It may be hard to reverse the long-term impacts of excessive financial deregulation and tax competition, but it is apparently never too late to save one’s soul. We are delighted to see that Harvard professor and former Treasury Secretary Larry Summers has finally acknowledged the dodgy role that “big bills” ($100 bills, €500 notes and CHF 1,000 notes) play in global money laundering, corruption, tax dodging and organize crime, and has called for a “big bills” currency reform.Well, welcome to the club. Indeed, I first proposed a $100 bills reform idea way back in the 1970s, when Summers and I were still in grad school.1 More recently, with TJN’s support, I was also among the first to campaign for a similar reform by the ECB with respect to €500 notes. The currency reform story is especially hot right now because the ECB has just proposed to cease issuing new €500 notes. The proposal is being actively considered by an EU policy conference.The ECB proposal has also received support from another latter-day saint, former Standard Chartered chief executive Peter Sands, now a visiting fellow at the Harvard’s Kennedy School. The road to Damascus may have become unsafe, but the road to Harvard is still as popular as ever with sinners.For reasons that are unclear, this ECB proposal is reportedly opposed by Germany’s Central Bank. It is also opposed by some libertarians who evidently believe, perversely enough, that we have the inalienable right to demand that governments issue paper currency in precisely the denominations best suited to facilitate tax dodging, money laundering, and the subversion of the rule of law.In any case, the ECB proposal on €500 notes apparently stands a good chance of being adopted. This is surely one small step for man. From a slight distance however, this whole big bills story is an object lesson in decades of missed opportunities.When I originally wrote about big bills back in the 1970s, there were less than four $100 bills in circulation per U.S. resident. Now there are more than thirty, at least 75 percent of which are working around the clock offshore to facilitate everything from drug traffic and bribery to sweatshop labor and terrorism. The United States may or may not deserve to be called “the worlds largest tax haven”—personally I prefer to rank it slightly behind Switzerland and the UK spider web of havens. But there is no question that the United States is the world leader in the provision of dirty money.My articles did help to generate a few positive results. These included a whole new interest in literature on “estimating the underground economy” and the role of $100 bills in drug traffic. I was invited to testify before The U.S. Senate’s Joint Economic Committee and briefly got access to unpublished Federal Reserve data on interregional currency flows, by denomination. It turned out that banks in Florida, California, and Texas were indeed the key sources of net outflows of $100 bills, and that the most important new source for $100 bill demand by far was the booming global underground economy. That finding, in turn, helped to trigger a crackdown on cruder forms of cash-based money laundering by U.S. banks, as well as a new interest in capital flight and offshore banking.But for decades nothing was done about big bills. While my recall proposal was reportedly hotly debated at the U.S. Treasury and the Fed, the role of $100 bills in the global underground economy was studied, but tolerated and studiously left alone—right up to the present day.Unfortunately, that meant that the newly formed Eurozone had to compete with $100 bills when the ECB came to introduce its new currency in 2001. The ECB decided to compete with a vengeance, introducing €200–€500 notes, at least two- to five-times as valuable as a $100 bill.Now, European policymakers are many things, but they are not naive. The ECB must have done this knowing full well that all these big new bills would quickly help the euro become one of the global underground economy’s most convenient payment/savings vehicles.Indeed it has. Not only are there now more than €255 billion of €100-€200 notes outstanding—outside of bank holdings, owned by the ill-defined “public”—but there are also more than €306 billion of €500 notes outstanding, worth at least $560 each. And, predictably—just like the 1970s demand for $100 bills in Florida—more than 25 percent of all €500 notes are issued in Spain, the EU’s major entrepôt for drug traffic.So while we are delighted to see Professor Summers’s belated support for a big bills reform, it is really too bad that he didn’t do anything about this 16 years ago while he was U.S. Treasury Secretary, during the Clinton boom years of the late 1990s. That would have headed off the ECB’s unfortunate decision to issue new €500 notes in 2001, and obviated the need for its February 2016 proposal.Are we in any case better late than never? Not really. To a large extent the horse is out of the barn, even with the ECB’s proposal—which would only prevent the issuance of new €500 notes, and would not do anything about the more than €561 billion of €100 notes to €500 notes outstanding. Of course it would not touch the more than $1 trillion in $100 bills outstanding.Having delayed action for decades, therefore, are the ECB and Professor Summers really now willing to demand a big bill currency recall? Thousands of drug dealers, arms dealers, terrorists, and tax dodgers around the globe are waiting breathlessly for the answer.
1See also my “The Cash Connection: How to Make the Mob Miserable,” Washington Monthly (June 1980).