PHOTO: GETTY IMAGES
March 3, 2016 6:58 p.m. ET
Are Japan and Switzerland havens for terrorists and drug lords? High-denomination bills are in high demand in both places, a trend that some politicians claim is a sign of nefarious behavior. Yet the two countries boast some of the lowest crime rates in the world. The cash hoarders are ordinary citizens responding rationally to monetary policy.
The Swiss National Bank introduced negative interest rates in December 2014. The aim was to drive money out of banks and into the economy, but that only works to the extent that savers find attractive places to spend or invest their money. With economic growth an anemic 1%, many Swiss withdrew cash from the bank and stashed it at home or in safe-deposit boxes. High-denomination notes are naturally preferred for this purpose, so circulation of 1,000-franc notes (worth about $1,010) rose 17% last year. They now account for 60% of all bills in circulation and are worth almost as much as Serbia’s GDP.
Japan, where banks pay infinitesimally low interest on deposits, is a similar story. Demand for the highest-denomination 10,000-yen notes rose 6.2% last year, the largest jump since 2002. But 10,000-yen notes are worth only about $88, so hiding places fill up fast. That explains why Japanese went on a safe-buying spree last month after the Bank of Japan announced negative interest rates on some reserves. Stores reported that sales of safes rose as much as 250%, and shares of safe-maker Secom spiked 5.3% in one week. Cash hoarding is another lesson in the limits of monetary stimulus. Economies stuck in deflation need lower taxes, liberalized labor laws, freer competition and other reforms to promote faster growth. But Keynesian economists and central bankers prefer pump-priming, so they rail instead against cash.
Which is where the fear-mongering about terrorists and gunslingers comes in. “In certain circles the 500 euro note is known as the ‘ Bin Laden,’” former U.S. Treasury Secretary Larry Summers wrote last month in calling for a global ban on notes worth more than $50 or $100. He noted interest from European Central Bank PresidentMario Draghi and said that “if Europe moved, pressure could likely be brought on others, notably Switzerland.”
Fellow Harvard economist Kenneth Rogoff wants to retire cash altogether, primarily because “a significant fraction, particularly of large-denomination notes, appears to be used to facilitate tax evasion and illegal activity.” But he doesn’t hide the additional monetary-policy motive: “Getting rid of physical currency and replacing it with electronic money,” he wrote in 2014, would allow central bankers to set negative interest rates without people “bailing out into cash.”
The current hoarding in Switzerland and Japan thus underscores one of many ways in which cash is a basic tool of economic liberty: It lets people shield themselves from monetary policies that would force their savings into weak economies that can’t attract sufficient spending or investment on their own. These economies need reforms that boost incentives to work and invest, not negative interest rates and cash limits that raid the bank accounts of law-abiding citizens.
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