As the world economy heads further into uncharted territory with commodity deflation, negative interest rates abroad, The Brexit, and the economic turmoil in Venezuela, one notable economist and former U.S. Treasury Secretary, Larry Summers, has proposed a radical solution to curb criminal activity, drug and human trafficking, tax evasion, and money laundering by eliminating large denominational notes in both the U.S and Europe through either legal tender laws or by legislation. His proposal is based off of a working paper by Peter Sands from the Mossavar Rahmani Center for Business and Government.

This policy would include the 500 Euro note and the $100 bill. By 2018 , the European Central Bank will no longer be producing the 500 Euro(although it will still be considered legal tender) and it will be slowly phased out. At first glance, this may seem like a harmless policy change. After all, as Summers states, “There is little if any legitimate use for €500 notes. Carrying out a transaction with 20 €50 notes hardly seems burdensome — and this would represent more than $1,000 in purchasing power.”

Kenneth Rogoff, the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund, has echoed Summers in a recent essay for the Wall Street Journal. His claim is that the use of cash in general not only gives rise to the same criminal activity that Summers has stated, but also enables illegal immigration by allowing these workers to be paid off the books in cash. The difference between Summers and Rogoff is a matter of degree, in which Summers only targets eliminating the $100 bill, while Rogoff suggests that the $20 bill and $50 bill are be phased out as well.

To be fair, phasing out the largest of these denominational bills would prevent virtually no day-to-day transactions, for the lone reason that this note is the equivalent of a $600 bill. However, in this article, I will discuss why I believe that this potential future policy (particularly in the U.S.) creates a unique opportunity for investors,savers, and businesses.

An important addition to this policy that is mentioned by Rogoff is that interest rates must go into negative territory in order to stimulate spending and borrowing so that the increased economic activity will induce businesses and investors to spend and invest to combat the low economic growth the U.S. has seen in recent years. In what economists call the zero lower bound, where effective interest rates go below zero, businesses should theoretically be induced to borrow with such low borrowing costs, and consumers should be more willing to spend instead of save due to such low rates. As Rogoff states:

In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy, by encouraging borrowing. Unfortunately, the existence of cash gums up the works. If you are a saver, you will simply withdraw your funds, turning them into cash, rather than watch them shrink too rapidly. Enormous sums might be withdrawn to avoid these loses, which could make it difficult for banks to make loans—thus defeating the whole purpose of the policy.

Take cash away, however, or make the cost of hoarding high enough, and central banks would be free to drive rates as deep into negative territory as they needed in a severe recession. People could still hoard small bills, but the costs would likely be prohibitive for any realistic negative interest rate. If necessary, central banks could also slap temporary fees on any large withdrawals and deposits of paper currency.

My analysis will be limited to the $100 bill in particular, although if smaller denominations are eliminated afterward then this will also apply to them to a lesser extent due to the higher rates of inflation that are likely to follow such policies including negative interest rates charged on checking deposits and savings accounts. While real interest rates in the U.S. are currently negative due to price inflation exceeding the rates that banks are paying to customers, I will be focusing on negative nominal rates from this point on(unless otherwise stated). I will also ignore the moral and ethical arguments against this policy which have been stated already.

According to recent estimates by the Federal Reserve, the total amount of money in the U.S. economy(known as M2) is currently about $12.7 trillion. However, most of this money is digital, with only $1.4 trillion, or 11 percent, consisting of physical cash(approximately half of which is held abroad). The rest is contained digitally in checking and savings accounts among others. Of this $1.4 trillion, $1.08 trillion are composed of $100 bills. So over 78% of all the value of physical currency in circulation is from these large notes.


Assuming that negative interest rates will be combined with both the halt in production of such large denominational notes and the elimination of their legal tender status(or them being outright outlawed), it can be safely assumed that there will be one of two outcomes. Either 1) $100 bills will be hoarded or 2) they will still exchange and circulate at a “premium” to digital dollars. For it to be determined which of these is the likely outcome, it is necessary to understand a concept known as Gresham’s Law.



In its most basic form, Gresham’s Law states that “bad money drives out good money”. But this is not complete. For this to theoretically hold true, the exchange rate between the “good” money and the “bad” money must be equal. Or to be even more precise, the legal exchange rate at which these two monies exchange must differ from the market(non-par) price. In that case, debts and transactions will be paid with the bad(overvalued) money, while the good(undervalued money) will be hoarded.

A Federal Reserve research paper by Rolnick and Weber questions the theoretical and historical validity of Gresham’s Law, providing substantial evidence that undervalued money doesn’t always disappear from circulation. They found several examples in the U.S. of undervalued money (alternating between gold and silver at different periods) actually circulating at a premium beside the overvalued money dictated as legal tender by the federal government. For example, between 1793 and 1846, when gold was undervalued at the mint(1793-1833), 25% of the money in circulation consisted of gold; when silver was undervalued at the mint(1834-1846), almost half of the money in circulation was silver. They make this observation, as well as others, and base it on the existence of fixed transaction costs, rather than fixed exchange rates(between these monies) which, according to their research, have never actually existed:

If such a rate were ever managed-through a mint policy or a legal tender law, for example-it would imply potentially unbound profits for currency traders at the expense of a very ephemeral mint or a very naive public.

It is my contention that a similar version of Gresham’s Law will apply with the abolishment of cash, particularly higher denominational bills previously mentioned, being combined with negative nominal interest rates. There are several differences between my version and the one proposed by Rolnick and Weber. While their work is based almost entirely on gold and silver as monies at different time periods, I will be concentrating on physical cash versus digital dollars. But before it can be seen why real dollars will circulate with digital dollars at a premium instead of being hoarded, it must be understood why the idea of a significant general price deflation, or a rise in the purchasing power of the dollar(whether digital or real) in the U.S. economy, is extremely improbable without negative interest rates and legal tender laws.



