Is the Hundred Dollar Bill Too Big for Its Riches?

Harvard University professor and former Treasury Secretary Lawrence Summers has never been one to shy away from controversy. He resigned as Harvard’s twenty-seventh president in 2006 after a no-confidence vote against a financial conflict-of-interest matter, and outrage over a 2005 speech in which he suggested women were under-represented in science and engineering because of “different availability of aptitude at the high end.”

That said, his achievements in the field of economics are too long to list in this modest blog.  But a proposal he put forth in the February 16 The Washington Post may turn out to be his most enduring legacy.  He’s of a mind to put to death the 100 dollar bill, based on a paper written by his colleague Peter Sands.  The paper also proposes the 500 euro note, a currency that in certain circles has been labeled “the Bin Laden,” be withdrawn from circulation.

The thinking of Summers and Sands is that high-denomination notes offer a natural invitation to crime and corruption.  If international drug cartels are going to lug around a million dollars’ worth of paper money to finance their monkey business, they’re more likely to do so “when a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds as would be the case if the $20 bill was the high denomination note.”

So, if the two economists have their way, forget about making large purchases with cash.  The largest notes governments will entitle you and me to walk around with will be twenties.

Of particular interest in the Page/Summers proposal is the likely secondary effect of restricting us to small bills, one that’s more immediate to law-abiding Americans: We’d be more inclined to spend our money. After all, what’s an extra five or ten dollars here and there? Give the waiter an extra tip, take a cab instead of a one-mile walk, bring home a surprise small gift for your significant other just because it’s Tuesday.

Coupled with Fed Chief Janet Yellen’s recent announcement that the Fed is weighing the possibility of negative interest rates, the idea of killing the hundred dollar bill comes off like a silly government gambit to jump-start the economy. Why in the world would we want to deposit our money in a bank that charges us for the privilege of keeping it there?  Let’s just spend it!

If you give the matter some thought, a government that discourages savings accounts is also unintentionally making a case for investing in gold. The traditional argument against doing so has been it doesn’t offer interest.  Investors would rather keep their money in an interest-bearing account than buy gold coins, according to the naysayers. And even when interest dropped you could still assume your cash was safe inside the bank.  But now that central banks and the Fed have figured out how to engineer a bank robbery by the bank itself, there is literally no place left to hide where someone’s sticky fingers aren’t grasping for your life savings.

Yet now that gold has raged like a tiger through the first month and a half of 2016 and broken its twelve-hundred-dollar resistance, many investors who’d never given the yellow metal a second thought are reassessing their strategy.  Paper money doesn’t excite them very much anymore.  And if Lawrence Summers and Janet Yellen have their way, it will excite them even less in the not-so-distant future.