Legal Seminar, Denver, CO

071018 Discussion Draft

1. Legal Tender. One account of the emergence of paper money in China explains that the emperor imposed a death penalty on anyone who refused to accept it. See David Wolman, T HE E ND OF M ONEY 1-2 (2012). Here in the U.S., we have a more limited version of support for our currency: "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." 31 U.S.C. § 5103. a. This does not prevent private ordering with regard to payments that do not involve debts. b. McDonald’s can refuse to accept bills larger than $20 (even though they are legal tender). c. A vendor can choose, ex ante, to be paid only in Euros if they choose to do so. Or they may choose a non-fiat currency altogether, including some form of scrip or some form of commodity. d. United Airlines can require a payment card to purchase onboard snacks, refusing cash or a check. (And that may be good for your health – cash can transmit germs!) “Shake Shack” restaurants announced a plan for cashlessness, which it then walked back after customer complaints. See https://www.pymnts.com/news/payment-methods/2018/shake-shack-cashless- transactions-restaurant-pos/ (June 20, 2018). e. Cryptocurrencies (discussed in part IV, below) are finding acceptance despite not being “legal tender”. But you may still need fiat currency to pay your taxes and other debts to the government! 2. Safety/Soundness. Once cash is in circulation, its value in relations to goods and services can be depreciated by government policies. Once a reliable link is removed between cash and an underlying represented commodity (i.e., cash as akin to warehouse receipt), additional threats to stability and value emerge. Further, when cash is deposited in the banking system, depositors face risks through errant or untrustworthy behavior by intermediaries. Regulatory efforts directed toward these problems have achieved varying success over time. And of course there is always the problem of counterfeiting. For a very useful comparative treatment of regulatory approaches in various countries, see Charles W. Calomiris & Stephen H. Haber, F RAGILE B Y D ESIGN (2014). a. Cash stores outside the banking system can mute the effects of monetary policies. For example, using negative interest rates to incentivize borrowing and spending could be avoided entirely through holding cash outside of the domestic banking system. b. Significant stores of U.S. dollars beyond the needs for current purchasing are stored, much of which is outside the U.S. See Kenneth Rogoff, Costs and benefits to phasing out paper currency at (May 6, 2014 working paper), http://scholar.harvard.edu/files/rogoff/files/c13431.pdf c. Rogoff, supra, estimates n 2013 $1.2 trillion dollars in circulation in 2013, about $4K for every person or 7% of GDP. More than 78% of this was held in $100 bills; small denomination bills of $10 or less accounted for less than

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