David R. Henderson  

Money as Coined Liberty

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Here is another installment of the questions I asked as discussion leader of a colloquium on Ken Rogoff's and others' proposals to abolish $100, $50, and possibly $20 bills. I've previously posted here, here, and here.

(1) On page 64, Rogoff, in discussing German opposition to a proposal to cap cash payments at 5,000 euros, writes:
"Curiously, the opposition's rallying cry seems to be 'Money is coined liberty' from Dostoyevsky's The House of the Dead."
In explaining why he thinks this is curious, Rogoff writes:
"To draw an analogy between life in a Tsarist prison and life in the modern liberal state as a defense of large-denomination notes borders on the absurd."
This leads to two questions:
(i) When one uses the statement "Money is coined liberty" to argue against a policy that is far less onerous than life in prison, does that mean that one is claiming an analogy?
(ii) Imagine you had never heard where the quote came from, as I had not. Is there an important sense in which money is coined liberty?

(2) On page 66, in discussing underreporting of income for tax purposes in Canada, Rogoff writes:
"It [this observation] is important not only for fair distribution of the tax burden but also because political support for redistribution policies (e.g., a negative income tax) would presumably be stronger if there were greater confidence in truthful reporting of incomes."
This raises two questions:
(i) A factual question: Is it clear that people would support redistribution more if they thought it was much more difficult to avoid taxes? (I'm thinking of a friend who, year ago, had a mainly cash and check business for providing a service that wasn't tax deductible to the customers, who was and is a strong believer in redistribution. Would have supported it even more had he been paying more taxes?) Possibly, my friend example is not the right example. Is it possible that he's thinking that people who pay all their taxes due would support redistribution more if they thought that those who previously underreported cannot as easily do so and, therefore, will pay more taxes?
(ii) Is there another side to this? Could you argue that if Rogoff is right factually, then underreporting of income has an unintended beneficial side effect on taxpayers, even those who don't underreport?


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CATEGORIES: Monetary Policy , Money , Taxation




COMMENTS (11 to date)
Khodge writes:

We ought to fear the power the state to simply observe our spending habits, yet the vast majority of people cede that just for the convenience of using a debit card on even the smallest of purchases or give big brother vast knowledge of our personal lives to get a discount on our grocery bill.

Of course, if you take a sufficient amount of cash on a road trip, the local cops can seize that money on suspicion of whatever.

john hare writes:

Money does give one the liberty to buy and sell outside the official plastic economy. Garage sales, food trucks, and flea markets would about disappear if they had to set up credit card accounts. As for checks, cash doesn't bounce, get overdraft penalties, and the verification system doesn't go down. I take cash to auctions as do many others I know.

I would hate for the nutrition Nazis to critique my restaurant eating habits based on their (often flawed) assumptions of what is good for me. I don't want to be in a position to have to justify all purchases for my invention hobby/business as many of them are visibly wrong several iterations in, often embarrassingly so.

Money is liberty, even if often used for lousy reasons. I like the liberty to make mistakes without discussing it.

Adam writes:

Yes, liquidity is liberty. Liquidity in one's purse is freedom. Where's the benefit of 'the dollar' if not in small bills? Online trades are done just as well and just as easily in euros--it's just an accounting detail.

But cash is king. Like other commenters say, small bills don't bounce and they are the currency of interpersonal trades--garage sales, babysitting, lawn mowing and those at farmer's and flea markets. Small benefits per person but the benefits add up to sizable sums across millions and billions of dollar using persons.

In the long run, tech will certainly replace small bills. But why endorse currency euthanasia? Let small bills die a natural, competitive death.

James writes:

Rogoff seems to be making a strange argument that because western governments are not abusive right now, there is no need for liberty preserving institutions such as cash. I’m sure Rogoff would see the problem if I told him to get rid of his door locks because nobody is burglarizing his house right now.

Dylan writes:

On the 2nd question of under-reporting, I think your explanation skirts the real point that Rogoff is trying to make. That is, if it becomes harder to under-report then all taxpayers have a reasonable assurance that those people who are on the receiving end of the redistribution actually need the money. Where if under-reporting is rampant, then you can think that your money is going to "welfare queens" or other people that are maybe doing as well or better than you yourself are. I'm skeptical of this claim in the U.S., just because I haven't gotten the feeling that even those that object more strongly to paying taxes and/or redistribution do so because they think that the people receiving the money are secret millionaires. In countries where under-reporting is perceived to be much more prevalent I'm more sympathetic to the argument, but my perception is that countries like Greece that are known for tax avoidance are already fairly redistributionist in policy. Seems like an interesting and not too difficult thing to test for though, plotting countries by tax avoidance on one axis and some measure of income redistribution on the other...

