'There are no adequate alternatives to cash', The Case for Cash an ADBI working paper

Author James McAndrews responds to arguments for phasing out high denomination notes and the relationship between cash and central banks implementing severe negative interest rate policies.

Excerpts from ADBI working paper (March 2017)

Cash is an extremely useful social contrivance. Two possible drawbacks of high-denomination cash have recently been discussed by Kenneth Rogoff in his book The Curse of Cash, and echoed by other economists. They are the extensive use of high-denomination cash by criminals and others engaged in illicit and corrupt activities, and the role that cash plays in avoiding deeply negative nominal interest rates imposed on bank accounts. Rogoff and others call for a phaseout of high-denomination cash over a long time. The use of cash in crime, I’ll argue, is preferable to the alternative, and there are limits to the benefits of deeply negative nominal interest rates. There are no adequate alternatives to cash for poor and unbanked people. Consequently, the current high-denomination cash in the United States should be retained...(abstract).

The promise of new forms of financial inclusion that would address the lack of mainstream financial services for poor and unbanked people remains unfulfilled. There are many developments, such as gift cards and other debit products, that have attractive features compared with cash, but so far the combination of zero fees, anonymity, widespread acceptability and immediate discharge of one’s obligation that cash provides is unattainable. Alternatives to meet the important needs of the cash-based licit economy, especially those of the poor, should be well-identified and in place prior to phasing out high-denomination currency... (p.13).

Cash does not fuel crime, any more than condoms fuel lust or clean needles fuel addiction. Cash is a social contrivance that assists people, sometimes in vulnerable positions, to alleviate their concerns and discharge their obligations with finality. Without the use of convenient high-denomination cash, many vulnerable people will likely be ensnared in a trap in which they are unable to fully discharge their obligations and would then face the threat of violence if they fail to pay in full. That such people do not hold large amounts of high-denomination currency at present offers no evidence that they do not benefit from its presence in society (p. 14).

Download ADBI working paper here

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