Cash: It's Just as Good as Money by Guest Blogger Buck Klemkosky

What Yogi Berra said is only partially true. In fact cash and money are not the same thing. There is a lot more money in the world and the U.S. than cash. Currency is another name for cash and in the U.S. it includes coins minted by the U.S. Treasury and bank notes ($1 to $100 bills) printed by the Federal Reserve Bank. The U.S. has $47.6b of coins in people’s pockets or piggy banks and $1,369.2b of FRB notes floating around. Not all are circulating in the U.S. as the dollar can be used in almost any country in the world. No one knows exactly how many dollars are outside the U.S. but government estimates are up to one-half. They have been talking about a cashless society for years but the amount of U.S. coins and notes increases 5-6% annually.

Currency (coins plus FRB notes) in circulation in the U.S. is $1,416.8b. Money includes all that currency but in addition includes bank demand (checking) deposits, shares at credit unions and money market funds and outstanding traveler’s checks. That equation describes M1, a narrow version of the money supply which totals $3,050.2b today. M1 plus savings deposits and time deposits less than $100,000 equals M2, which totals $12,466.7b. M2 is a broader measure of the money supply which the Fed monitors closely in setting monetary policy. 

Currency in circulation is less than half of M1 and 11.4% of M2. So cash may be as good as money but it’s not the same as money which is more widely used and more important in economic transactions.

Cash may be just as good as money for small economic transactions but obviously very burdensome for large transactions. Analysis of the denominations of currency outstanding tells an interesting story. In the U.S., $100 notes outstanding total $1,080.b, 78% of all notes. In Europe, there are $322b of €500 notes ($550) outstanding, 30% of total euro notes; Switzerland has $39b of SF1000 ($990) notes, 92% of all Swiss notes and Japan has $67b of ¥10,000 ($88.50) notes, 92% of all yen notes outstanding. Luxembourg, a country notorious as a tax haven, has euro notes outstanding equal to 200% of its economic output.

The obvious question is why there are so many large denomination bills outstanding in these countries? Most Americans don’t carry a lot of $100 bills and many Europeans don’t know the 500-euro note exists; most are in Russia and other countries outside the Eurozone. Swiss retailers usually will not accept the SF1000 bill for payment. 

Subtracting the amount of U.S. currency abroad still leaves over $2000 for each of the 330 million U.S. citizens and over $5000 per household. The obvious answer is that many of the high-denomination notes play little role in the functioning of the legitimate economy. It is the currency of choice for illegal purposes such as drug trafficking, money laundering, fraud, tax evasion, corruption and terrorist activities. It has been estimated by the IRS that $350b-$400b annually is not reported as income because of cash transactions in the underground economy. A 2011 study found as much as 18% of all taxable income goes unreported costing the government nearly $500b in revenue. There are legitimate reasons for having cash transactions but the probability of abuse increases.

Many are in favor of abolishing all high-denomination bank notes to make it more difficult to carry on illicit activities. Canada scrapped a C$1000 note in 2000 and Singapore a S$10,000 note in 2015. In 1969, the Fed and U.S. Treasury stopped issuance of $500, $1000, $5000 and $10,000 bills although they remain legal tender. At the end of 2015, $300m of these bills are still outstanding, most as collector’s items. While the U.S. Treasury says they have no plans to change the denominations in use today, the European Central Bank will consider abolishing the €500 note later this year. Achieving international consensus to eliminate other high-denomination bank notes will not be easy but it will be on the G20 agenda later this year for consideration.

Another reason some are making the case to eliminate cash as another “outdated relic” is monetary policy and the advent of negative interest rates. Banks in the Eurozone, Sweden, Denmark, Switzerland and Japan already have to pay to deposit funds at their respective central banks. If negative rates should ever filter down to bank depositors, it would incentivize everyone to convert deposits to currency. Large corporations and institutions with billions of dollars in deposits can’t easily convert them to physical cash; it would have to be stored in warehouses and vaults, incurring storage and security costs. Some large banks already impose a fee on large corporate deposits. Individuals could more easily convert deposits to cash and put it under the mattress, but at the risk of theft. Conversion of deposits to cash and hoarding of cash would diminish the effectiveness of monetary policy. The ability of a central bank to implement negative-interest-rate policies would be made less effective by cash hoarding. For example, the amount of SF1000 bills has increased by 17% since the Swiss Central Bank imposed negative interest rates on bank reserves in December 2014. Even though bank depositors don’t yet pay negative interest rates, this shows the sensitivity of big-bill cash hoarding to the possibility.

While there hasn’t been much progress toward a cashless society in the U.S., some countries such as Sweden and South Korea have seen the use of currency diminish. South Korea, for example, is a checkless society although bank notes are available. Every major building there has an ATM machine which allows one to pay bills via wire transfer to any other bank with no fee. The technology certainly exists to have a cashless society in the U.S. and elsewhere using mobile phones, online banking and more sophisticated ATM machines. Digital transactions would be cheaper, faster and provide more transparency. Those engaging in illicit activities would not like it or if worried about “big brother” overseeing their activities. There would have to be a central bank system to provide trust and stability unlike Bitcoin and several other private digital currencies. But don’t expect currencies to fall by the wayside any time soon; currencies have been around for 4,000 years and probably will be for many more decades. People like the security of having physical cash at their disposal as Yogi undoubtedly did.