What Can India Teach Us About Abolishing High-Value Currency? : Parallels The idea of eliminating big bank notes is gaining traction in advanced economies, as governments look for ways to disrupt $2 trillion in illegal money flowing through the global economy every year.

What Can India Teach Us About Abolishing High-Value Currency?

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RACHEL MARTIN, HOST:

And this is a story of paper money, you know, like the money that might be in your wallet right now.

STEVE INSKEEP, HOST:

Or maybe not - more and more of our transactions do not use paper money at all. If you have a debit card, you might go weeks without touching it.

MARTIN: But a dramatic act on the other side of the world exposed just who still relies on it. The government of India got rid of its highest-value currency notes. The resulting chaos offered insight into the evolving role of currency around the world. Here's NPR's Julie McCarthy.

JULIE MCCARTHY, BYLINE: No other American arguably knew more about paper money than Benjamin Franklin. He wrote pamphlets extolling it. He printed money for the colonies designed to foil counterfeiters. Nearly 300 years on, Franklin graces the $100 bill, which Harvard economist Kenneth Rogoff points out has been growing as a proportion of U.S. currency in circulation.

KENNETH ROGOFF: And that's pretty much true across the advanced economies where there are huge amounts of cash that's been printed but most of it in big bills.

MCCARTHY: Rogoff is the author of the book "The Curse Of Cash," which makes the case for eliminating high-value currencies, including the $100 bill. He says, in the United States, more than 80 percent of the value of U.S. currency is in $100 notes.

ROGOFF: That amounts to more than 34 $100 bills for every man, woman and child.

MCCARTHY: But if according to surveys the average American reports to be holding no more than $50 to $60 at any one time, where are all those $100 bills?

ROGOFF: What we know is that we don't know. But frankly, in every major criminal and tax evasion enterprise, cash plays a big role somewhere down the line simply because it's so liquid. The government sanctions it. You can use it anywhere. But there isn't really a centralized database. Most of it's unaccounted for.

MCCARTHY: Be it human smuggling, drug trafficking or fraud, illegal flows of money are estimated at more than $2 trillion a year, according to the U.N. Office on Drugs and Crime. To combat crime, Europe's central bank is gradually phasing out the 500-euro note nicknamed the bin Laden for its financing of terrorism. Tufts University's Bhaskar Chakravorti says most Europeans don't rely on the 500 euro bill to conduct legitimate business any more than Singaporeans depend on their $10,000 bill that's also been phased out.

BHASKAR CHAKRAVORTI: Those denominations are so high that generally anybody who would have to deal with that value of a transaction will probably use a digital transfer for it.

MCCARTHY: Rogoff says eliminating high-value currency won't end crime, but it would disrupt the business model of the bad guys. He says in the U.S. it could also increase tax compliance among ordinary citizens. He says the small-business person who earns income in the form of cash and doesn't report it to the IRS is a bigger problem than offshore accounts.

ROGOFF: I had one friend who told me, well, people use $100 bills. My dad carries them around all the time and big wads of them. And I said, well, that's interesting. What does he do? And she said, oh, he runs a home decorating business out of our house. She pauses for a second and says, that's funny. I never saw him go to an ATM machine. That's much more of the tax evasion.

MCCARTHY: Rogoff says getting rid of the $100 bill would reduce the $500 billion that tax evasion costs the U.S. government each year. And with cash transactions dwindling in advanced economies, scrapping their big bills is no hardship. But the economies of poor countries rely on cash, and Rogoff explicitly states...

ROGOFF: If you're a developing economy, don't try this at home.

MCCARTHY: But in India, they did, and overnight eliminated all 500 and 1,000 rupee notes. Prime Minister Narendra Modi meant a swift strike at untaxed wealth. But economist Deepak Nayyar says what he got was a nationwide cash crunch because his gamble removed...

DEEPAK NAYYAR: Eighty-six percent of all cash in circulation in the economy.

MCCARTHY: Making matters worse, Rogoff says...

ROGOFF: They pull them out of circulation without having the new notes to replace them.

MCCARTHY: Moreover, the 500 rupee note is not high value. Worth $7.50, it's used by just about everyone. Removing it devastated millions of workers paid in cash. It imperiled countless small businesses that conduct transactions in cash. One economist called the exercise an assault on the poor. Well into the new year, severe cash shortages have subsided, and a sense of normality has returned.

(CROSSTALK)

MCCARTHY: At the height of the crisis, some Indians protested, but most quietly queued for the limited withdrawals which they still face. With populist fervor, Prime Minister Modi said that forcing people to exchange now-defunct notes for new ones would flush out the corrupt rich who stockpile black money.

NAYYAR: That is money which is income unreported to the tax authorities.

MCCARTHY: But Deepak Nayyar says the flaw with Modi's plan is that only a fraction of unreported wealth is actually held in cash. More than 90 percent of such income...

NAYYAR: Would be held in the form of gold, real estate, foreign accounts.

MCCARTHY: Assuming hoarders of black money did come out from the shadows to deposit their untaxed cash, economist Partha Mukhopadhyay says the banks lacked the analytic structures to swiftly identify them or levy taxes on their unreported money.

PARTHA MUKHOPADHYAY: And therefore this is going to be a long and hard exercise.

MCCARTHY: Mukhopadhyay says the broad gains are political, not economic - good news for a prime minister looking for re-election. The public has connected the scrapping of big bank notes with hurting the corrupt.

MUKHOPADHYAY: And as long as you can keep people believing in that, whether it is true or not, you might have picked up very substantial brownie points.

MCCARTHY: But with liquidity sucked out of the market in November and December, car and home sales plummeted, investments fell. The International Monetary Fund slashed India's growth rate. Again, Kenneth Rogoff.

ROGOFF: The tactics were really hard to understand. I just don't quite know what they were thinking.

MCCARTHY: It appears the lesson India offers in removing high-value bills is how not to do it. Julie McCarthy, NPR News, New Delhi.

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