How to Make Mob Miserable - Cash Connection?
IN 1976, the American Economist, James S. Henry wrote:
Who are the users of big cash? The logical suspects-people who need a highly liquid, anonymous form of wealth, something one could slip into an unmarked envelope, or stuff easily inside an ordinary suitcase. They include tax evaders, drug traffickers, illegal gamblers, loan sharks, fencers of stolen goods, and corrupt politicians, among others.
There are only two kinds of activity in the U. S. which depend almost exclusively upon large, untraceable, non-credit transactions. The first is profit-motivated crime: illegal gambling, drugs, prostitution, loan sharking, protection, the fencing of stolen merchandise, etc. The second is tax evasion by people who arrange to receive cash income and don't report it.
A surprise currency recall: On any given Sunday, the Federal Reserve would announce that existing "big bills"-$50s and $100s - would no longer be accepted as legal tender, and would have to be exchanged at banks for new bills within a short period of time. When the tax cheats, Mafiosi, and other pillars of the criminal community rushed to their banks to exchange their precious notes, the IRS would be there to ask those with the most peculiar bundles some embarrassing questions.
Imagine the panic that would strike our criminal community if, all at once, it had to liquidate its enormous hoards of big bills, or else explain where they came from. Any single criminal, acting alone, might be able to dispose of his cash without much trouble. But when all criminals tried to convert their cash at once, they would bump into each other at every turn, competing for the scarce alternatives to cash, trying to unload their bills through innocent-looking outlets, and generally calling attention to themselves. The recalls could be repeated, at random, every few years or so, raising the "transaction costs" of doing illegal business-or else most big bills could be taken out of circulation completely.
The immediate effect of this scheme would be to strike a sharp blow at tax evaders, dope dealers, racketeers, purveyors of vice, and corrupt officials. These denizens of the criminal deep would have to surface with the large cash balances which they carry on hand, and the tax authorities could begin to ask questions.
Naturally, many criminals would search hard for ways to escape these consequences. Unless the reform was carefully implemented they might, for example, convert large bundles by selling them piecemeal at a discount. (Participating in such discounting might be made a criminal offense. In any case this discounting would have an equalizing effect on the income distribution.) Or they might run from bank to bank, cashing in small amounts at each one. (Old bills might be redeemable only at a bank in the city where one is register to vote, with cross-checking between banks in each city.)
In general, these escape routes would not be difficult to check, assuming that the reform were introduced with the appropriate degree of surprise and cunning. In the longer run, cutting down on large denominations in circulation would increase the transaction costs of illegal activity (by, for example, reducing the amount of money that can be contained in any given suitcase). The liquidity crisis which would ensue for tax evaders and other criminals might to some extent be averted by the substitution of other currencies, or other exchange mediums such as precious metals. But these are much less convenient, especially for consumer-oriented criminal enterprise. In any case the substitution would be expensive and time-consuming.