Pierre Lemieux

In Defense of Cash

Pierre Lemieux*
Some economists and pundits have been arguing for banning cash. Used in this sense, cash is the 11% of the money stock (calculated as M2) made of paper currency in the United States. The rest of the U.S. money stock consists almost entirely of electronic entries for bank deposits and money market funds. (Coins, which are not included in the definition of cash here, add only 3% to currency.) Through checks, debit cards, direct transfers, etc., electronic money makes up nearly 60% of transactions and more than 80% of their value. Cash is even less used in some Scandinavian countries, which many see as becoming cashless societies.

For background information on the definitions of money and cash, see Money Supply, by Anna J. Schwartz, in The Concise Encyclopedia of Economics.

The best-known proponent of banning cash is Harvard University professor Kenneth S. Rogoff.1 Banning cash means that the government would stop issuing it and would buy the outstanding stock in exchange for interest-bearing securities. Rogoff proposes a gradual phasing out over 10 to 15 years, starting with $100 and $50 bills and then extending to $20 bills. Eventually, only denominations of $10 and under—which now represent only 3% of the cash—would be allowed, or perhaps replaced by heavy coins.

This is a much bigger issue than it first appears to be. Not only would banning cash as we know it inconvenience a lot of people, but also, as we shall see, it would come with many new regulations and controls. For example, it would require tight regulation of crypto-currencies, harassment of "cash hoarders," and prohibition of prepaid cards (which are too similar to cash).

The arguments that Rogoff and others invoke for a partial or total prohibition on cash are its widespread use in criminal activities, its constraining effect on monetary policy, and its diminishing convenience for legitimate use. Each of these arguments is flawed, as I will explain later. Let's look more closely at the first two arguments.

The main argument is that cash facilitates crime. It is anonymous and leaves no paper trail. Larger bills are relatively easy to carry and to store, and constitute a large proportion of currency—80% for $100 bills. Surveys suggest that American consumers hold only a small proportion of the cash in domestic circulation, and, thus, most of the large bills are supposedly used in criminal activity: drug-related transactions, cash sales and salaries in the underground economy (to pay illegal immigrants, for example), and terrorism. The situation is similar with national currencies in other countries.

The second main argument for banning cash requires a detour into macroeconomic theory. When government wants to stimulate aggregate demand to escape a recession or slow growth (as is happening currently), it will, according to mainstream theory, push down interest rates. When interest rates are close to zero (as they currently are), reducing them further requires pushing them down into negative territory. No one had experimented with this idea until the past few years in a few countries (including some countries in the Eurozone). But if saved money (say, in a bank account) brings a negative return or, in other words, requires a fee, individuals and businesses will, at some point, start hoarding cash instead. This would nullify the policy goal of making them spend the money. Thus, monetary policy cannot go much below the "zero bound" of interest rates. The advantage of a cashless society, the argument goes, would be to have no zero bound, thus liberating the full power of monetary policy.

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.

But the world in which we live is very different. As Lord Acton said, "Power tends to corrupt and absolute power corrupts absolutely." It is in the interest of nearly everybody that government power be constrained. In Western societies, social and political institutions have developed for this purpose.

Fighting Crime

Consider the crime argument. Constraining government, even in fighting crime, forms the constitutional basis of a free society. Criminals are probably more likely than blameless citizens to invoke the Fifth Amendment against self-incrimination, or the Fourth Amendment against "unreasonable searches and seizures." The Eighth Amendment, against "cruel and unusual punishments," looks even more tailor-made for criminals. But this is not a valid reason to abolish these constitutional rights, which are meant to protect individuals against government overreach.

A similar argument is relevant to neutral things like cash. Why should innocent individuals be prevented from using cash only because criminals use it improperly? It is estimated that alcohol is involved in a third of crimes,2 but this is not a good argument for a new Prohibition. Preventing crime should normally be done by dissuasive punishments, not by prior controls on non-criminal behavior.

Moreover, not all crimes are real crimes.3 Terrorism is a real crime, but there are already many laws and regulations against actions committed by terrorists. And cash is probably not a major factor in terrorism. Victimless crimes are different. Tax evasion, selling and buying drugs or cigarettes among adults, and ordinary activities in the underground economy are "criminal" in a different sense than murder.

Furthermore, some activities that the law currently defines as crimes (in certain countries) may actually provide useful built-in constraints against abuse of power. Tax dodging, for example, limits the voracity of Leviathan and its tax exploitation. It increases the cost to the state of raising taxes and, thus, tends to maintain them at a level more likely to gain the consent of most citizens.4

The same argument applies to the underground economy more generally. It provides a built-in constraint against overregulation. As regulation increases, more people—consumers, entrepreneurs, unfashionable minorities—move to the underground economy. Thus, government cannot regulate past a certain point, and this constraint kicks in more rapidly in a free society.

"That cash plays a role in making these built-in constraints more effective against abuses of power is a benefit, not a cost."

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.

Monetary Sorcerers

Facilitating negative interest rates is the second argument used against cash, and its cogency is far from obvious. Monetary theory is complex. Is it true that a recession requires government to try to boost "aggregate demand"? Does it work? Different schools of economic thought give different answers. We still debate the causes of the Great Depression 80 years later, not to mention the controversies about the recent Great Recession. The precise influence of central banks on interest rates is debatable.5 We don't understand why exactly interest rates have been on a downward trend since the 1980s. Economists know relatively little about the efficacy of monetary policy. Politicians and the general public know even less.