First, while the banking system, operationally known as fractional reserve banking, allows for both an expansion and contraction of the money supply, the incentives for an expansionary monetary policy greatly outweigh the latter. This is in spite to the fact that deflation, while good for creditors(i.e. banks), is bad for debtors(individuals). However, if deflation is significant this relationship only holds true up until the moment of default on the part of the debtors, who cannot repay the loans to the creditors due to the increasing nominal value of debt. Default is the instantaneous transfer of wealth from the creditor to the debtor. If this were to happen on a large enough scale, the banking system would be heavily crippled. It can also be ascertained that while the government can gather revenue from taxes on capital gains and especially rising nominal incomes, the same cannot be said in a deflationary world. With the prices of goods and services falling, real incomes and wealth are increased, even though nominal incomes stay the same or fall less than prices. The difference is, the government has yet to figure out a way to tax the increase in real wealth with deflation. They can only do so with inflation and the inevitable rise in nominal wages that accompanies it. And in a serious deflationary recession the federal government will be hard-pressed to collect tax revenue if GDP falls, unemployment rises, and the banking system falters. It should be said that it is conceptually possible for the government to do this in a similar manner to which they do it with rising nominal incomes. The problem would be using a price index that is accurate in estimating falling prices. While it is possible, it can be ignored for the purpose of this analysis.

Second, due to the digitalization of monetary exchanges in our economy, consumers are becoming less inclined to carry physical cash around with them. This is primarily due to the existence of credit cards, debit cards, and EBT cards. These “substitutes” for cash, along with other clearing systems, have reduced the demand to hold cash balances, thus artificially raising relative prices more than what they otherwise would have been over time(when coupled with low rates). Other digital payment systems such as Paypal and Venmo link directly to your bank account, reducing the need to exchange real dollars. This also reduces the demand to hold physical cash(balances).

Third, and most importantly, due to the nature of fractional reserve banking, a significant fall in prices in our economy rests solely on money being “idle”, or not spent. In other words, if, generally speaking, cash balances are lower than they otherwise would be due to the previous reasons given, then the possibility for deflation is virtually eliminated. The last time the U.S had any real deflationary pressure was during the first years of the Great Depression. This is primarily due to consumers taking money out of their respective banks and “hoarding” it. While this is certainly possible for consumers to do today, it cannot be maintained in the aggregate. As economist Gary North states:

…it is not possible for depositors to take sufficient money in paper currency notes out of banks and keep these notes out, thereby reversing the fractional reserve process, thereby deflating the money supply. That was what happened in the USA from 1930 to 1933. If hoarders spend the notes, businesses will re-deposit them in their banks. Only if they deal exclusively with other hoarders can they keep money out of banks. But the vast majority of all money transactions are based on digital money, not paper currency.

Today, large depositors can pull digital money out of bank A, but only by transferring it to bank B. Digits must be in a bank account at all times. There can be no decrease in the money supply for as long as money is digital. Hence, there can be no decrease in prices unless it is FED policy to decrease prices. This was not true, 1930 to 1933.

Consumers, while currently having the power to hoard physical cash, don’t have the means to prevent this money from being stored digitally while they still use it, to any extent, as a medium of exchange.



Now, let’s explore a scenario where the Federal Reserve lowers nominal interest rates below zero, thus causing banks to do the same to their depositors(to maintain profit margins). This could be due to inflation slowing(disinflation), a significant correction in the stock market, or some international economic disturbance such as Brexit. If the Fed gave markets significant notice of this policy change, consumers would merely begin to withdraw their money from banks and acquire cash to escape the negative rates, which is essentially the same as saying that they would be paying the banks to hold onto their money. But what if the government changed the law so that large notes over $50 were no longer considered legal tender(coupled with the the U.S. Treasury no longer printing $100 bills) or were made illegal as money as proposed by Summers? While the outcome would be similar if not the same for either policy, we will look at both separately.

Let’s take the circumstance of a change in the legal tender status of the $100 bill first. Most would respond that those still possessing $100 bills would simply hoard them, transforming them from a medium of exchange to an asset to be held as a buffer against uncertainty or inflation, as they(and gold were) during the Great Depression. This, however, would most likely not be the case. Legal Tender laws are often confused with the idea that only legal tender can be used in both private and business transactions. But this is not true. From the Federal Reserve’s official website:

Section 31 U.S.C. 5103, entitled “Legal tender,” states: “United States coins and currency [including Federal reserve notes and circulating notes of Federal reserve banks and national banks] are legal tender for all debts, public charges, taxes, and dues.”

This statute means that all United States money as identified above is a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise.

In other words, there is no reason why a consumer cannot pay for a product with another type of money other than dollars. This can be seen with the creation of Bitcoin and others “crypto” or purely digital currencies. Websites such as and Expedia, along with many brick-and-mortar businesses accept Bitcoin as the means of final payment for their goods and services. While these payments are most likely eventually exchanged for dollars, this is beside the point. Economist Bob Murphy makes this clear:

Even though the US government can tell Americans which pieces of paper are dollars, it cannot tell Americans that dollars are the money that they will use economically. The existence of legal-tender laws and other regulations complicates the issue, but nonetheless it is possible that next Tuesday, nobody will want to hold US dollars anymore and so their purchasing power will collapse, with prices quoted in US dollars skyrocketing upward without limit. This has happened with various fiat currencies throughout history, and these episodes did not occur because the State in question repealed a regulation that had previously ensured its currency would be the money of the region. Instead, the people using that currency simply abandoned it in spite of the government’s desires, resorting either to barter or adopting an alternative money.

In a world of negative interest rates, consumers would be induced to withdraw their money from banks due to the opportunity cost of paying a “fee” for having the banks holding their deposits. In essence, if the $100 bill were no longer legal tender according to law, these large notes would still be used as a medium of exchange. This is especially true if price inflation is increasing which is a likely scenario in a negative rate environment, which would cause digital money to be exchanged at a discount(and physical dollars including the $100 bill at a premium).

