thus, ultimately, by the gov.). There might be products that I want to purchase, or people I want to support, without my government knowing about it. Take pot, for example; while I have not smoked pot in decades, what if I am a pot smoker in Colorado who travels to some other state where it is still illegal and I want to purchase some?
2. What about all the people OUTSIDE the USA who use US cash? Many of these people live in countries with horrible (oppressive, corrupt) governments and their only chance of escape from this oppression is through accumulation and use of US paper currency.
3. What about hacking? Personally, I purchase all gasoline for my car with cash, because I have read about how the most common false purchase on anyone’s card is for purchase of gas via card.
4. What about power outages (due to a hurricane, etc.)? No one would be able to buy or sell anything while the power was out.
I decided to read Rogoff’s book to see what he had to say and then to grade his book, not based on whether or not I happen to agreed with him, but on whether or not what he says is interesting and whether or not he makes any good points. On the basis of these criteria I give his book 5 stars.
DIFFICULT READING
First, a warning: This book is extremely difficult reading in places; so difficult that I could not understand certain sections and had to skip them. I am not naive in the area of banking/finance or uneducated. I read the British magazine The Economist for years and I am a Prof. of Computer Science at a major university (with an additional MA in Anthropology).
An example of an incomprehensible section is “Quantitative Easing Explained”. I had wanted to understand how QE differs from simply creating more money, but could not penetrate Rogoff’s explanations. In general, the entire book reads more like a textbook for graduate students of finance/banking/macro-economics than for the average, well-educated person on the street. That said, the book is quite interesting and has convinced me that at least I personally would survive if just the first stage (eliminating all $100 bills) were implemented. I would still oppose the elimination of $20 bills and lower denominations.
Second, this book is not restricted to US currency (and therefore the American reader). Throughout Rogoff discusses and compared physical currency use across multiple countries (e.g., I did not know Germans really love physical cash more than other Europeans), along with many graphs and charts (e.g., showing what percentage certain denominations represent with respect to a given country’s GDP).
MAIN PURPOSE: NEGATIVE INTEREST RATES
Rogoff’s main purpose, in proposing elimination of all paper currency, is that he wants governments to be able to set NEGATIVE interest rates and he predicts that, under such circumstances, people would respond by acquiring and using more paper cash. If paper cash were eliminated, then people would have to accept negative interest rates.
One criticism I have of this book is that Rogoff is so steeped in the milieu of bankers and economists that nowhere in his book does he take out any time to really explain why negative interest rates would be better than having a government simply engage in more infrastructure/public works to get a country out of its economic doldrums. Since Rogoff failed to give this explanation I will attempt to do so here: Imagine that an economy is limping along and that everyone is afraid to invest in new businesses and/or expansion of current businesses. There are two ways that one could stimulate that country’s economy: (1) the government taxes its wealthier citizens more and then “primes the pump” with infrastructure works, e.g. in repairing bridges/roads, expansion of airports, upgrading schools, expanded funds for education (like the GI Bill after WW II), and so on or (2) the government lowers interest rates into NEGATIVE territory.
In the latter case, all those wealthy individuals, who are sitting on their cash, would be motivated to invest their cash in the market because, with negative interest rates in place, their cash would now be costing them money rather than making them money (as is the case with normal, positive interest rates).
I assume that Rogoff’s main (unstated) assumption is that having those who are sitting on their cash individually decide how to invest that cash (to avoid the cost of negative interest rates) would be much more efficient (and politically easier to do) than having governments decide directly how to increase the tax burden on the wealthy and also decide where to spend those newly acquired public funds.
Rogoff never discusses the above explicitly (unless he hid it in one critical sentence; which would still be ironic, since this is the first main point of his book; the other main point being that, to have negative interest rates work well requires elimination of physical cash — at least those of large denominations).
Given that negative interest rates would most effectively help get a country’s economy out of the doldrums, Rogoff then attacks the one response (by that government’s citizens might take) that would counteract the positive effect of negative interest rates, which would be for those citizens with lots of money, to replace their electronic wealth with wealth being held in physical, paper cash.
SOME INTERESTING SEGMENTS
Rogoff briefly goes through the history of coins and paper currency, as it developed across different countries, which is quite interesting. He discusses seigniorage (I term I had never heard) which is about how governments can make a lot of money due to the difference between the cost of producing a currency, in contrast to the face value placed on that currency.
