Larry Summers goes after “big money” in this blog, by which he means large denomination currency—most specifically the 500 euro note.
What’s the beef?
Such a large denomination note makes it easier for crooks and terrorists to engage in money laundering. The larger the bill the less bulky the package to sneak through customs.
At the Richmond Fed’s money museum there is a $100,000 note on display. Currently, for the very reason Summers worries about, the largest U.S. note is $100.
Summers’ argument is prudential: we should not allow the market to use the denomination it desires, because it encourages unethical behaviors. In fact, Summers says in the best of all worlds we would withdraw $100 notes from circulation.
The photo below shows what $10,000 in $1 bills looks like—or equivalently—what $1,000,000 in $100 bills would look like. It’s relatively easy to smuggle something smaller than this paper bag and in terms of euros, the bag would be about less than one-fifth as full.
Adam Smith, who also worried about unethical behaviors, argued that government should make bills larger—no smaller than 5 pounds—essentially preventing poor people from gambling in private bank notes.
As of a few moments ago, the European Central Bank has voted to scrap the 500 euro note, but a 1,000 euro note still exists. Go figure. Both the $100 note and the 500 euro note are used for illegal activities, and earn governments lots of seignorage. So it’s like asking a junkie to give up cocaine for the betterment of his health.