126 – Will Luther on Cash, "Supernotes," and Cryptocurrencies

Episode Summary

Executive Summary: Will Luther discusses a Cato Unbound debate on cash, crime, and civil liberties, arguing that larger-denomination cash can preserve privacy, enable transactions, and protect against inflation. He critiques proposals to tax or demonetize supernotes, defends a nuanced view of crime and tax evasion, and compares cash with cryptocurrencies and potential Fed-issued digital money.

Main Topics: Why cash still matters (Priority: 5/5): Cash provides censorship resistance, privacy, and a decentralized payment option that can work as a global backup currency during crises. Supernotes and inflation (Priority: 5/5): Luther and J.P. Koenig debate whether the U.S. should issue a $500 or $1,000 note to restore the lost purchasing power of the $100 bill. Taxing supernotes vs. Pigovian logic (Priority: 4/5): Koenig proposes taxing large notes to offset crime and tax evasion, while Luther argues this taxes the input to bad activity rather than the activity itself. Crime, tax evasion, and welfare (Priority: 5/5): Luther challenges the assumption that all cash-related crime is welfare-reducing and argues that some illegal cash use reflects over-regulation or victimless transactions. Cryptocurrencies and stablecoins (Priority: 4/5): The discussion covers Bitcoin’s volatility, the rise of stablecoins, and the tradeoffs between privacy, stability, and redeemability. Fed accounts, narrow banks, and financial intermediation (Priority: 4/5): The conversation closes by weighing direct access to the Fed balance sheet against the risk of undermining private banks’ role in allocating credit.

Key Arguments: Cash protects financial privacy and enables irrevocable payment access, which matters for ordinary users, dissidents, and the unbanked. Inflation has eroded the usefulness of the $100 bill; a supernote would restore cash’s transactional and wealth-preserving role. Taxing supernotes is not a true Pigovian tax because it targets all cash uses, not only illicit uses. Rogoff’s estimate that 34% to 49% of currency is used for illegitimate purposes is methodologically weak because survey nonresponse can reflect privacy concerns, not criminality. Some tax evasion and some crimes are not straightforward welfare losses; they can reflect restrictive laws, victimless transactions, or overtaxation. A mild deflation, consistent with the Friedman rule, may better support the optimal quantity of money than taxing cash holdings. Eliminating cash would likely push criminals toward substitutes such as cryptocurrencies rather than end illicit exchange. Stablecoins try to solve crypto volatility, but full backing improves credibility at the cost of profitability and growth. A Fed-issued digital currency could be stable and powerful, but it would likely sacrifice the privacy that makes cash and some cryptocurrencies attractive. Opening direct access to the Fed balance sheet could weaken private banking’s role in financial intermediation and credit allocation.

Data Points: Largest U.S. note in circulation: $100 bill - Since July 1969, the $100 bill has been the largest denomination in circulation in the U.S. Old U.S. large denominations retired: $500, $1,000, $5,000, and $10,000 bills - Luther notes that the U.S. used to have larger denominations before retiring them in 1969. Inflation-adjusted value of $100 in 1969: Roughly $700 today - Used to show how inflation has reduced the real utility of the $100 bill. Proposed supernote tax: 5% - Koenig’s essay proposes discounting/redeeming the note below face value to discourage criminal use. Share of U.S. currency held abroad: About 50% - Cited from Rogoff’s decomposition of currency holdings. Share of U.S. currency held by banks: About 1% - Part of Rogoff’s estimate of where cash is held. Share of U.S. currency held by firms: About 5% - Part of Rogoff’s estimate of where cash is held. Domestic consumers’ reported holdings: About 5% to 10% of currency in circulation - Survey-based estimate cited in Rogoff’s argument. Unaccounted-for currency in Rogoff estimate: 34% to 49% - Rogoff infers this share is held for illegitimate purposes. Bitcoin peak price mentioned: About $20,000 per coin - Used to illustrate crypto volatility in late 2017. Bitcoin price at time of discussion: Just over $6,000 (around $6,300) - Shows the sharp decline from its peak. Bitcoin market capitalization at time of discussion: About $110 billion - Calculated from the contemporaneous Bitcoin price. Swedish large note phased out: 1,000 krona note - Example of countries reducing large-denomination cash. Largest euro note still produced after changes: 200-euro note - Following the phase-out of the 500-euro note. Belgium cash transaction limit: 3,000 euros - Example of European cash restrictions.

Pivotal Quotes: "Cash, on the other hand, leaves no trace of what we've bought or sold." — J.P. Koenig (quoted by David Beckworth): Introduced as a core rationale for preserving cash privacy and censorship resistance. "The tax on our existing denominations is already too high." — Will Luther: Luther argues that inflation already taxes cash holdings, so supernotes should be subsidized rather than taxed. "We don't want to kill the goose that lays the golden egg just to, you know, have an account at the Fed." — Will Luther: Luther warns that direct Fed access could undermine private banking and credit allocation.

Implications: The debate frames cash, crypto, and Fed money as competing payment technologies with tradeoffs in privacy, stability, and control. Listeners should expect continued pressure for digital payments, but also renewed arguments for preserving large-denomination cash and monetary choice.