There are thirty three hundred dollar bills for every man, woman, and child in the US, So if you've only got one, somebody else has your other two. Hi, and welcome back to Bloomberg Benchmark, a show about the inner workings of the global economy. I'm Tory Stillwell and economics reporter for Bloomberg News in d C. And I'm joined by my co host Akido, our Benchmark editor in San Francisco. Hey Hockey,
Hey Tony, how's it going pretty good? I am recording today out of our newsroom, so you may hear a little bit of background noise. Oh well, I'm recording from San Francisco for the first time in I think four months. Oh wow. Yeah, welcome back, and it's good to be back. Yeah, thank you so much. Well, today's show is all about
Dolla dolla bills, y'all, Dolla dollar bills. Yeahs. But the European Central Bank last week said it would stop producing their five hundred euro bank notes after citing concerns that it could facilitate illicit activities some criminals. Actually, they refer to this note as the bin laden, referring to the I was just I wrote that in my notes isn't that so interesting? I mean, I feel like that says a lot about this. That's the former leader of al Qaeda.
For all of our listeners out there, I don't I don't know how you wouldn't know who' been latin this, But in case you don't, yeah, good context. Well anyway,
that decision has been fairly controversial. And you know, Germany, since apparently before even the creation of the Eurozone, has been a big proponent of high denomination notes, and the head of the country's central bank just recently said that it's still debatable whether the removal of the five year old note is going to curtail any crime, and that it actually might end up undermining people's trust in cash. And apparently officials in Austria and also Switzerland are against
eliminating their own forms of high denomination money too. So to discuss all of this and more, we have enlisted Peter Sands, whose paper called making It Harder for the Bad Guys has helped fuel this debate. He's a senior fellow at the Harvard Kennedy School, and before that, he was CEO of Standard Chartered Bank for almost ten years. Welcome Peter high So Peter, as the head of a bank, I'm sure that you've seen your fair share of high
denomination notes, right. Actually, cash doesn't play much role in modern banking. I mean, obviously you take it out of a t m S and people deposited in branches, but most of what a bank does doesn't actually involve cash. So in a lot of ways, this was kind of a foreign world to you. Well, certainly, the rather murky world of people trying to move money across borders in sort of piles of high denomination notes was not something
I've come across. You're not an international criminals, Peter. Maybe you could walk us through a summary of your research for our listeners and then we can dig through some of the details afterwards. The my interest in high denomination notes is because they aren't used very much in everyday life. We don't normally take a five hundred dollar five euro note out of our pocket and try and buy a
coffee with it. But if you look at what criminals are doing, drug traffickers, people financing terrorism, people giving all
receiving bribes, actually they're using these notes very intensely. So the point of my research was to look at whether or not we should still be issuing these or whether we should get rid of them, not because it would suddenly stop criminal activity, but it would simply, as the title of the paper put it, make the lives of the bad guys a bit harder because the great advantage of high denomination notes is that they are the most anonymous and easy way to transport and store money secretly
if you if you want to do something illegal, right, and we're talking about people who are trying to evade taxes, finance, terror, corruption, financial crimes, those types of bad guys, I guess anybody who wants to do something that they don't want anybody in authority to know that they are doing. And the great thing about cash is that cash is anonymous and it leaves no record, and there's no other payment mechanism
that does that it. So for I guess some context for our listeners who haven't tried to move a large amount of money around anonymously. A million dollars worth of twenty dollar bills apparently is about a hundred and ten pounds, which would fit in about four briefcases. So think of that as maybe carrying tories entire body weight around. It's quite a lot would be able to do that one person. I would find it pretty hard, and you certainly couldn't
do it very discreetly. Right, Yeah, But if you tried to do that with one hundred dollar bills, that would only be twenty two pounds and it would fit in a single briefcase. So it's a totally new ball game. Right. And if we look at the five hundred euro notes that we're just announced that they're going to be phased out, a million dollars a million US dollars that is weighs about five pounds, and that would fit in a you know, a very small bag. So it's a it's like you said,
it's a total game changer. Yeah, and surprise, surprise, if you look at what cocaine smugglers are using, uh, they're preferred is the five year note, and then after that they quite like the hundred dollar bill. But give them a choice, they'll use the five euro because they can get more money in a smaller package, are less easy
to sort of find package, they can transport it more easily. Peter, I think a lot of our listeners are hearing this, and you know, they're thinking, like, gosh, this sounds like a relatively easy and simple thing for governments to do. So, you know, can we get any kind of sense on how much of an impact maybe getting rid of the one dollar bill would have on cutting crime, on on how much more taxes the I R s might be
able to collect. Well, it's very difficult to get a precise calculation, and a lot depends on how easy it is for the criminals to find substitutes. So if, for example, we get rid of the five hundred euro note as as it is proposed, just to stop issuing it, but the European Central Bank just ramps up production of the two hundred euro note, then the impact will be less than if it forces people, to, say, use the hundred euro note. So it depends somewhat on sort of how
the policy is implemented. But I think we can be pretty confident that there will be a positive impact, and it will be most positive whether stakes are high. So it won't make much difference if somebody is just trying not to pay tax on a very small amount of money, because they're probably not using higher denomination notes anyway. But if they're trying to not pay tax by taking say cash income um and not reporting it on tens or hundreds of thousands of dollars, then that is more likely
