David R. Henderson  

Banning the Benjamin Would Reduce Freedom

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Larry Summers is a bootlegger and a Baptist.

In a comment on my post on Larry Summer's critique of Donald Trump in a vacuum, ff asked:

What did you think of Larry Summers recent column in the WP advocating the U.S. ban $100 bill? His stated reason is to stop terrorists and drug dealers. Do you think the terrorist reason is a red herring? It seems obvious to me that the reason he is advocating this is to make it easier to implement negative interest rates or make it easier for the government to collect tax revenues. But, he never once mentioned those reasons in the article. IMO, Summers is an awful person for writing that column while intentionally hiding his true motives.

ff was referring to Summers's article "It's time to kill the $100 bill."

I don't think the terrorist reason is a red herring. My guess is that Larry honestly believes it. (I do think it's a bad argument. More on that shortly.) In that sense, Larry's the "Baptist" in Bruce Yandle's famous and valuable metaphor. For those unfamiliar with the metaphor, Baptists favored bans on sales of alcohol on Sundays because alcohol sales on the Lord's day offended their values. Bootleggers favored bans because people would be more likely to come to them for their liquor on Sunday. Yandle applied it much more broadly. By the way, writing this post caused me to reread Yandle's original article, which I had last read over 20 years ago. It's short and very insightful, especially on some of the drivers of regulatory change.

Back to Larry Summers. In following up the later comment by EB, I learned that Larry is also the bootlegger. That is, he has a personal interest in hobbling competition from cash. In June 2011, Larry joined the Board of Directors of Square, a company involved in electronic payments transactions.

Now to the issue at hand. I think Larry is right that banning the $100 bill would make it marginally harder for terrorists and criminals. I favor making it harder for terrorists and for some criminals but not for other criminals. I actually want it to be easier, for example, for those whose crime is to find ways around oppressive regulations in countries like Venezuela and Cuba. Larger-denomination bills help. What is the tradeoff here? My guess is that the legitimate uses of $100 bills vastly outweigh the illegitimate uses. Of course, Larry and I probably differ on what we regard as legitimate and illegitimate. We might both agree, for example, that it's legitimate for people to engage in black-market transactions for food in Venezuela. At least I hope he agrees with me on that. But we would probably disagree on the legitimacy of the illegal drug trade.

Moreover, Larry is keying in on one factor that makes crime easier and minimizing the value of that one factor in other uses. As he and I learned in graduate school (I'm guessing he learned it earlier from his two economist parents and from his two Nobel-economics-prize winning uncles), that is no way to do cost/benefit analysis.

For a much more even handed approach to the issue, I highly recommend, as did my co-blogger Alberto Mingardi last week, an excellent post on the issue by my Hoover colleague John Cochrane. He covers pretty much all the bases. John addresses the broader issue of banning currency altogether. But many of his arguments apply to banning Benjamins.

Incidentally, when I first read Larry's Washington Post article shortly after it came out, his role as bootlegger was not identified. Fortunately with "only" an 8-day lag, the WaPost has identified that role. It writes:

Added Feb. 24: Summers serves as an advisor or board member to number of financial technology and payments companies.

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COMMENTS (2 to date)
ThomasH writes:

If you think Square would be helped by not having 100 bills in circulation, write that up as a B-school case study and see how far you get.

BorrowedUsername writes:

Agree with ThomasH. You have some great arguments sometimes David Henderson but sometimes you see someone on the political left and work backwards from the assumption they must be corrupt. I happen to even agree with you that banning the $100 bill is stupid, plus it'll never happen, we can't even get rid of the penny for cash transactions. Until we have some other instant payment processing network that we can trust cash will have to be it for many in-person trust-free transactions.

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