Banknotes are useful. Not only do they provide their owner with a
standard set of payments services, they also offer financial anonymity.
This post introduces the idea of trying to price the anonymity
component.
To help think about why we might want to price anonymous banknote
usage, I’m going to make an analogy. Imagine Walmart sells special suits
that allow people to become invisible. While most Walmart customers
always pay for the goods they find in the aisles, a few try these
invisible suits on, grab a bunch of stuff, and sneak out without paying.
The product is weaponized and turned against its provider.
This same sort of weaponization characterizes
the modern provision of banknotes. The government, like Walmart,
provides citizens with a privacy-enhancing product: cash. Because its
coins and banknotes don’t leave a paper trail, they act as a financial
cloak. In the same way that an invisible suit can be used to evade
Walmart’s checkout counter, a government-issued banknote can be turned
against its provider by allowing users to avoid paying for the
government services they have consumed.
Walmart may wish to do something about the weaponization of invisible
suits, especially if the costs imposed by abusers of suits begin to
exceed the amount of income the company gets from buyers of invisible
suits. One option Walmart has is to stop selling the product. No one
would fault them for putting an end to an unprofitable business line.
Invisible-suit aficionados could just shop elsewhere.
But what if Walmart is society’s only provider of invisibility? This
complicates things. While a few bad apples regularly abuse Walmart’s
invisible suits by using them to steal, many others use the suits in
legitimate ways. So while a decision to stop selling invisible suits
might improve Walmart’s finances, it might also make society worse off.
This same tension crops up in the debate over the future of cash. A
ban on cash would help reduce tax evasion and improve government
finances. But since banknotes are the only anonymous financial product,
and no other entity is permitted to provide banknotes, a ban would put
an immediate end to financial privacy. Because privacy is something
that regular folks value for licit reasons, their welfare would be reduced.
Say Walmart does the noble thing. It continues to stock invisible
suits to meet the public’s demand for privacy. But the company still has
costs it must meet, including wages, inventories, and rent, and with a
steady loss of payments facilitated by the weaponization of invisible
suits, that hurdle becomes much harder to clear. To plug deficits,
Walmart may have to ask all its rule-abiding customers to pay a little
bit more for their purchases by raising all of prices by a little bit.
But an across-the-board price increase hardly seems fair. Those
abiding by Walmart’s rules are being asked to make up for a shortfall
that is entirely the fault of suit-stealing rule breakers. Honest
shoppers who don’t generally like to use invisible suits will be
particularly furious — and who can blame them? They are being asked to
pay more for the goods they hold dear in order to support the use of a
single product they never cared for much anyway.
This same lack of fairness plagues modern tax systems. The government
needs to fund (via taxes) the services it provides, but the presence of
cash is weaponized against the system by tax cheats. The funding gap that emerges must be made up
for by all of the remaining citizens — the non-cheaters. So taxes, or
the price of government services, will be higher in the presence of cash
than in a world without cash. Non-cheaters, particularly those who
don’t use cash, will feel betrayed because they must pay higher taxes to
support the ongoing provision of a product they don’t necessarily
value.
Walmart may have a better option. Instead of increasing the price of
all goods to make up for the behavior of a few invisible-suit users, it
can just raise the price of suits high enough to make up for the
shortfall. So customers who like invisibility end up bearing the costs
imposed by thieves who weaponize suits. This targeted approach seems
like a fairer path for Walmart to take. It releases a large chunk of its
customer base from the obligation of offsetting the
invisibility-induced shortfall while still giving those who value the
privacy provided by invisible suits the option of buying them.
If setting a higher price for invisibility is the best option for
Walmart, what about modern banknote-providing governments? In the same
way that Walmart increases the price of invisible suits to offset the
shortfall created by those who weaponize them, a government can
introduce a levy on cash users. Rather than placing this levy on all
banknote denominations, it might target high-denomination banknotes
instead. The idea is that bulky $1s and €5s may be less useful in
large-scale tax evasion than $100s and €200s.
By setting a levy or negative interest rate of 5 to 10 percent per
year on high-denomination notes (there are various ways to do this), the
government would be able to earn a large-enough stream of revenue to
help offset the shortfall created by cash-using tax evaders. The effect
would be a lower tax bill for all non-cheaters, both for those who
generally do not use cash and those who use only small-denomination
notes ($1 and €5s). In effect, the anonymity provided by $100s and €200s
would now be directly paid for by the users of those $100s and €200s.
Unlike an all-out ban on banknotes, financial anonymity would still be
provided.
I think it makes sense for the Walmart in our thought experiment to
give anonymity pricing a shot. Maybe governments should entertain the
idea, too.
[This post was originally published at the Sound Money Project. I’ve modified it slightly for clarity.]