to be affected by not having high denomination notes. And likewise, you know, drug trafficking is probably the crime that involves most cross border transportation of very large sums of money. It's been estimated that about thirty billion dollars a year crosses the US Mexico border in cash. You just have
to think about it very simply. If you didn't have a hundred dollar bill and you had to carry either fifties or twenties, you'd have two to five times as many packages things hidden in the floors of cars, you know, secret containers going across. So the cost of doing that for the criminals and their risk of detection would be higher. Um. And what's funny is people are quite reluctant when you first suggest getting rid of these things. People are a bit sort of anxious and you know, a bit uncertain
about it. But nobody's proposing to bring any of the things that have been eliminated back again. Right once they're gone, nobody wants them back again. You know that there's some of those notes five hundred thousand dollars, five thousand dollars, ten thousand dollar bills. They're actually all still legal tender and there some of them are still in circulation. Just if the FED finds them, they like gobble them up and destroy them and take them out. Oh my god. Yeah, absolutely,
they haven't been brought back. When when was the last time you used one hundred dollar bill? Oh gosh, um, you know, I think I maybe took out one hundreds when I went to Iceland a year ago. You were traveling to Yeah, I was traveling. That's the only time I ever take out money that big. Well, there are thirty three ish around thirty three at least over thirty hundred dollar bills for every man, woman, and child in
the US. So if you've only got one, somebody else has your probably outside of the US too, right, A lot of these bills aren't inside the country, that's right. We don't really know how much, but it's probably over them ah um, outside the US. Indeed, it's been suggested that, um, the city in the world which probably has most of them, um is probably Moscow, but again we don't know that
for certain. Well, we're going to take a short break, but when we come back, we will talk about how emerging markets are dealing with high denomination bills, as well as some of the CONTs behind taking them out after this break. So, Peter, one of the interesting points that you make in your paper is that a lot of these criminal transactions don't happen inside the US, inside US territory,
but they're occurring in US dollars. So when government officials in India or say Pakistan want to fight drug track, drug trafficking or corruption, uh, the existence of one hundred dollar bills makes it that much harder for them to actually fight that. UM. So I'm wondering, do you know if any emerging market officials have urged the US have urged US government officials to get rid of one hundred dollar bills? And has something like this ever been on
the G twenty agenda. I don't know whether um uh there have been specific conversations from emerging market government officials um uh to the US. I know that UM that emerging market sort of crime fighting officials UM are very aware of the role let's say the hundred dollar bill plays, whether it's in drug trafficking or corruption um or and so on. And I would be surprised if those conversations
UM haven't been happening. Um. And I'm aware that this discussion around the role of high denomination notes has been discussed in various forums in the context of terrorist finance and also in the context of corruption. Mm hmm. So these operators of you know, global common currencies like the US and Europe, they kind of have this global responsibility to Yeah, I would argue we do have a global responsibility.
Most emerging markets don't actually issue high denomination notes themselves, um, But the high denomination notes are in use in their own economies, um, in ways that are often quite sort of corrosive to their societies. Right, So this seems kind of like a slam dunk to me. Why why are some people opposed to this? Well, I'm sympathetic to the argument that cash still plays a really important role. It's incredibly convenient. It works when you don't have a electricity
or telephone signal. It works when you want to give you a child pocket money. You don't need any infrastructure, and it is private and there's real value in that. However, that's really useful in the many small transactions we're doing sort of every day, and the reality is we're not
using high denomination notes for it. And if you need high denomination notes in that kind of circumstance, the evidence would suggest that you're normally doing something which society probably doesn't want you to do it privately, right, you're probably being sketchy a little bit. Yeah, I mean, you know, if you need five eur notes to make a payment, UM, you're probably buying something or selling something in thousands or
tens of thousands or Europe. The the likelihood is that there should be some tanks attached to that, UM, and you know, it may be a bit of a dubious transaction. And I know as a kid, I mean I always personally liked it when I got my money in smaller bills, like for gifts, because it always made me feel like I was getting more, even though obviously I wasn't you know, Peter, your your paper came out in February and Larry Summers,
who UM is the former Treasury secretary. He wrote a very influential op ed about it back in your argument, and the ECB just last week came to this decision to stop issuing their five euro notes. Do you feel like your argument is gaining traction in the US. Well, it's certainly gaining traction in Europe. As you have noticed, UM, I think UM the US has been watching to see what Europe would do, and there's so much of it
out there. The three hundred billion euro of five hundred euro notes, there's a trillion dollars of there's over a trillion dollars of hundred dollar bills. But but given that the five hundred euro note was the the obvious starting point, that's where the attention has been focused. But I think it is important in the US to be very thoughtful about what the role is of the hundred dollar bill. Um. Do you really need thirty three hundred dollar bills for
