Time to Retire Ben and Borden, Grant and King?

One of the problems, post Christmas, is having one or more hundred dollar bills in your wallet. This is the traditional Christmas gift in my family, from elder to younger. My dad hands me a $100 bill. My mother hands me a $100 bill. When my grandparents were alive that meant another couple $100 bills. I have one nephew which means I take one of the $100 bills given to me and simply pass it down to my nephew. I don't even bother anymore to put it in a new Christmas card for my nephew. I simply remove the bill from my mother's card, issue the customary mock surprise and real gratitude, and then put it in my pocket. Next day when I see my nephew, I just take it out of my pocket and hand it to my nephew. My nephew, being 17 years old, does not at all mind the lack of the personal touch.

As I said, above, $100 bills are a problem because few retailers seem to take them anymore. Even $50 bills are getting harder to pass on. Counterfeiting is a major reason for this (the other being buying a $2 coffee with a $100 bill tends to drain a cash register of every bill in one transaction). Luckily 24 hour ATM machines (yes, I know) make it fairly easy to deposit your $100 bills and then take it out in widely accepted $20 bills.

$100 bills are, of course, important instruments of transaction not just in the Mother-Son-Nephew holiday time economy but also in the underground economy and the underworld economy. You can certainly find retailers and contractors who will offer a, ummm, lower cash price that is generously lower than the 3-5% retailers customarily build into their prices to cover the credit card fee. Odd that.

Of course, illegal drugs are nearly exclusively a cash 'n' carry business. Illegal bribes (are there legal ones?) are another enterprise that's largely cash based. And then of course not many people want to counterfeit $5 bills when they could print off $100 bills.

It's been a suggestion since at least the Reagan era that the $50 and $100 bills be eliminated. This would present a serious problem to at least the underworld economy as it would become five times more difficult to handle and hide the proceeds. According to the American government, in 2000, Americans spent $36 billion on cocaine alone. Assuming that's all paid for with $100 bills, to keep that money "off the grid" you'd have to store 360,000,000 slips of paper. Some place.

If you stacked up $1 million in $100 bills (assuming a paper bill is about .1 mm thick), you'd have a tight stack 3.25 feet high. If one year of proceeds from cocaine ($36 billion) was put in a similar stack of $100 bills it would be 2.23 miles high.

Now imagine if we got rid of $100 and $50 bills and issued only $20 bills. Those stacks would now be five times higher.

A more recent argument for the "demonetization" of the $100 (and $50) was made last year by David Gorman, author of Cashless Money. You can read his argument here. Let me highlight one paragraph:

In any scenario, their illegal operations would be disrupted, if not crippled, if we demonetized the $100 and $50 notes. Without launching one missile or discharging one firearm, the United States could deliver a peaceful "knockout punch" to crime, drugs and terrorism.

Hmmm.

Interestingly this hypothesis can be tested. It's tested every day in South Korea. In Korea, where I taught English for 4 years, the highest bill denomination is the 10,000 won note. It has roughly the same purchasing power as $10. So, in effect, you can't keep anything more than a $10 bill in your wallet.

Has this eliminated crime, drugs, and terrorism in Korea? Well, terrorism isn't a big problem, unless you define terrorism as some Korean grandmother trying to shove you out of her way so she can get her seat on the subway. Drugs are not a big problem in Korea either, which might have to do with the deterrent effect of grim punishments for possession of even pot. But crime? As in the kind of crime that needs cash to oil its operations. Well, bribery is alive and well in Korea. It does, however, seem to limit the size of those bribes. In Korea, one frequently reads stories of politicians and the like being arrested for accepting a bribe. You then read the amount of the bribe and it's so low as to be derisory. Let me quote one recent case:

…Mr. Kim, the former Samsung lawyer, claimed that he had doled out cash envelopes to scores of senior prosecutors, giving each the equivalent of $5,500 to $22,000, three times a year.

Now think about it. You've risen to one of the highest ranks in the legal profession. You're respected and being paid well. And you put it all at risk for an extra $17K a year? Would you risk your career and family for a third of your yearly pay?