In addition to negative nominal interest rates charging a percentage to customers’ digital accounts, there would likely be an increase in bank fees. These would include, but not be limited to, debit card fees, overdraft fees, user fees, and ATM fees(for withdrawing small bills), not to mention hidden fees. For example, according the Wall Street Journal, out-of-network ATM fees have risen over 50% in just the last ten years. While these fees already exist, there is considerable reason to believe they would be expanded or increased as such due to the fact that the majority of U.S. citizens would be discouraged from using larger denominational notes, and hence would do a larger percentage of their transactions with real money. While taxes on wages cannot be avoided due to the infamous withholding tax, a policy that eliminates $100 bills as legal tender would only further encourage holders of real dollars to use them in exchange. This is because all official purchases with digital money would be more easily tracked than if they were used with tangible money. This would make it easier for the state and local governments to levy bigger consumption taxes on all purchases of goods and services. In fact, in September 2012, the government of Argentina introduced a 15 percent tax surcharge for every time a purchase was made outside the country using a credit card issued by an Argentine bank. In addition, taxes on investments will encompass more of the economy. While today most investments are made electronically such as bonds, stocks, and real estate(most of which incur capital gains taxes upon liquidation), there are still investments that are made “off the books” and thus are not subject to taxes. This would most likely expand(along with similar consumer purchases) if such a policy were implemented, but with holders of real dollars possessing the advantage over non-holders.



Now let’s introduce a law that completely eliminates the use (economically) and production of $100 bills(during a period of negative interest rates). This is the extreme version of the proposal of Summers, Rogoff, and a few others. At first glance, it would seem unlikely that anyone would be willing to use or exchange something that has been completely outlawed by the government. However, there are numerous examples throughout U.S. history that have shown this to be false including prohibition and the “War on Drugs”. Assuming a large enough percentage of consumers will either ignore or purposefully disobey this new law, a case can be made that the holders of these $100 bills at the time of it being implemented will see windfall gains.

Under our assumptions thus far it seems that there will be a meaningful amount of consumers and market participants who not only foresee the ability to gain from these extreme policies, but they’ll also be willing and able, to a large extent, to avoid these laws due to the amount of anonymity that comes with using real cash (more on that later). This will solve the problem of network effects. Network effects exist when the desirability of an object or objects is dependent on the amount of people using it in a given area. The result will be a catallactic nexus of market participants, composed of wage earners and entrepreneurs, who interpret this transitory period as an opportunity to obtain premiums on exchanging their holdings of the now illegal $100 bills for goods and services from others who also use and accept these bills. This will occur instead of consumers merely hoarding these larger bills for several reasons.

With the cessation of the production of $100 bills, a law prohibiting the use and exchange of said currency would allow for an increase of the value of each note relative to the total physical supply(with a given demand). This stabilization of the supply of large notes would cause a significant price deflation, particularly in relation to the price of the same goods in terms of digital money(and smaller denominational notes). While the supply of $100 bills will most likely remain the same and circulate outside of the “digital” economy, there will be a tendency for the supply to decrease over time for two reasons.

First, physical pieces of paper that are used as money deteriorate over time as they’re handled by a multitude of people in countless situations. It’s only natural that the wear and tear to these large notes will at some point become too severe for them to be accepted at par with newer, fresher looking dollars(or to be accepted at all). And since the treasury is no longer printing these specific dollar bills, the supply will fall. Second, as professor North stated, there will be a tendency, albeit a small one in this case, for users of the $100 bills to either deposit their bill in a bank account themselves, or to initiate an exchange with a market participant who, for whatever reason, may decide it to be advantageous or convenient to hold his money in digital form(perhaps he feels there is less risk of theft of storing money in his bank than in his wallet or under his mattress).

This is in contrast to digital dollars, which will almost certainly see an increase in supply due to the incentives banks have to loan more money out. This is due to the fact that in a negative rate environment, banks that keep their reserves at the Federal Reserve will pay a fee to have them held there, rather than be paid a small percentage on the reserves as has been the case historically. On the other hand, it could be argued that the demand to use digital dollars in exchange could vastly exceed real dollars, especially in a inflationary period. As economist Finbar Feehan-Fitzgerald claims:

A currency experiencing more inflation than substitute currencies would be used in trade as often as possible. This would serve dual purposes. First, the owner of the substandard currency would prefer to use it in trade in order to keep their more stable and more robust currency in hand. Second, an individual in possession of the value-losing currency would rush to exchange it in order to obtain goods losing value less rapidly than the said currency.

Laws and policies aside, we have seen that historically this doesn’t hold true however. Moreover, as Nobel laureate F.A. Hayek states:

Beyond the desire to use his regular receipts for his ordinary
expenditure, the wage- and salary-earner would probably be
interested chiefly in stability. And although in his mortgage
and instalment payments he might for a while profit from a
depreciating currency, his wage or salary contract would
incline his wishes towards an appreciating currency.

As mentioned earlier, deflation tends to favor wage-earners and creditors and inflation tends to favor debtors. During a period of negative interest rates, while digital money is losing value relative to physical dollars(particularly the $100 bill), the opportunity cost of paying off debt using digital money falls relative to real large notes. This means that digital money will be more advantageous to use in paying off debts and fixed installment payments. But consumers and wage-earners will no doubt prefer an appreciating currency to acquire more goods and services with a given amount of labor. While these market participants won’t be able to acquire these appreciating $100 bills(except in exchange with someone willing to part with them) through their banks or paychecks, the owners of $100 bills who possessed them the moment these policies were implemented will see their currencies stabilize and even decrease in supply, and rise in purchasing power relative to digital money, which will increase in supply(due to increase in lending and inflation), and decrease in purchasing power(due to fees and negative rates on bank accounts). Hence, these real dollars will command a premium over digital money, which will inversely exchange at a discount.

Another reason market participants will be encouraged to use physical currency in trade instead of digital currency is the likely price controls enacted by the government due to any significant amount of inflation in the economy, most likely caused, in part, by negative interest rates. As I stated earlier, digital money can easily tracked by the banking system and a nation’s government. Every transaction using a smartphone, credit card, or Paypal can be recorded in a digital ledger that the issuing bank, phone application, or clearing house can keep in it’s database so that the government can have easy access to where people’s money is going. This makes it virtually impossible for anyone to buy products whose prices are fixed by law to acquire said goods at any other price as long as they use digital money. On the other hand, transactions using physical dollars are completely anonymous, and while purchasing goods at below the government-mandated prices would be technically illegal, anyone who would be willing to take advantage of the premiums that real dollars have over digital money would be able to do so in the likely scenario that producers would be participating in the black market.