um everybody in America? It does seem it does seem an awful lot. The Swiss particularly have been a little opposed to this idea. You know, some of the officials there have argued that the right to pay anonymously is a basic liberty and that people are using, um, the one thousand franc notes. They're arguing that there you're use not only the means of payment but also as a
store of value. Can you explain to us exactly what they mean by that and whether or not that's a convincing argument Frankly, I think we should get rid of the one. The Swiss should get rid of the one thousand Swiss franc um no, because I suspect it's largely used UMU to store value, but to store value which has been illegally obtained in one way or rather through
tax evasion or some form of crime or corruption. And yes, there maybe some people who choose to hold their savings sort of under their bed, but A you've got to be pretty wealthy to really need to do it in thousand Swiss franc notes right that for it to make a difference between doing it in the hundreds and thousands, you've got to be storing a serious amount and be you've got to ask the question of well, why is it that somebody is so keen for it not to
be recorded in the banking system. And I'm wondering, Peter, when this idea came to you in the first place. Was it when you were running Standard Chartered or was it a little bit later? Well, it could to me when I was still out Standard charldhood, but um I didn't have the time to do very much UM about it as an idea. UM And so when I came to Harvard. I thought, well, I should focus on this and see whether it is such a good idea as it sort of seemed to me to get rid of
these notes, um. And that's why I worked with a bunch of a group of graduate students here to do research into the different high denomination notes in the world and also the role that these different notes played in different forms of illicit activity. And after all that research, it turned out to be just as good as an
idea as you thought it would be. Well, if anything, it turned out to be a better idea, because the more we looked at it, the more we came to the view that really people went you seeing these notes very much, they don't play a significant role in normal, everyday economic activity um. And therefore the downside of getting
rid of them seems incredibly limited. And yet, on the other hand, almost every seizure of illegal cash, be it for corruption or drugs or whatever, involves these higher denomination notes. So when you've got something which is being used a lot for bad things and not being used a lot for good things, and it is something that is produced by the state, it's not a sort of natural thing.
It's a it's something that the government produces. You've got to ask, why are we producing something that makes life easier for criminals and so and and it's a very it is actually a very easy policy to implement, and in the world of fighting crime, most things are quite difficult to do, whereas turning off a printer is a
pretty simple policy. Is there a chance that I mean this would save us money or cost us for mean terms of eliminating these bills, Well, you you you lose a bit of money, um if you're the central bank, from what's called senor ridge, which is the interest that central banks earn on money they've issued. Essentially, when you hold a note in your pocket, it's an interest free
loan to the government. But that's a pretty small amount when interest rates are as low um as they are at the moment, and actually in the many places now that interest rates are becoming negative, it's a it's a negative loss. So it's that that really isn't a problem. But I think that is more than offset by the increased tax take. You don't have to assume very much in terms of um greater tax payments from people who've been using cash to avoid paying tax to more than
offset any potential loss from um Senior Ridge. And then of course any reduction UM in the sort of massive flows of money involved in crime has to be a significant social benefit. Great well, Peter, this has been an awesome conversation. Thanks so much. And if anyone has some five hundred euro notes that they would like to not have on their hands anymore, just contact us. I'm at two zero two four s too willing to fly send it over in a briefcase. Thanks Peter, Thanks very much.
Thank you so, Tori. I thought that was a really fascinating conversation, and you know Peter's paper over fifty pages, was fascinating to what did you learn? Well, I learned that there is a lot to write about on this topic. As you said, his research is extremely thorough, Um. But I just think here the most fascinating thing is just the sheer size and bulky nous that cash has and what sort of equality that is to it, Especially when
you think of cutting out those big denomination bills. It suddenly becomes a lot harder to do things that you probably shouldn't be doing. But I think the the other side of the story here has a really big point, which is how much, say, do we want the government to have over how we pay for things, how we conduct private business. Mm hmm, yeah, I mean that doesn't really concern me a whole lot. I would love to
live in a cash list society. Really, what if I mean they tapped into all your stuff and saw that, like you've then moaned me for like a drunken braunch one day, and then that got leaked to vand and then Dan was like, wait what, I don't know. I mean, I don't think the government cares very much whether I had a drunken brunch or not, but maybe point taken.
And and you know, so when I recently spent three months in Japan, and Japan's like a super cash heavy society, and I was always running to the A t M because so many places don't take credit cards, um, and I constantly had to be walking around with like, you know, fifties sixty thousand yen in my wallet, which you know in Tokyo. Tokyo is a pretty safe society, so it's fine, but it made me feel uncomfortable. Yeah, I can totally
understand that. Well, lots of good arguments on both sides, and will be really interesting to see if this gains traction here in the US now that Europe is doing something about it. Yeah, definitely Well. Benchmark will be back next week and until then, you can find us on the Bloomberg Terminal and Bloomberg dot com, as well as on iTunes, pocket Cast, and Stitcher. And while you're there, please take a minute to rate and review the show so more listeners can find us and let us know
what you thought of the show. You can talk to us and follow us on Twitter at Akito seven and that Tori stillwell. You can also email our producer at a McCabe with to see is at Bloomberg dot net. See you next week. M