It’s Time To Go After Big Money


The Mossavar-Rahmani Center for Business and Government at Harvard that I am privileged to direct has just issued an important paper by Senior Fellow Peter Sands and a group of student collaborators.  Sands’ paper makes a compelling case for stopping the issuance of high denomination notes like the 500 euro note and 100 dollar bill or even withdrawing them from circulation.

I remember that when the euro was being designed in the late 1990s, I argued with my European G7 colleagues that skirmishing over seigniorage by issuing a 500 euro note was highly irresponsible and mostly would be a boon to corruption and crime.  Since the crime and corruption in significant part would happen outside European borders, I suggested that to paraphrase John Connally it was their currency, but would be everyone’s problem.  And I made clear that in the context of an international agreement, the US would consider policy regarding the $100 bill.  But because the Germans were committed to having a high denomination note, the issue was never seriously debated in international fora.

The fact that – as Sands points out — in certain circles the €500 is known as the “Bin Laden” confirms the arguments against it.  Sands’ extensive analysis is totally convincing on the linkage between high denomination notes and crime. He is surely right that illicit activities are facilitated when a million dollars weighs 2.2 pounds as with the €500 note rather than more than 50 pounds as would be the case if the $20 was the high denomination note. And he is equally correct in arguing that technology is obviating whatever need there may ever have been for high denomination notes in legal commerce.

What should happen next?  I’d guess the idea of removing existing notes is a step too far.  But a moratorium on printing new high denomination notes would make the world a better place.  In terms of unilateral steps, the most important actor by far is the European Union.  The €500 is almost six times as valuable as the $100.  Some actors in Europe, notably the European Commission, have shown sympathy for the idea and ECB chief Mario Draghi has shown interest as well.  If Europe moved, pressure could likely be brought on others, notably Switzerland.

I confess to not being surprised that resistance within the ECB is coming out of Luxembourg (see also), with its long and unsavory tradition of giving comfort to tax evaders, money launderers, and other proponents of bank secrecy and where 20x as much cash is printed relative to GDP compared to other European countries.

These are difficult times in Europe with the refugee crisis, economic weakness, security issues and the rise of populist movements.  There are real limits on what it can do to address global problems.  But here is a step that will represent a global contribution with only the tiniest impact on legitimate commerce or on government budgets.  It may not be a free lunch, but it is a very cheap lunch.

Even better than unilateral measures in Europe would be a global agreement to stop issuing notes worth more than say $50 or $100.  Such an agreement would be as significant as anything else the G7 or G20 has done in years.  China, which is hosting the next G-20 in September, has made attacking corruption a central part of its economic and political strategy. More generally, at a time when such a demonstration is very much needed, a global agreement to stop issuing high denomination notes would also show that the global financial groupings can stand up against “big money” and for the interests of ordinary citizens.

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