Economist Robert Wenzel has suggested in a recent article that in a scenario where ATM withdrawals are restricted for any reason, as little as ten thousand dollars under the bed could possibly equal $100,000 in buying power during such a period and “those who have cash are going to be in a very strong position in terms of buying power.” While he does not go into detail about why this is so, it can be deduced that it is a lack of real dollars that would cause this discrepancy in value. This falls in line directly with our analysis that a lack of supply of real dollars, including other factors, relative to other currencies will raise the purchasing power of the limited currency when measured against the unlimited currency.

A more realistic example has been made by University of Michigan professor of economics Miles Kimball. He proposes that central banks proactively eliminate the exchange rate between electronic money and physical money. Instead of depositing $100 into your bank account and it being credited with an equal amount, you would be credited with $98 for example, which would equate to negative two percent on deposits. This would instantly create a scenario in which physical dollars exchanged at a premium against digital dollars. Simultaneously the government could sever the ties in value between deposits and cash by not requiring banks to accept cash as legal tender. Whether the federal government makes cash illegal or not is immaterial. Anyone who uses cash would be at an advantage. Professor Kimball adds:

“Businesses have got to start planning for this. Any lawyer who writes a debt contract without stipulating what happens if the market price of a paper dollar is not equal to an electronic dollar has to wake up… There’s going to be some central bank that does what I’m suggesting, and the companies who didn’t prepare for it are going to be disadvantaged.”

He makes the claim that what we have stated about individual holders of $100 bills also holds true for businesses as well. While physical currency would be exchanged at a premium, it would be advantageous for them to transact with it. In addition, since both types of currency would be legal to use, any business or corporation could float bonds to raise capital. However, in this negative rate environment, lenders( larger businesses) would pay borrowers(citizens) to borrow money. In his example, he says that the government could make it legal to accept both cash and digital money as payment, which is significantly different from the scenario I’m presenting in my analysis. It seems more than likely that the government will instead outlaw cash entirely so central banks can get past the problem of the zero lower bound. Yet this scenario that Kimball presents as being probable only strengthens my analysis by demonstrating the desire for market participants that are aware of such policies to secure profits rather than incur losses.

We have seen that policies of negative interest rates combined with the elimination of high denominational notes will cause those notes to be exchanged at a premium versus digital money, rather than disappear from circulation as is claimed by proponents of Gresham’s Law. Given that there will be a substantial amount of market participants who anticipate these policies and their effects, they will be at an advantage when their physical notes climb in purchasing power while simultaneously digital money begins losing its purchasing power. To the extent that this holds true, it will be seen that there is an inherent economies of scale in terms of money through reduced transaction costs(fees and taxes) by the limitation of their supply. Those who attempt to withdrawal money from banks to acquire real dollars such as the $100 bill will not be permitted through law to do so. This will create a “grey economy” where those who seek alternatives to digital money will be able to do so through network effects. In addition, there are several recent real world examples that support our position.



Since Argentina defaulted on its foreign debt in 2001, it’s currency, the peso, has collapsed in value by over 75%. While the government has tried to raise it’s value on the regulated official exchange rate using its foreign reserves, Argentinians have been attempting to pay large premiums for higher valued currencies such as dollars which are traded on the black market as “blue dollars” at prices far exceeding the official exchange rate. For example, according to The Economist, in late 2015 citizens exchanged pesos on this “blue dollar” rate at a rate of over 14 pesos for one dollar, compared to an official exchange rate just under 10 pesos for one dollar. That is an over 40% premium for a more stable and trusted currency. Even more interesting is the fact that in September 2012, the official exchange rate was 4.63 pesos for one dollar, while unofficial rate was 6.39 pesos for one dollar. In essence, in 2012 dollars held a premium of roughly 27% over pesos, while 3 years later, in 2015, they held a premium of more than 40% over pesos. Thus it is obvious that Gresham’s Law does not hold true regardless of the effective exchange rate maintained by the government. This in fact shows that policies that devalue currencies can have effects that last for years.

In Venezuela, price inflation was over 150% for fiscal year 2015. At the time of this writing it has increased to 500%. It is estimated by the International Monetary Fund that inflation will be over 1600% in the coming year. As of February 2016, there are four different exchange rates used to trade bolivars, the official currency of Venezuela, for dollars. The official exchange is called CENCOEX, in which one dollar can be acquired for 6.3 bolivars. The other two exchanges are SICAD 1 and SICAD 2, which require 12 and 50 bolivars, respectively. The newest exchange is called SIMADI, which requires around 200 bolivars in exchange for one dollar. While each of these 4 exchanges has different uses for different market participants, they all have one thing in common. It is considered to be quite difficult to acquire dollars at these more favorable exchange rates for reasons such as fraud, lack of trust in both the stability of the bolivar and the process of acquiring other currencies, capital controls, transaction costs, and the overall bureaucracy that no doubt inflicts monetary costs to users that wish to make these exchanges at the going rate(s).

As a result, Venezuelans have relied on the black market to acquire foreign currencies like the dollar. While it is possibly easier to acquire dollars at the black market exchange rate, it is much more expensive to do so. For example in early 2016, the black market exchange rate was 900 bolivars for one dollar. This is more than a 400% premium for dollars than the highest official rate. The vast majority of citizens that can acquire dollars at the black market rate are only the wealthy and higher-income earners. And these citizens primarily hoard the cash as a means of saving. Unfortunately in the case of both Venezuela and Argentina, there isn’t much data on the use and hoarding of high denominational dollars in these countries. Peter Sands states:

…it is hard to imagine that Argentina’s persistent mismanagement of monetary policy and banking would have continued so long if the elite did not have the dollar alternative. Through access to US $100 bills, elites secure insulation from domestic monetary and banking disasters, which weakens their incentive to seek change. Whilst there is no data to prove this, we would suspect that in most such countries, access to and holdings of foreign currency high denomination notes is highly concentrated.

