Paper currency helps criminals and constrains central banks—so why do we still use it?by Kenneth Rogoff / September 15, 2016 / Leave a comment
Published in October 2016 issue of Prospect Magazine
Has the time come for developed nations to start phasing out most paper currency? A large number of economic, financial, philosophical and even moral issues are buried in this arresting question. But on balance, I believe that the answer is yes.
When I first wrote about the idea 20 years ago, it was pure fantasy. But after the explosion of payment methods, with services like Google Wallet and apps like Venmo joining credit and debit cards, it is no longer unthinkable. Even today, many practical objections can admittedly be raised to the idea of significantly scaling back cash. But my proposal involves leaving small notes in circulation for a long time (perhaps indefinitely), to cover most concerns about everyday payments, security, privacy and emergencies.
I have two main arguments for transitioning to a less-cash (if not quite cashless) society. First, it would make it more difficult to engage in recurrent, large and anonymous payments and thus it would discourage tax evasion and other crime. Second, it is arguably the easiest way to help central banks invoke negative interest rate policies—a tool that would have been of great use during the 2008 financial crisis.
Governments make profits from issuing currency because the cost of minting coins or printing paper notes is less than the market value of the money. But any profits reaped this way are dwarfed by the costs of the illegal activity that cash facilitates.
Tax evasion is a massive problem. It violates what economists call “horizontal equity,” the principle that those with the same income or assets should pay the same amount in taxes. When some people don’t pay the taxes owed on their true incomes, others have to pay more. If some companies use bribes to get around anti-pollution regulations, they gain an unfair competitive advantage and degrade the environment. When businesses go off the books to pay workers less than the minimum wage, they disadvantage competitors that abide by the law.
In addition, tax evasion hampers the efficiency of the tax system. If taxes are evaded more easily by cash-intensive businesses, investment is directed to them rather than to more readily taxable enterprises, which compounds the loss of tax revenue.