My Hoover Institution colleague John Cochrane has highlighted an excellent speech by James McAndrews of the New York Federal Reserve Bank. It’s titled “Negative Nominal Central Bank Policy Rates: Where Is the Lower Bound?”

There’s a lot of meat in the speech and I recommend both the whole thing and John Cochrane’s blog post about it.

I want to focus on one thing that McAndrews discusses: the idea of eliminating currency. McAndrews “writes” [remember that it’s a speech]:

In his paper, Ken Rogoff suggests that the use of currency, by allowing anonymity in trading, facilitates tax evasion and other criminal activity. He points out many benefits of currency, including seignorage, lack of reliance on electronic networks, transaction cost savings, and expanded civil liberties associated with additional privacy. If these aren’t enough however, let me suggest another, very important benefit of currency that I explored in a paper with Charles Kahn and William Roberds.

The anonymity afforded by currency transactions prevents a buyer from suffering from any actions taken after the transactions that could exploit the knowledge gained by the seller of the buyer’s identity. For example, identity theft, or theft of credit or debit card information, is avoided through the use of currency. This is an economic benefit that is distinct from valuing privacy from a civil liberties point of view. If currency cannot be used in transactions, buyers are at a disadvantage, and many otherwise beneficial transactions (not related to buyers seeking to engage in tax evasion or otherwise illicit activity) would not take place.

Rogoff’s paper that McAndrews discusses above is here.

McAndrews makes a good point against the proposal that Rogoff seems to be floating as a trial balloon.

But there are two other arguments to be made against Rogoff’s idea of an active government policy to discourage the use of currency.

1. This is a very practical argument and I’ll state it indirectly with a question: Has Ken Rogoff ever tried to sell a used car? I have and other friends have. The way my wife and I used and the way my friends have used is to ask for payment in currency. This is for an obvious reason: the odds are that you will never see this person again and if a check bounces, you’re screwed. You could argue that the buyer could use a certified check. True. But what if the buyer doesn’t have a bank account? Many people do not. And even if the buyer does have a bank account, if he brings to the transaction a certified check for the selling price, he loses all his bargaining power. That’s why a good strategy if you’re buying a car advertised at, say, $5,000 but think you can bargain it down to, say, $4,700, is to bring a certified check for $4,500 and pay the difference in currency. But remember that Rogoff is suggesting having no currency. So that strategy wouldn’t work.

2. What Rogoff sees as one benefit of eliminating currency is in fact a mix of benefits and costs. Rogoff writes: “Paper currency facilitates making transactions anonymous, helping conceal activities from the government in a way that might help agents avoid laws, regulations and taxes.” When you read “agents,” you might think of government agents. That’s not what he means. Rogoff writes in that stilted way that many economists write, using the word “agents” when what he means is “people.” Clearly, in context (read the whole thing if you doubt me), Rogoff sees this as a problem with paper currency. But whether it’s a problem depends on whether the laws, regulations, and taxes that people are trying to evade are good laws, regulations, and taxes. Rogoff implicitly assumes that they are but makes no case for his assumption. Instead, he does what many economists do: implicitly takes the side of government and acts as a government “agent.”