So these dollars are seen as more of an asset than a medium of exchange to the wealthy and high-income earners. However, it has been observed by some economists such as professor Steve Hanke of Johns Hopkins University, that citizens of Venezuela have begun abandoning bolivars and started using dollars in trade when he states:

Facing this inflationary theft, Venezuelan’s have voted with their wallets. Indeed, they have unofficially begun to dollarize the economy.

Companies such as American Airlines and Ford Motor Co. have stopped accepting bolivars as payment for their products. This “partial dollarization” seems to be spreading with a lag along with the massive inflation that has decimated the bolivar. In fact, while most real estate contracts are calculated in bolivars, in higher income areas, many owners do business outside the law and accept payments and rents in dollars only.

The difference between the scenario in Argentina and Venezuela, and the one of negative rates in the U.S. is that in those examples, the more stable currency that held a large premium over the inflationary currency was a foreign currency. This implies that once citizens of these countries realized how devastating the devaluation of their currencies would be, it became either too expensive or too difficult for many to import dollars or euros in order to acquire necessary domestic goods and services. Because of this, the ability of a more stable currency, despite its exchange premium over the depreciating currency, to circulate in the black market is significantly hampered by the lack of network effects(though not completely eliminated).

This is in contrast to the U.S. where both real dollars and digital dollars are both domestic. This means that international transaction costs are essentially eliminated and many market participants will already possess the requisite amount of physical dollars to create the network effects necessary for them to take advantage of the premiums their dollars will have in exchange over digital dollars.


In a working paper previously mentioned titled, “Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes”, Peter Sands makes the argument that high denominational notes such as the $100 bill should be eliminated from circulation. His reasoning isn’t important for the purpose of our analysis but there are several points to be made in relation to our claim that in a negative interest rate environment with the abolishment of cash, it will be advantageous to use physical currency in trade.

According to Sands, cash is the preferred proxy that criminals use whether in high denominational notes such as the $100 bill or in lower denominational notes. The difference, he claims, is that lower denominational notes play an important role in everyday exchange in the economy while higher denominational notes have very little impact. Criminals involved in illegal activity could still very easily conduct illicit activity using $5, $10, or $20 bills, but it would increase transaction costs and transportation costs, particularly with cross-border exchanges. And even with domestic or local transactions, the ability to exchange with anonymity would be more difficult due to the larger amount of smaller denominational notes that would be required to conduct a transaction of the same value in $100 bills. He states:

Criminals are not going to stop being criminals simply because we eliminate high denominations. So they are going to look for other ways to make payments and move and store value surreptiously. The issue is whether the substitutes are more expensive, less convenient and carry greater detection risk. The most obvious substitutes are lower denomination notes of the same currency. Yet using these would raise the cost of doing business for criminals, since they are bulkier and heavier.

Thus it easy to see why in the same paper, Sands finds that $100 bills exchange at a premium with smaller U.S. dollar denominations in many emerging markets.
Cash premiums for Paper


This discovery seems to somewhat reflect the analysis of the paper by Rolnick and Weber on a different version of Gresham’s Law. They argue that the determining factor of whether a currency circulates at a premium is based on the costs of paying such premiums. Legal tender laws can explain what is used as the unit of account, but cannot predict when a money will circulate at a premium and when it will be hoarded. For example, during the years of 1792-1833 only the large denominations of the undervalued currency, which was gold and Spanish dollars, circulated. Most of the gold was exported, but for several years the Spanish dollar, which contained more silver than the U.S. dollar, circulated at a premium. More important is the fact that small denominational coins of the undervalued money in this period did not circulate:

The small change available during this period consisted of U.S.
silver coins and a substantial amount of Spanish coins.
The small-denomination Spanish coins contained less
silver than the U. S. coins (just the opposite relationship to
that between the Spanish and U.S. dollars), and, as our
hypothesis predicts, the undervalued small U.S. coins
had trouble circulating.

The reason for this has to do with the costs incurred from paying for premiums on smaller denominational coins which are usually higher than on larger denominational coins. This causes citizens to bundle the smaller denominational coins together to complete transactions and they disappear:

Generally, the smaller the denomination, the more costly it is to pay the fractional part of a premium. Because of this additional cost, traders are not likely to pay premiums on individual small-denomination coins. Thus the public is not likely to use these coins as a medium of exchange and is, rather, likely to collect them into large quantities that will exchange at a full premium; that is, individual units of small-denomination currency will tend to be bundled and taken out of circulation.

Similar reasoning can be used to support our position that large denomination notes such as the $100 bill will circulate at a premium, particularly against lower denominational notes and digital dollars. While it has already been seen that the fees, taxes, and negative interest rates that will be levied on digital money will cause physical dollars to exchange at a premium, it should be emphasized that this will also be the case when compared to lower denominational notes. As the Wall Street Journal states:

A million dollars in $100 bills weighs approximately 22 pounds and can fit comfortably into a large shopping bag. With $10 bills, it isn’t so easy. Think of lugging around 220 pounds in a giant chest. Hoarders and tax evaders would find small notes proportionately costlier to count, verify, handle and store. The use of cash could be further discouraged by putting restrictions on the maximum size of cash payments allowed in retail sales.

This implies that costs, particularly transportation and transaction costs, will be much higher for lower denominational notes than larger notes. Since banks cannot be trusted to store $100 bills by market participants who wish to exchange these notes, holders of them will prefer to keep them stored with as little cost as possible. Thus it is easy to see that $100 bills will be the preferred denomination in terms of storage. Counting notes will also pose a considerable cost if extremely small denominational notes such as $1, 5$, and $10 bills are used, especially for larger purchases. The same logic applies to verifying the authenticity of physical cash, as well as handling and transporting it. This will hold true for market participants wishing to take advantage of their holdings of $100 bills because we can see the same results when applied to criminals using $100 for illegal activities. Peter Sands makes this clear:

High denomination notes are the preferred form of cash for conducting illicit activities where significant values have to be transferred, stored, or moved. As an indicator of the incremental value provided by larger denominations, criminals will pay a premium for €500 notes and US$100 bills often attract an exchange rate premium relative to smaller US$ denominations in many emerging markets.

