It’s been some time since I last fell into sustained contemplation on the things I most appreciate about Jewish economists. Though one of those–I realized just today–is their commitment to low crime civic order. This came to mind reading a piece by Larry Summers in the Washington Post (via 0hedge).
Mr. Summers, you will recall, is a former President of Harvard, who got himself effectively cashiered from that roost for saying that only men can produce semen, or some such sexist drivel. At any rate, his ethnic fellows weren’t buying the ruse, and quickly picked up the scent of anti-semitism amidst the heavy feminist musk.
Though the suspicious sentiment wasn’t unanimous. Former Harvard professor of Jewish studies, Avi Matalon, opined that “racial hatred of the Jews” was not a factor in the Summers controversy. Well obviously racial hatred wasn’t a factor, since Jews are white. Except when it is advantageous not to be. Though that material was all surely well-covered in Dr. Matalon’s course, and so we’ll leave it to readers’ recollection.
The topic tonight is Larry Summers’ helpful departure from his base of expertise in economics into law enforcement. I don’t think any of us like crime, and Larry has alighted on an almost elementary approach to achieving its reduction: do away with high denomination currency. That sensation you are experiencing of why didn’t I think of that? is the reason he is a former president of Harvard and you merely work for a living.
It’s time to kill the $100 bill.
Harvard’s Mossavar Rahmani Center for Business and Government, which I am privileged to direct, has just issued an important paper by senior fellow Peter Sands and a group of student collaborators. The paper makes a compelling case for stopping the issuance of high denomination notes like the 500 euro note and $100 bill or even withdrawing them from circulation.
I remember that when the euro was being designed in the late 1990s, I argued with my European G7 colleagues that skirmishing over seigniorage by issuing a 500 euro note was highly irresponsible and mostly would be a boon to corruption and crime. Since the crime and corruption in significant part would happen outside European borders, I suggested that, to paraphrase John Connally, it was their currency, but would be everyone’s problem. And I made clear that in the context of an international agreement, the U.S. would consider policy regarding the $100 bill. But because the Germans were committed to having a high denomination note, the issue was never seriously debated in international forums.
The fact that — as Sands points out — in certain circles the 500 euro note is known as the “Bin Laden” confirms the arguments against it. Sands’ extensive analysis is totally convincing on the linkage between high denomination notes and crime. He is surely right that illicit activities are facilitated when a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds as would be the case if the $20 bill was the high denomination note. And he is equally correct in arguing that technology is obviating whatever need there may ever have been for high denomination notes in legal commerce.
What should happen next? I’d guess the idea of removing existing notes is a step too far. But a moratorium on printing new high denomination notes would make the world a better place.
You must admire a man just looking to make the world a better place. Whatever your impressions of Summers or the Mossavar Rahmani Business Center, their integrity can’t be impugned. These people don’t just live in the ether of abstruse economic theory, they look for solutions on the street. How can we lower crime in Europe and America? Now we know. It’s all very considerate. And very coincidental.
Coincidental to the increasing central bank fascination with a negative interest rate program (NIRP). You may recall my previous remarks on negative interest rates. Along with the qualifier that the only way they can be effectively implemented is by precluding the public’s cash-out option. If you are going to lose money on a bank deposit, you might be inclined to withdraw it. And that’s not a permissible part of the program. In economic terms, money flowing out of the system is called disintermediation. And disintermediation is banker death. But there is no cash-out if there is no cash.
So with the $100 bill reportedly representing 78% of the total dollar currency in circulation, its removal starts getting the Federal Reserve very close to de facto cash elimination. And you very close to paying the bank to borrow your money.
All of which is a completely unforeseen consequence of Mr. Summers’ crime fighting proposal. That the two ever came to meet at all is romantic serendipity. And that’s what I appreciate the most.