A US economist has called on governments around the world to “drastically phase out” banknotes — a bold proposal sure to anger many Australians.
In his new book The Curse of Cash, published in early October, Professor Kenneth Rogoff argued that removing all large-denomination notes would discourage tax evasion and organised crime, and boost the effectiveness of central bank policy.
The US and other developed countries should gradually remove the $100 note, then the $50 note, and then the $20 note, leaving smaller denominations and coins in use “perhaps indefinitely”, he wrote.
“I conclude that the overall social benefits to phasing out currency are likely to outweigh the costs by a considerable margin.”
It sounds fantastical, but Australia almost did this. After World War II, the government proposed to declare all £20, £50, £100 and £1000 notes as no longer legal tender, to prevent tax evasion and their use in the black market.
It never happened. The regulation, under the National Security Act, was gazetted in May 1945, but didn’t come into force. It was overridden by the Commonwealth Bank Act later that year.
Tina Clark, 47, of Sydney, a recent victim of debit card fraud and frequent user of cash, said the idea is plain wrong.
“I live on a budget, so I take out what I need and try not to card it,” Ms Clark said.
“Anyone can get a hold of your card and just go shopping. These people went shopping on my card for two days. They can easily do that.
“They all keep telling me paper money is going to go, or plastic money in our case, but I hope not. I hope the world becomes sensible again.”
In his book, Prof Rogoff admitted the proposal would spark concerns about security, privacy and the use of money in emergencies. It would also require special measures to ensure “financial inclusion” of the poor, who are more dependent on cash.
“Of course, any plan to drastically scale back the use of cash needs to provide heavily subsidised, basic debit card accounts for low-income individuals and perhaps eventually basic smartphones as well.”
Prof Rogoff’s primary argument for abolishing most banknotes was to prevent tax evasion and organised crime.
“There is little question that cash plays a starring role in a broad range of criminal activities, including drug trafficking, racketeering, extortion, corruption of public officials, human trafficking, and, of course, money laundering,” he wrote.
The Australian Taxation Office (ATO) confirmed to The New Daily that bank notes are used to evade tax, particularly in hair and beauty salons, restaurants, cafés and the building and construction industry.
A banknote researcher and collector, Mick Vort-Ronald, said getting rid of larger denomination notes to fight crime makes sense, but would “never happen” in Australia.
“The bigger the notes that are out there, the easier it is to have black money or illegal money change hands because of the volume,” Mr Vort-Ronald said.
“Nevertheless, high demand is there for the $50s and $100s and therefore it’ll never happen. It’s just a bit of a dream for someone who wants to put up an idea.”
More power for central banks
Prof Rogoff also argued that abolishing large amounts of cash would allow central banks to cut interest rates below zero, without fear of causing massive cash hoarding.
“Treasury bill rates cannot fall much below zero, precisely because people always have the option of holding paper currency, which at least pays zero interest,” he wrote.
“To be precise, it is virtually impossible to think about drastically phasing out currency without recognising that it opens a door to unrestricted negative rates that central banks may someday be tempted to walk through.”
Australia’s official cash rate is currently 1.5 per cent. The Reserve Bank will decide to cut or hold the rate on November 1.