The consequences of a deliberate policy of negative interest rates are very uncertain. Negative rates don't seem to work at low doses, as we see in Europe and Japan. Many observers are worried that the current low interest rates are already fueling an asset bubble—perhaps in commercial real estate.6 The hubris of proposing a new prohibition in order to facilitate a more daring experiment with negative interest rates is puzzling.

Diminishing Convenience?

The diminishing convenience argument cannot bolster the case against cash. To argue against the usefulness of cash is to deny the revealed preferences of many individuals. The fact that cash has not disappeared even in non-criminal hands means that it is convenient for many individuals. Economic efficiency is defined in terms of what individuals want.

Why many individuals want cash, including large bills, is, like all preferences, ultimately subjective. Some may value privacy more than others. Depending on risk aversion, cash also provides a sort of insurance policy. Holding cash or at least having access to it reserves the capability, if ever needed, to avoid capital controls or outright confiscation, by moving money across borders. Cash can also protect individuals and their intermediaries—pension funds, life insurance companies, etc.—against negative interest rates on their savings. It is for each individual to make his own cost-benefit analysis.

Foreigners hold at least one half of U.S. cash—in Zimbabwe and some South American countries, for example, to protect themselves, often illegally, against the debasement of their own currencies by their own governments. This reminds us that good cash is often useful. It also suggests that, as the economist would normally assume, the welfare of these foreigners should be included when evaluating policy proposals.

The real issue is whether governments, including the U.S. government, should be the ones supplying cash. It is true that producing cash to satisfy transaction demand costs nothing to the taxpayer: on the contrary, the central bank earns seigniorage (the difference between the cost of printing banknotes and their market value). It is an intriguing fact that the availability of government currency provides protection against government intrusion itself.


For more on the private supply of money, see the EconTalk podcast episodes Selgin on Free Banking and Lawrence H. White on Monetary Constitutions.

Were the U.S. government to stop producing dollar bills, Americans would probably experience little inconvenience, as foreign cash (pounds, Swiss francs, euros...), notes from private banks, or cryto-currencies could easily be substituted.7 But proponents of cash prohibition also want to ban these substitutes. What they don't like is any monetary instrument that reduces government control.

Mission Creep

Mission creep naturally follows from the logic of government regulation. For example, the war on drugs generated the new crime of money laundering, boosted civil forfeiture laws,8 and contributed to mass criminalization. Money laundering regulations have scared American banks into retreating from many foreign activities—so that now, the U.S. government feels obliged to assure them that it does not, in this case and for the time being, take a zero-tolerance approach!9

Enforcing a total or partial ban on cash would generate a new crop of regulations and controls, as Kenneth Rogoff admits. During the implementation period, restrictions on the maximum size of cash payments could be required. As cash is being phased out, other measures would have to be taken, including subsidized debit cards or their provision by government for low-income people. The use of foreign cash or any other cash would have to be prevented. Crypto-currencies would have to be regulated. Fees on withdrawals and deposits of any remaining cash might be required. Moreover, in case of very negative interest rates, prepayment of taxes would have to be controlled, and banks might need bailouts. Many savers would no doubt ask for state help. Other regulations would be adopted to close newly discovered loopholes.

Government is not manned by angels, and constraining its actions is as necessary as it ever was, if not more so. Banning cash would do the opposite, which is the broad reason why it is a bad idea. In their ivory towers, policy makers and their economic advisers sometimes forget that efficiency is what individuals want. Indeed, it is often in the policy makers' own interest to forget it. Contrary to the prohibitionist temptation, the default option should not be to intervene, but to leave people free to strike their own bargains in free markets.


Kenneth S. Rogoff, "The Sinister Side of Cash,"Wall Street Journal, August 25, 2016. This piece was a preview of Rogoff's just published book The Curse of Cash (Princeton University Press, 2016). I much rely on Rogoff's case against cash, which is as well-argued as it can be.


Lawrence A. Greenfield, Alcohol and Crime: An Analysis of National Data on the Prevalence of Alcohol Involvement in Crime, Department of Justice, 1998. PDF file.


By "real crime," I mean an action whereby A transfers money or other benefits from B to himself. On this conception of crime, see David D. Friedman, Law's Order: What Economics Has to Do with Law and Why It Matters (Princeton University Press, 2000), pp. 32-33. Believers in social contractarianism or in natural law will have different definitions of "real crime," but these should be generally consistent with the point I am making here.


I present a public choice argument to that effect in "The Economics of Tax Dodging," Library of Economics and Liberty, January 5, 2015.


Jeffrey Rogers Hummel, "The Myth of Federal Reserve Control Over Interest Rates," Library of Economics and Liberty, October 7, 2013.


Michael S. Derby, "A Fed Insider Warns of the Risk of Low Rates", Wall Street Journal, September 18, 2016.


There is an important economic literature on private currencies and currency competition. Its main representatives include Lawrence White (George Mason University), George Selgin (now at the Cato Institute), and the late Nobel Prize winner Friedrich Hayek.


On civil forfeiture laws, a good example of the non-angelic world in which we live, see "What Civil-Asset Forfeiture Means", The Economist, April 14, 2014.


Emily Glazer and Aruna Viswanatha, "U.S. Defends Its Curbs on Money Laundering", Wall Street Journal, August 30, 2016.

*Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais. His latest book is Who Needs Jobs? Spreading Poverty or Increasing Welfare (New York: Palgrave Macmillan, 2014). He lives in Maine. E-mail: PL@pierrelemieux.com.

For more articles by Pierre Lemieux, see the Archive.

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