Anyway, I'm certain these amounts would be actually higher save for the fact they have to be paid in the equivalent of $10 bills. Our 3.25 foot high stack of $1 million in $100 bills would now be 32.5 feet high in $10 bills. Higher than a house. A $22,000 bribe would represent a stack of bills almost a foot thick. To wit, your neighbors might not notice a man leaving a nondescript briefcase on your porch at night but they would certainly notice a dump truck backing up to your house thrice yearly at 3 am and unloading a pile of $10 bills on your lawn.

Counterfeiting, if we eliminated the $100 bill, would require five times as much work to produce as much money. Well, people still try it in South Korea. My girlfriend actually got a counterfeit 10,000 won note from the bank. And not just from an ATM machine (I know) but a teller.

The underground economy is certainly alive and well in Korea too. One quickly learns when negotiating with a camera or computer sales guy that saying "casheeeee" tends to conclude negotiations in your favour. Given that few Korean banks will issue foreign English teachers a credit card, you pretty much have to pay for big ticket items in 10,000 won bills. When buying, say, a $1,700 laptop (or 1,700,000 won in Korea), you have to hand over a rather sizable stack of bills. It kind of gives you a sense what post-WWI German citizens experienced. You hear stories about Germans having to hand over huge stacks of money to pay for a simple restaurant meal or a wheel barrel full of marks to pay the grocer bill.

On the flip side, in Korea, it is kind of fun to look at your 2,000,000 won a month salary and pretend like you're actually earning $2 million a month, although you just happen to live in some hyper-Monaco like bubble where you're earning $2 million a month but a cup of coffee is $3,000. Hey, if you were pulling down $2 mil a month would you care coffee is running you three large?

Credit card use is a fairly new thing in Korea. Koreans had their own credit crisis back in 2003/2004. The Korean banks started to hand out credit cards, especially to young Koreans, and well, Koreans quickly ran up huge personal debts they couldn't pay back. The Korean government had to step in, form something called quite literally the "Bad Bank", and assumed the debt.

Credit cards have, however, helped ease the drudgery of having to bring large stacks of bills to the appliance center to buy a fridge. Even more interesting Koreans have their cell phones tied to their bank account and are used like debit cards (as we call them in Canada or maybe they call them "check cards" in the USA).

Use of credit cards and forms of electronic debit has no doubt been a good thing in the eyes of the Korean government (well, responsible use) as it makes it more difficult for small time merchants to keep transactions off the books and not pay taxes on them. One of the ways the Korean government tries to fight merchants not ringing up cash payments is the Korean government lets consumers write off purchases at restaurants and other establishments, as long as they have a cash register receipt.

I found this out because my girlfriend in Korea was always making sure I handed her receipts for dinners I paid for. She explained Koreans could write these things off their taxes. (Not just restaurants, pretty much any purchase over $5.)

Other than businesses being able to write off meals and entertainment, a tax refund for mere consumption of "stuff" by the average salary worker confused me greatly from a Western perspective. Like why not just lower the VAT tax (yes, I know) up front?

At first I thought the write off was meant to promote consumption. Like, we always hear the Japanese are such huge savers that the consumer side of the Japanese economy always suffers because Japanese squirrel away a little too much (from a shop keep's perspective). I hypothesized this was a Korean attempt to head off such a situation. But then I started to notice how much my GF spent on shoes, how crowded any shoes store in Korea was with young women happily handing over their cash for new footwear, and I concluded that consumerism was not at risk in Korea.

Eventually I concluded, after one restaurant owner actually offered my girlfriend a small amount of cash if she didn't make them issue a receipt, that this write off was an attempt to give consumers an incentive to prompt merchants to record transactions.

Anyway, I've sort of gone Abe Simpson ("So I tied an onion to my belt, which was the style at the time. Now, to take the ferry cost a nickel, and in those days nickels had pictures of bumblebees on 'em. Give me five bees for a quarter, you'd say.") on you, gentle readers, and got side tracked rambling about the good ol' days I had in Korea.

Long, long story short. The lack of bigger bills has not eliminated the underground economy in Korea. Greed finds a way.

-- Karl Mamer