David R. Henderson  

The Case for Allowing Cash

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There is a possible universe in which these arguments against cash would be true. In such a world, politicians and bureaucrats would know and single-mindedly pursue the public interest (that is, what is in the interest of everybody), economists and bureaucrats would perfectly understand the consequences of government policies, clear laws and transparent regulations would never be used for anything else than their well-understood original purposes, and prosecutors would always protect individual rights.

This is from the excellent Econlib Feature Article for October, "In Defense of Cash," by Pierre Lemieux.

In the piece, Lemieux defends the idea of allowing people to use cash. Such a defense is necessary? Actually, yes. Harvard University professor Kenneth Rogoff, a man whose thinking I have generally respected, is on a crusade against cash. Ken wrote an excellent piece on Third World Debt for my first edition of The Concise Encyclopedia of Economics. As far as I can tell from his published work--I haven't read his book yet--he doesn't do a cost/benefit analysis of his proposal to limit and possibly end the use of cash. Rather he looks at benefits, many of which are speculative, and virtually ignores costs.

Pierre Lemieux rights the balance.

Two more paragraphs from Lemieux's piece:

That cash plays a role in making these built-in constraints more effective against abuses of power is a benefit, not a cost. In a free society, one could provide a cogent argument for increasing the face value of the largest-denomination notes. The largest Swiss note, for example, is 1,000 Swiss francs (roughly the same as $1,000 at the September 22, 2016 exchange rate).

Because of all these constraints, the cost of fighting crime is certainly higher in a free society. But for the vast majority of individuals, the benefits of freedom are even higher. Liberty is not a bug--it's a feature.

Read the whole thing.

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CATEGORIES: Monetary Policy , Regulation

COMMENTS (1 to date)
Joe B. writes:

The Rogoffian fear of cash is not in regards to crime, but that the exalted goal of so many orthodox macroeconomists---no inflation---is impossible if cash exists.


People will save in the form of cash, if no inflation, and then inevitably start transacting in cash, to avoid taxes and regulations. If the state takes a 20% to 30% bite, then cash transactions become compelling.

Even the best-run states seem to take 20%, so off-the-books cash transactions are always a good idea (yes I want a smaller state too).

We see this already with ballooning cash in circulation in the US, now at $4,500 per resident (!), and rising rapidly since 2008. Low inflation always encourages cash holding.

As the off-the-books economy grows, more taxes are shoved onto that portion aboveground.

Of course, running inflation at 3% or so solves the problem, and effectively taxes cash-holders.

Or, you can do away with cash, go to zero inflation, and have a state that is able to monitor and record every e-mail, phone call and transaction.

I am sure that omniscience will never be abused.

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