He also discusses past attempts at making physical cash costly to the holder of that cash. I found that quite interesting. For example, I did not know that, during the Great Depression, in the town of Wörgl, Austria, its 2000 inhabitants had to purchase stamps (costing 1% of each currency’s face value) and place them on their currency each month (for that currency to remain viable) and that this experiment ran for a year.
Clearly, forcing people to buy and place stamps on their large denomination bills would act like a negative interest rate but would also be considered quite onerous in this day and age. Another approach he mentions is to place termination dates on physical currency — any $100 bill not used within some time period (indicated on the bill) would cease to have any value.
Another interesting idea is that of making the rate (between physical cash and electronic cash) not be 1-to-1. (This approach is called “Eisler’s two-currency system”). Imagine that you have $100,000. Half of it is electronic (i.e. your bank account tells you that you have $50,000 in a savings account). The other half of it is physical (you have 500 $100-bills socked away in a safe somewhere). Currently, an electronic dollar is exactly equal to a physical dollar, but what if this were not the case? For each alternative to negative interest rates, Rogoff goes into great detail as to how these alternatives would affect various sectors of the economy.
He does the same for negative interest rates. For example, what if we are in negative interest rate territory and I write someone a cheque for $10,000. then hat person might want to hold off cashing that cheque for as long as possible (because then I, as the writer of that cheque, would have the ongoing loss, which would resulting from holding that cash while under negative interest rates).
ILLEGAL ECONOMIES
Rogoff goes into great detail concerning where physical cash resides (for mainly the US $100 bill and the Euro €100, €200 and €500 banknotes but other countries are considered). For US paper bills, about half are outside of the US. (Not mentioned in Rogoff’s book, but stated in wikipedia, there continue to exist $1000, $5,000 and $10,000 US high-denomination notes. There are only a little more than 300 of these $10,000 bills; ditto for $5000 bills; however, there are over 160,000 $1000 banknotes still in existence. Whenever these high-denomination notes get cashed, the Federal Reserve then destroys them).
WHAT ARE $100 BILLS USED FOR?
According to Rogoff, the bulk of $100 bills are used in illegal activities, such as drugs, counterfeiting, human trafficking, illegal immigration, terrorism and tax evasion. He argues that catching tax evaders will lower taxes for the rest of us and that elimination of large denomination physical cash will make transport of ill-gotten gains much more difficult. He considers and discusses alternative forms of currency that criminals might use and the difficulties these alternatives pose for criminals. He also considers use of cyber currencies (such as bitcoin and any future new versions of block-chain-based currencies).
WILL IT HAPPEN?
I think the US gov. is definitely going to eliminate $100 banknotes in the near future; partly due to the influence that Rogoff’s book will have on top bankers and their corresponding government officials (and this book is clearly written for these types of policy makers).
While reading this book, in Nov. 2016, the Indian government eliminated both 500 and 1000 rupee notes (which are their largest denominations and worth around $7.50 and $15 respectively, so this would be equivalent to the USA banning its $10 and $20 notes).
Unlike the Indian government, which developed the plan in secrecy and then sprung it on its population (Indians have about a month in which to exchange the banned bills for lower denomination currency), Rogoff argues that before the US government bans $10s and $20s, debit cards would be handed out to all poor people (many of whom currently lack bank accounts).
ITS EFFECT ON ME
What if $100 bills were eliminated? Like most Americans (as supplied by numerous tables/charts in Rogoff’s book) I carry at most $100 in my wallet, normally in $20s and $10s, with some $5s and $1s. Like most Americans, I use cash for small transactions (e.g., 7-11 stores, tips at restaurants, gas …) while I use credit or debit cards for any items over $40. Already banks (and therefore ultimately the gov.) know about all of my purchasing habits, along with my sources of income (revealed when paying taxes). If the electric grid went out, I would already be in trouble. Should I be socking away $100 bills in the case of a grid collapse? If there were a serious collapse of our electronic infrastructure it is likely that paper currency might not be accepted either. I know that doomsday preppers do not hoard cash; instead, they hoard items for bartering, such as cigarettes.
CONCLUSION
All in all, I found this book extremely thorough in its treatment of the many issues arising from elimination of physical cash and any subsequent implementation of negative interest rates. For anyone interested in these issues, this is definitely the “go-to” book to go to.
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