It has been seen that due to costs incurred by holding and exchanging digital dollars and lower denominational notes in an economy consisting of negative nominal interest rates and legal tender laws, it will be advantageous for holders of larger denominational notes such as the $100 bill to use them due to the premium they will command because of these transaction costs, as well as inflation. Gresham’s Law in its popular form does not hold true, as the historical evidence and theory demonstrate. Instead of one currency disappearing from circulation, the undervalued currency will likely be traded at a premium unless the costs of using that money in exchange are too high.



  1. The US will NEVER do this..Then the politicians would have to exchange those huge bags of cash they have, and then explain where they got it…Want to end the drug war? Easy..Change the 100,50,20 dollar bills to blue..You have to exchange all you current cash for the new Blue Bills..Anyone with large bags of cash will now have a paper weight because they can not explain where they got it and it turns worthless….If a dumb ol southern boy can figure it out, you know they can…


  2. I think you’re having a brain fart.

    If the $100 dollar bill is discontinued there could be a (very) limited time when they are accepted as currency but not being produced. During that time, they may appreciate just as you say but in short order they will be DEMONETIZED and become worthless.

    Your scenario reminds me of the government scrip issued to servicemen in Korea and Vietnam. Every 6 months or so they would change the scrip and you only had a few days to exchange the old scrip for the new. If you had a giant pile of old scrip after that day, you had nothing.

    If you want to see how REAL monetary policy works you should look at things that are outside the law. The price of drugs or what prisoners use for exchange are good examples. If they go cashless with negative rates I would expect millennials to switch to (highly encrypted + anonymized) cryptocurrencies while old farts like me would probably just switch to gold, silver, and ammo.


    1. “they may appreciate just as you say but in short order they will be DEMONETIZED and become worthless.”

      “If you want to see how REAL monetary policy works you should look at things that are outside the law.”

      non sequitur


      1. I think you’re missing an enormous blind spot in your theory. Since 1986 Treasury has MINTED a complete alternate money available to the American people, they are the legal tender gold and silver eagle coins and if you look at the mint records you’ll see that the quantity available is proportional to that which we had in circulation prior to their 1930’s and 1960’s theft and demonetization respectively.

        If there is ANY risk that paper money of larger denominations is going to be devalued or eliminated people are going to flood into those monetary devices which, by current law, must be produced to meet the publics demand. Transactions between individuals and small businesses would just go off book, or be recorded in the coins face value and taxed at what would essentially be an order of magnitude or greater below the corresponding paper money price. An example would be purchasing a truck for 22 and 1/10 eagles (gold). You’d be paying approximately $1100 legal tender face value for a vehicle that would cost $30,000 in $100 bills or digital $…


      2. “paper money of larger denominations is going to be devalued or eliminated people are going to flood into those monetary devices which, by current law, must be produced to meet the publics demand. ”

        While this is certainly possible, here are a number of issues. 1) there is no a priori reason why this must necessarily occur. Network effects and transaction costs will play a role and will determine what happens that no one can possibly know beforehand. 2) If people choose these minted coins, it does not preclude physical dollars from circulating alongside gold or silver coins. Both can circulate for a time, as has happened with competing currencies. 3) The way that currency is typically devalued is that its supply is increased considerably. But If physical currency of large denominations is no longer recognized and produced as money, then its supply will be limited, eliminating the chance that it can be “devalued” by government. It will no longer be fiat money. Digital money and these legal tender gold/silver coins in your scenario, however, can be increased to meet demand. This will have a inflationary effect on them relative to physical dollars. On the contrary, you seem to have missed a blind spot yourself. Remember, value is determined by demand AND supply.

        “Transactions between individuals and small businesses would just go off book, or be recorded in the coins face value and taxed at what would essentially be an order of magnitude or greater below the corresponding paper money price.”

        This and similar tactics have been attempted before with unfortunate results for the citizens involved(though I sympathize with them). Here is an example:

        From the second source:

        “The Supreme Court said, if they don’t have criminal intent, then they are not guilty of tax evasion,” Hansen explained. “That doesn’t mean you don’t have to pay the tax, but it means you didn’t commit a crime and won’t go to jail for a felony.”

        As far as they use the coins in a black market, it is certainly workable. But if anyone took your advice on “being recorded in the coin’s face value..” they would most likely be caught. If these men in 2003 were caught when the government is more lax, then in a monetary crisis it would be almost inevitable they would be discovered and punished(or at least forced to pay the taxes as these men were). Again, you missed that distinct possibility.


    2. The problem is you are not allowing for $100 bills to remain as a black market currency as he is obviously implying. Of course they would be worthless according to the government but lots of people don’t care what the government says. Any currency is fully dependent on belief in that currency. There will be a black market use for them absolutely.


  3. I’m sorry. I don’t mean to hurt your feelings, but this article is complete rubbish.

    No one would ever accept (or hold onto) a $100 bill if it were outlawed. There would be tremendous concerns about liquidity, protection against counterfeiting, and possible law-breaking.

    Gresham’s law applies to commodity money, not fiat currency. This means that the currency being used has value based on the material (commodity) it is made out of.

    Fiat currency ($100 bills) derive their value through state sponsorship. Upon losing “legal tender” status, it would lose all value.


    1. “There would be tremendous concerns about liquidity, protection against counterfeiting, and possible law-breaking.”

      Liquidity and counterfeiting are a problem with any currency. There are many ways merchants use to detect the latter today that the market would solve in my scenario. For example:

      “Gresham’s law applies to commodity money, not fiat currency. This means that the currency being used has value based on the material (commodity) it is made out of.”

      Unfortunately Gresham’s Law is is not actually a law and evidence shows this. In addition, exchange rates between monies which are based on the material contained in the (commodity)money have little to do with whether the money is hoarded or exchanged at a premium. It is based primarily on transaction costs, which applies to any type of medium of exchange by definition:

      “Fiat currency ($100 bills) derive their value through state sponsorship. Upon losing “legal tender” status, it would lose all value.”

