18 June 2007

The Death of the $500 Bill Remembered

In 1969, the United States ceased printing currency in denominations larger than $100. Before then, there were $500, $1000, $5000 and $10000 bills in circulation. A few legacy bills are still out there. But, for the most part, they are collectors items and are removed from circulation when they make their way back to a bank. The combined value of the bills larger than $100 still in circulation is dwarfed by the value of bills of types that are still printed.

A dollar in 1969 was worth about five times as much as it is now. In 1969, a $100 bill was worth about five hundred 2007 dollars. Today's $100 bill is worth about what a $20 bill was in 1969. Today's $5 bill is worth about what a $1 bill was in 1969. And, today's quarter is worth about what a nickle was in 1969. We hope you haven't been keeping your life savings under the mattress, because its value is falling every year.

There is no indication that anyone plans to introduce large denomination currency to the United States in the near future. The government's desire to fight tax fraud, illegal immigration and money laundering outweighs the utility of large denomination currency for most policy makers. As it is, cash transactions of $10,000 or more (or smaller cash transactions "smurfed" into multiple smaller transactions an effort to avoid this rule) must be reported to federal authorities, even though they are legal.

There is also no strong push from business interests to introduce large denomination currency amounts. As it is, most $100 bills in U.S. currency are used abroad, often in the black market cash economy, or in countries with ill developed banking industries like Russia and Kosovo. And, the introduction of the widely accepted 100 euro and 500 euro notes has reduced the demand for United States $100 bills in the foreign black market cash economy. Many U.S. retail merchants do not accept bills larger than $20, and cash machines also almost never dispense either $50 bills or $100 bills. Credit cards are now used in most situations where $100 bills used to be common in the United States. Almost nobody buys a case of wine, or a set of new tires for their car in cash. A few people do buy a weeks worth of groceries or a tankful of gas in cash, but the numbers are falling. Cases of eccentric people paying their doctors and lawyers with cash have become the stuff of water cooler talk and urban legends.

If the $100 bill were discontinued today, few people would notice a change in their day to day lives, and pizza deliverers could all breathe a sigh of relief at not having to make immense amounts of change for customers.

Personally, my use of cash is pretty much limited to parking, bus fare, eating out, mocha, movies, convenience store purchases, and postage for a letter or two. It is no longer unusual for me to make a purchase of $3 to $5 with a credit card, and I try to do so when I can because it creates a better paper trail of my spending for budget purposes and counts towards a reward program on the card. In Cherry Creek you can even put $1 of parking on your credit card, which makes sense, as I rarely carry large quantities of change around with me.

The only time in my life I ever used a large quantity of $100 bills was to transfer funds from an old checking account to a new one when a moved once. I could have used a cashiers check, but I avoided a fee by using cash and it was a kick to have a few thousand dollars worth of hundred dollar bills in my hands for once in my life. Of course, if I had been unfortunate enough to be stopped by police at that moment, life could have gotten complicated very fast, and I almost certainly would have been presumed to be a drug dealer. Also, the cash very likely would have showed traces of cocaine or heroin on it from prior users, further implicating me in wrong doing.

The biggest casualty of inflation and the new currency regime in the United States has been not the big bills, but the smaller ones. A frail $1 bill is worn out in six months of circulation and has to be replaced, while coins last decades. But, Americans have gotten out of the habit of carrying sturdier, but heavier coins in their pockets. Given a choice between a variety of attractive $1 coins and the lighter weight $1 bill, Americans have overwhelmingly opted for paper. If we were starting from scratch today, the $1 bill almost certainly wouldn't have been introduced because it is so short lived, but going forward the inertia is significant.

So, today, I rememeber the demise of the $500 bill, but I don't mourn it.


Ken said...

And what probable cause would the police have had to find the cash on you?

Andrew Oh-Willeke said...

Speeding most likely. It is illegal, clearly a valid basis for a stop, and almost everyone, myself included, does it.

NewMexiKen said...

I was being a little facetious as I presume you to be a law abiding type. But a stop for speeding wouldn't have given them the right to look through your car for bundles of cash.

The answer to "may we look in your trunk" is always "no," right?

Andrew Oh-Willeke said...

The downside of answering "no" is that it is likely to produce an unlawful arrest with a dubious probable cause, also lying about consent is reputed to be not uncommon.

Anonymous said...

I miss the large notes. I use cash to help control my spending and I would like to be able to have some fun with a McKinley every now and then.

And, given that I will buy my next for "cash", I would really like to show up at the closing with a bundle of Salmon P. Chases.

Anonymous said...

I have to disagree, transaction fees for moving cash are common,$10000 sg note has not caused any problems in singapore despite being worth $8000.

Anonymous said...

Large bills where discontinue due to lack of use/printing.

While cash is in decline, there are arguments for at least a $500 or $1000 bill,
in particular credit/debit fees eat up 1-2% of a transaction. Cash is convenient for emergencies,
and when notes that europe has a note worth about $600-700 dollars.

Try going to the gas station, paying utilities,
etc in credit, a fee is charged.

The concern of laundering is useless in the extent that one can just diamonds
in toothpaste to launder.