Ray writes:

Slightly off-topic, but you should really use a thumbnail version of your image rather than a 3MB 5000x5000 pixel version squashed down via an img tag. :)

David R Henderson writes:

@Khodge,
We ought to fear the power the state to simply observe our spending habits, yet the vast majority of people cede that just for the convenience of using a debit card on even the smallest of purchases or give big brother vast knowledge of our personal lives to get a discount on our grocery bill.
I’m one of those people. I do it to get the airline miles. I guess if I consumed differently, e.g., frequenting houses of ill repute, I would use more cash. But it’s hard to see how the government knowing that last week I spent $2.95 on a cheeseburger at In-N-Out Burger is going to hurt me.
Here’s how I look at it: When I see evidence that the government will use my spending habits against me in a serious way, I will shift more towards cash.
@john hare,
Money does give one the liberty to buy and sell outside the official plastic economy. Garage sales, food trucks, and flea markets would about disappear if they had to set up credit card accounts. As for checks, cash doesn't bounce, get overdraft penalties, and the verification system doesn't go down. I take cash to auctions as do many others I know.
Well said. I think Rogoff is particularly dense, or, even worse, unconcerned, about this kind of consideration. My respect for him as an economist and as a person, which was reasonably high before this book, has fallen by a double-digit percent.
Money is liberty, even if often used for lousy reasons. I like the liberty to make mistakes without discussing it.
Well said.

David R Henderson writes:

@Adam,
In the long run, tech will certainly replace small bills. But why endorse currency euthanasia? Let small bills die a natural, competitive death.
Exactly. One of the readings at the colloquium was about Sweden, and, although the author seemed gungho on Rogoff, every example he gave seemed to be of people voluntarily switching out of currency, not being forced to give up big bills.
@James,
Rogoff seems to be making a strange argument that because western governments are not abusive right now, there is no need for liberty preserving institutions such as cash. I’m sure Rogoff would see the problem if I told him to get rid of his door locks because nobody is burglarizing his house right now.
Well said.

David R Henderson writes:

@Dylan,
That is, if it becomes harder to under-report then all taxpayers have a reasonable assurance that those people who are on the receiving end of the redistribution actually need the money. Where if under-reporting is rampant, then you can think that your money is going to "welfare queens" or other people that are maybe doing as well or better than you yourself are.
Good point.
I'm skeptical of this claim in the U.S., just because I haven't gotten the feeling that even those that object more strongly to paying taxes and/or redistribution do so because they think that the people receiving the money are secret millionaires.
I agree. Critics will point to the outliers, but no one claims that they are even close to being millionaires or even half millionaires.
In countries where under-reporting is perceived to be much more prevalent I'm more sympathetic to the argument, but my perception is that countries like Greece that are known for tax avoidance are already fairly redistributionist in policy. Seems like an interesting and not too difficult thing to test for though, plotting countries by tax avoidance on one axis and some measure of income redistribution on the other...
Good idea.

Ted writes:

Redistribution has only one utilitarian purpose; to quell social unrest that destabilizes the prevailing dominance hierarchy, and thus the economic underpinnings of the state. All other stated rationale are consequences of redistribution, not arguments in favor of its economic utility.

The standard Pareto distribution effect is a case in point; money must be returned to the bottom in order to retain its capacity to achieve growth-inducing velocity.


The arguments in favor of replacing M1 fungible currency notes with tracked general ledger entries revolve around convenience to the consumer, but they mask the true purpose, which is to enable universal rent-seeking behaviors applicable to every micro-transaction and social engineering enabled by big data tracking models.


Those who wait for visible signs of harm from specific recordation of the nature of all micro-transactions are forgetting that the harm will be masked until any freedom to return to untracked exchange has been eliminated.

I see no more than a very mild case of hyperbole in the comparison of Tsarist state excesses and modern liberal states, which are coercive by their very nature. Perhaps it's a function of the aged's memories of incremental betrayal that refusal to dismiss the rather trite saying that "freedom isn't free" becomes stronger with each passing year.


Modern liberal states retain balance between individual liberty and coercive collectivism through political and societal friction. Dismissive reliance on some sort of utopian stasis within liberal ruling structures is unwarranted, given the nature and history of the establishment and maintenance of personal freedom within a necessarily coercive political structure.


having spent the last forty-three years in various forms of private commercial business undertakings, I have obtained an uncomfortably intimate familiarity with the myriad ways that individuals and organizations create new ways to skim a portion of value from transactions to which they are not entitled. Industry by industry, the details are legion, but they have a common thread; a surreptitious manner of sticking a hand into a money stream in order to dilute the gains of the primary participants in the transaction.


We see this most obviously in government gatekeeping behaviors, but only because of an enforced partial transparency. There is little or no such transparency in private industry; no one is the wiser until scandal breaks. In the instance of eliminating the transactional opacity of M1 exchanges through maintenance of the paper currency supply, there will be no functional alternatives by the time the minutiae of the harm has been revealed.


This website is geared toward economic theory, and I value it highly as such, but I would posit that the overarching theory can become functionally inaccurate when the underlying data is misinterpreted through ignorance of fundamental mendacity at the transactional level.


More directly, Dr. Henderson, I do not believe that downward redistribution would have greater support, from those whose income is depleted, should they have increased confidence in the integrity of the reporting process.

khodge writes:

@David,
Agreed. Paranoid in theory, overuse my debit card in real life.

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