      By losing legal tender status, $100 bills would no longer have the characteristics of fiat money in that 1) their supply would be limited due to the halt in production of them, which would have a deflationary(appreciating) force on their value and 2) they would no longer be subject to digital transaction costs such as bank fees, taxes, and negative interest rates whereas digital money would, giving these real notes the advantage in exchange.

      “derive their value”

      Digital dollars and physical dollars would essentially become two different types of monies. So state sponsorship would not be required for real dollars to hold value($100 bills losing the features of a fiat money), particularly if this relationship is based on transaction costs and not exchange rates(set by government) which the article I provided shows evidence of.


    2. That’s not really factual. In reality all currencies are fiat at all times and completely depend on faith. Right now many businesses accept Bitcoin and it has no inherent value as it is obviously digital and it’s not state sponsored. Bitcoin alone blows your statement out of the water.


      1. Jim: whilst Bitcoin and a potentially outlawed $100 bill both offer transaction anonymity, the businesses accepting Bitcoin for payment are internet based. It is not practical/safe to send cash via post for online purchases, whereas Bitcoin offers convenience and security.


  4. First of all I do not accept that adopting alternative currencies during a currency crisis is comparable to retaining physical currency that has been outlawed. However, I agree that people may want to use physical currency as an alternative, but suspect this would be more likely foreign currency and/or precious metals. The example you cite (Venezuela) demonstrates this.

    I think the main issue with your analysis is it presumes holders of a currency have the foresight to see that digital dollars will inflate more over time than physical, outlawed $100 bills, at the time the bills are outlawed. Recall a typical wage earner’s understanding of inflation is at best limited to rising prices, not an increase in the currency supply.

    You also underestimate the herd mentality and lack of critical thinking by the vast majority of citizens, who blindly believe whatever is told to them by the mainstream media.

    In my opinion, if a govt changes legal tender laws to exclude large denomination bills, this will no doubt be accompanied by a media campaign to convince people to exchange rather than hold said bills. Hearing such fear-mongering, a sizable amount of wage earners will choose to exchange these rather than run the risk that they become worthless. Seeing this, others who may be in two minds as to keep or hold, will likely be compelled to exchange so as to not to lose out.

    Before you know it, faith in the strength of $100 as viable alternative means of exchange has been lost and everyone will exchange them.


    1. “more likely foreign currency and/or precious metals. The example you cite (Venezuela) demonstrates this.”

      1) If they choose precious metals, this doesn’t prevent any other currency like bitcoin or $100 bills from competing with them in a black market. This is what we want. Currency competition. 2) Why do Venezuelans desire dollars? For the only reason they are foreign? Hardly. It is due to the fact that the dollar is the reserve currency of the world. It is one of the highest valued currencies and the most demanded internationally due to this status. So it has nothing to do with foreign or domestic currencies per se, it has to do with what is regarded as having value. 3) If the government eliminates legal tender laws for $100 as you say, then don’t foreign currencies also not have legal tender status in the U.S.? So if you have $100 bills as an American, why would you try to trade them for foreign currencies that also don’t have legal tender status? There’d be no point. 4) By trying to acquire foreign currencies for dollars, you would necessarily be subject to transaction costs(risk, transportation costs, exchange rates, etc.) whereas with just holding the dollar and using them you would not. Hence, dollars would be superior. 5) In a crisis such as this, would foreign currencies hold up any better than the dollar? As Gary North states:
      “What will they choose as an alternative? The yen? The euro? Why will those currencies and economies be better than ours? They surely aren’t today.”

      “You also underestimate the herd mentality and lack of critical thinking by the vast majority of citizens, who blindly believe whatever is told to them by the mainstream media.”

      On the contrary, this is what will create the necessary network effects for $100 bills to maintain value. Ignorance in the market allows those with superior foresight to take advantage of these discrepancies.

      “a sizable amount of wage earners will choose to exchange these rather than run the risk that they become worthless. Seeing this, others who may be in two minds as to keep or hold, will likely be compelled to exchange so as to not to lose out. Before you know it, faith in the strength of $100 as viable alternative means of exchange has been lost and everyone will exchange them.”

      I think you’re confused here. My claim is that the physical currency will be exchanged at a premium, not hoarded(or not entirely). You’re looking at the old, false version of Gresham’s Law that has been disproven here:
      The fact that $100 dollar bills will no longer be legal tender means not only will they no longer be fiat money, but also 1) They will no longer be printed by the U.S. Treasury Dept., which means their supply will be limited. This is in contrast to digital currency which will still be inflated by the Federal Reserve banking system to stimulate the economy. So the tendency will be that prices will generally rise in terms of digital money, but not(or not as much) in terms of physical money and 2) Physical dollars won’t be subject to the transaction costs of digital money like bank fees, negative interest rates, taxes, etc. This in turn will also mean digital currency will trade at a discount to physical money.


      1. I agree people seek value, not just something foreign. But how much value will people in the US assign to a bill that is not legal tender anywhere on the planet? I don’t think very much but you clearly differ. And the fact that it will not be printed any more will not make something worth nothing more valuable.

        As I recall more than half the physical $100 bills are outside the US. If what you say does come to pass, then what do you see happening to all the physical dollars around the world? And how could someone outside the US profit from your notion?

        It is said that a cryptocurrency replacement (‘e-dollar’) is being planned (testing has allegedly already started), which all existing digital dollars will be converted into and all current physical US$ will devalue against (say 5% or 10% per annum), thereby compelling people to pay their physical currency in to the bank. After this, significantly negative rates can be introduced. See here for more info:

        Such a new, modern form of money will be an easy sell to the masses, and it will hand banks and the Govt much more power and control so they will both be in favour. As such, I find this this scenario a likely response to the next big financial shock.


      2. “the fact that it will not be printed any more will not make something worth nothing more valuable.”

