Debate over the $100 bill: Gamblers and negative rates

Larry Summers says it's time to scrap $100 bill
Larry Summers says it's time to scrap $100 bill

The battle for the $100 bill is spilling into the public sphere: A conversation that has taken place behind closed doors is becoming a major point of monetary contention.

Earlier this week, former Treasury Secretary Larry Summers wrote a call to "kill the $100 bill" in The Washington Post's Wonkblog. Claiming that large-denomination bills provide a "boon to corruption and crime," Summers goes so far as to suggest "a global agreement to stop issuing notes worth more than say $50 or $100."

Summers based his analysis on a recent paper from Harvard's Mossavar-Rahmani Center for Business and Government entitled "Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes." Authored by Peter Sands, a senior fellow at the center, the paper says that changes to currency issuance can disrupt the "business model" of tax evaders, criminals, terrorists and those engaged in bribery.

In essence, Sands argues that "bad guys" will have a harder time moving money if it takes up more physical space because it's available only in smaller denominations. Others argue, however, that eliminating the $100 bill — or the 500 euro note, as is currently being considered — would simply induce criminals to find another mechanism for storing and transporting wealth.

Recognizing this criticism, Sands writes that criminal operations "would find substitutes, such as the next highest denomination note in the same currency, high denomination notes in other currencies, disguised transactions through the banking system, Bitcoin, or valuables such as gold or diamonds."

"Yet all of these alternatives have disadvantages," he continued. "In different ways they are heavier and bulkier, more traceable, less widely accepted or have higher transaction costs."

Bitcoin, for instance, is frequently used in cybercrime, but is actually much more traceable than other stores of value.

Noting that actually eliminating the bill would be too extreme a measure, Summers advocated that the U.S. should simply stop making new $100 notes. Not only is this strategy less likely to anger fans of the denomination, but it is also a lot more feasible than rounding up the outstanding bills.

The $100 bill is incredibly popular, and it's even closing in on the $1 bill: The Federal Reserve reports that there were 10.8 billion $100 notes in circulation at the end of last calendar year, compared to 11.4 billion $1s.

The $20 bill, meanwhile, had only about 8.6 billion notes in circulation at the end of 2015.

"This is a bold, relatively simple-to-implement action that could have significant impact and has limited downside," the Harvard paper said. "High denomination notes are arguably an anachronism in a modern economy given the availability and effectiveness of electronic payment alternatives. They play little role in the functioning of the legitimate economy, yet a crucial role in the underground economy."

But there are, in fact, legal activities that could suffer from a reduction in $100 bills.

Richard Munchkin, who is known for playing casino table games to his advantage with card counting and other strategies, said he sees the potential removal of large bills as a major threat to his profession.

"The thing that kills us eventually is that we will not be able to play anonymously, because if casinos know who's beating their games, they won't let us play — and the fastest way that would happen is if there's no more cash," Munchkin said.

Without large bills, he explained, it's hard to imagine casinos continuing to be as cash-reliant as they are now.

This may be the next money laundering capital

In fact, Munchkin said, a payout of several thousand dollars in $20 notes would make casinos do "everything they possibly can" to avoid cash — moving instead to a system that tracks gamblers in some form.

"If you have to use some form of credit, then we'll have to give up our names, and then we'll get barred," predicted Munchkin — whose real name, unsurprisingly, is not in fact Richard Munchkin.

Finally, another concern about a drawdown in large denomination bills is that it would make it more challenging for law-abiding citizens and companies to store their wealth in nonbanked cash. In other words, a dearth of $100 bills could increase the burden of keeping money in the proverbial mattress.

Sands acknowledges this criticism, but wrote that hoarding cash is "highly correlated with tax evasion," and it only represents "a minute fraction of high denomination notes" when retained during crises. Plus, he argues, "lower denomination notes offer an only slightly more inconvenient solution for ordinary people, given the sums involved."

"Only the very wealthy would be truly inconvenienced by having to make such a substitution," Sands added.

But in a world of negative interest rates — as seen in Japan and parts of Europe — there could be a financial incentive to keep money out of banks that isn't related to tax evasion. In fact, some have suggested that storing bundles of $100 bills would be a popular solution in a negative-interest-rate environment.

This potential complaint about eliminating large denomination bills is actually a positive, from Sands' perspective: Cash hoarding, according to his paper, "impedes the ability of a central bank to use monetary policy in a deflationary environment."

"Negative interest rates cannot be imposed on cash. Introducing negative interest rates would create a powerful incentive to hold deposits in cash, most likely in higher denominations," Sands wrote. "Eliminating high denomination notes, so that saving in cash was more inconvenient would mitigate this problem."

— CNBC's Alex Rosenberg contributed to this report.