Larry Summers and others have recently argued that high-denomination notes (HDNs) make it easier to transact crime, finance terrorism, and evade taxes. The conclusion seems to be that removing the $100 from circulation could have a lot of potential upside without much downside. The argument derives largely from a paper describing the many ways in which HDNs promote illicit activity.
The WSJ claim that removing the $100 bill is a threat to free enterprise is, of course, nonsense. However, while the specific facts supporting the case are convincing, the conclusion itself may be unwarranted without further addressing the following questions.
- The Sands paper notes that 25 to 70% of $100 bills are held abroad. Even assuming that 100% of the lower bound is used in strictly illicit activity, that leaves $750 billion in clean hands. If the premise of the argument is that HDNs make crime easy – and that criminals pay a premium on the order of 5-10% for this subsidy – then existing $100 bills will float towards criminals. Ending future issuance of this note (I assume this is not a mandatory exchange as Summers writes about “ending the further issuance”) doesn’t seem likely to rival the natural market equilibrium as benign users let their notes fall in criminal hands. Sure the premium paid might go up, but there is a large stock pile, so to speak.
- In 2016 the Fed plans to print $150 million worth of $100 bills, or in other words ending future issuance for the next 2000-5000 years would balance the non-foreign / criminal portion of the $100 held (depending on your estimates). Now if only criminals benefit from the convenience, the remaining balance would easily float over with little extra cost. If this isn’t the case it means the innocent users of $100 benefit from its convenience somehow – a market-based claim that can’t be ignored by simply stipulating otherwise.
- There is an information tradeoff. Imagine if criminals transacted only in $10,000 notes. It would be reasonably easy for intelligence agencies to sneak a traceable note to probe criminal networks. This would be close to impossible with a $20 note (not the least because this is a high velocity note used by normal people).
- Citing the high use of $100 among criminals doesn’t mean much. Of course criminals use the lightest / most compact / highest denomination currency at their disposal. Therefore suggestions along the lines of “n% of criminal activity is transacted in $100 bills” mean little because if we got rid of the $100 and managed to avoid the problems noted in point (1) it would be the case that “n% of criminal activity is transacted in $20 bills”.
- Consider the proposed premiums for $100 bills. For one, if the numbers were this high it further emphasizes the point made in (1). But importantly, they seem a little too large to be only about the denomination. There is a large liquidity premium. (I bet criminal FX markets in Argentina don’t have much in the $1 note inventory). People transacting in smaller notes – like innocent Argentinians avoiding a tyrannical government – are unlikely the balance, “marginal”, consumers of dollar bills. Furthermore, given that transaction with a criminal is likely more heavily penalized than transaction with a bystander, this implicit tax is built into the premium. I have a hard time believing $100 is 10% cheaper due only to transportation and convenience....