        1) Isn’t that the very reason why Bitcoin has increased in value exponentially? 2) History shows the elastic supply of a currency has a huge effect on its value:

        “what do you see happening to all the physical dollars around the world? And how could someone outside the US profit from your notion?”

        Yes, around half of all $100 bills are held abroad. I haven’t looked into this, but if these notes are no longer legal tender, why would it matter if theyre held abroad or not? If other countries won’t accept them, then these foreign citizens could travel to the U.S. to use them in exchange where citizens are more familiar with them. Remember, these dollars are not traceable.

        “thereby compelling people to pay their physical currency in to the bank. After this, significantly negative rates can be introduced.”

        Then why would anyone who’s aware of this possibility want to risk the loss of their wealth? Some less-informed citizens might perhaps, but savvy investors and intelligent savers who are well read on economics will not.


      3. I suspect you put too much faith in the general public. You are obviously well versed in economics but the majority of people are not ‘savvy investors and intelligent savers’. The majority go along with whatever is told to them by the MSM.

        There is a war on cash: the message in MSM is cash is largely used by tax cheats and criminals. I think convincing people to accept a new cryptocurrency would be a relatively easy sell. Obviously the media would not mention it is so they can reduce rates beyond the -0.35% rate limit where the cost for storage of large amounts of physical cash becomes attractive.

        Incidentally I am a non-US citizen residing outside of the USA who holds a fair amount of $100 bills. If what you say comes to pass, then I will let you know when I am on my way to cash them in and perhaps we can celebrate over a beer!

        One concern I have is if $100 bills were banned, then surely US border agents would remove them from people coming into the US, no?


  5. Nov 13, 2016 Currency Reset In India Causes Panic and Chaos With Massive Hit On Black Market

    In a stunning move that shocked many people In India, the government decided without warning to make all 500 and 1000 rupee valueless. This while not preparing for this move and printing money for to exchange at the banks has created a panic in this country.


    1. Yes, I have been paying attention to this event. Although it’s only a few days old, I’m still not shocked by it. This is a general trend emerging. But there are a few important differences between this situation and my analysis.

      1) Interest Rates. The benchmark interest rate(repo) was slashed to 6.25% from 6.5%. This is a far cry from a negative nominal interest rate, which would greatly raise the opportunity cost of keeping deposits in banks. And as pointed out in the paper, Gresham’s “Law” as I stated with a currency exchanging at a premium is based on transaction costs rather than exchange rates. So, this is not even close to a real world experiment as some might point out.

      2) Dollar vs Rupee. While the Rupee is the main currency in India, it’s role is significantly different than the dollar in the U.S., or even the Euro in Europe. The dollar is the reserve currency of the world, giving it a special position in world markets as the strongest currency to use both in purchases and investment. This heavily influences the psychology of market participants and the desire to hold cash balances(with similar reasoning for the Euro being used in numerous countries in the Eurozone). In an economic crisis, it is likely that for a time, at least, the dollar will be seen as a safe investment due to this status, whereas it is being seen the Rupee does not have the same confidence of its holders. This would change obviously, if the monetary authorities in the U.S. decided to stimulate the economy with negative interest rates and/or injections of credit into the markets. But this is beside the point. The result we are beginning to witness in India cannot be compared with any level of accuracy to a situation I’ve described.

      3) Inflation. While inflation is considerable at around 4%, it has been steadily falling since 2013 when it was higher than 10%. For the dollar, inflation would have to be heading higher due to either a) inflation expectations and/or b) negative nominal rates. This would be combined with the elimination of the legal tender status of $100 notes.

      In summary, while the situation is similar in the fact of the Indian government eliminating the legal tender status of the two highest denominational bills, it cannot be what you’d call a “real world experiment” due to the factors I’ve stated above. However, it is an interesting event and I will continue to keep track of it due to its relevance to the “War on Cash” that we are seeing in other places as well.


      1. As I understand it India’s recent move was aimed at hitting black money, which is almost exclusively held in 500 and 1000 notes.

        These are losing their legal status by the end of 2016, but can be exchanged at banks before then. However, if you pay in more than 4000 rupees you have to demonstrate where you got it from.

        The 500 and 1000 notes are being replaced with a 2000 note.


  6. thank you for this interesting article.

    However you make an assumption about gresham’s law that I believe is wrong and this is why you end up concluding that gresham’s law doesn’t apply to digital fiat over physical fiat. This assumption is “Gresham’s Law does not hold true regardless of the effective exchange rate maintained by the government. ” But Gresham’s law states that “bad money drives out good”, but not that “legal money drives out illegal”, and it can be argued that physical cash is better money than digital cash for a number of reasons (being more anonymous for example), which means than gresham’s law actually explains why cash is more valued than digital fiat or that another’s country currency can have more value than the legal fiat of the country you live in.


    1. Your comment is appreciated, but confused. “Good money drives out bad money” is ambiguous and doesn’t explain the mechanism closely enough. More specifically Gresham’s Law concentrates on overvalued money versus undervalued money, which is historically due to government price controls. Here is Rothbard:

      “Government imposes price controls largely in order to divert public attention from governmental inflation to the alleged evils of the free market. As we have seen, “Gresham’s Law”—that an artificially overvalued money tends to drive an artificially undervalued money out of circulation—is an example of the general consequences of price control. Government places, in effect, a maximum price on one type of money in terms of the other. Maximum price causes a shortage—disappearance into hoards or exports—of the currency suffering the maximum price (artificially undervalued), and leads it to be replaced in circulation by the overpriced money.”

      The second part of your comment is mistaken as well. It doesn’t follow that cash is ‘better’ than digital currency because it is anonymous or some other subjective reason. The fact of the matter is is that people mostly voluntarily choose digital currency and quasi-currency like deposits, credit cards, and Paypal because specific transaction costs are lower than using dollars which can be sometimes more inconvenient.

      Furthermore, Gresham’s Law has nothing to do with how currencies of different countries are valued against one another. That is mostly due to domestic monetary policy which determines not only the rate of money supply growth, but interest rates as well. This determines the exchange rates between international currencies. There is more to it but that is the gist. The relative values of international currencies can always be described without using Gresham’s Law .


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