Farewell to the $100 Bill in the U.S. – Harvard Economist Calls It a No-Brainer Decision

In the United States, despite the rise of digital payments, cash still plays a significant role in transactions. Interestingly, about 60% of financial exchanges occur using debit or credit cards, yet cash remains the third most popular payment method. At the center of the cash economy is the $100 bill, a denomination that stirs debate among economists like Kenneth Rogoff.

Rogoff, a Harvard economist and chess grandmaster, has called for discontinuing the $100 bill due to its role in illegal activities. While this stance has its supporters, the bill’s future remains uncertain, given its continued prominence in both domestic and international finance.

Concerns

One of the main arguments against the $100 bill is its use in illegal activities. Rogoff highlights that a significant portion of $100 bills circulates outside the U.S., with enough bills existing in 2022 for every American to possess 55 of them. This raises concerns about its potential role in the underground economy, where large-denomination bills are commonly used for money laundering, drug trafficking, and tax evasion. In Rogoff’s view, eliminating the $100 bill would be a crucial step in enhancing transparency and improving monetary policy, as it would make it more difficult for criminals to operate.

Counterfeiting is another critical issue tied to the $100 bill. It has historically been a target for counterfeiters, especially with high-profile cases like North Korea’s “super note” operation, which produced near-perfect fake $100 bills. Since higher denominations offer more value, they are attractive to criminals who seek to profit from producing fake currency.

Psychology

The $100 bill also has an interesting psychological effect known as the “denomination effect.” This concept, studied by economists and psychologists, suggests that people are more reluctant to spend large-denomination bills than they are to part with smaller denominations. The idea is that larger bills feel more valuable, even though they have the same purchasing power as smaller bills. This effect plays a significant role in spending habits.

Helen Colby, an assistant professor at Indiana University’s Kelley School of Business, explored this phenomenon with college students. She found that participants were less likely to spend a $100 bill compared to five $20 bills, even though both have the same value. Colby explains that spending a large bill feels more “final,” as the physical bill is gone forever after the transaction, whereas swiping a credit card or using smaller bills does not create the same psychological barrier. This reluctance to spend large bills further reinforces their role in saving rather than daily spending.

Durability

Another factor that contributes to the $100 bill’s unique status is its longevity. While smaller denominations like the $1 and $5 bills wear out within 18 months due to frequent use, the $100 bill has an average lifespan of over 10 years. This durability adds to its perceived value, as people often see it as a more lasting form of money. Its longevity, combined with the denomination effect, makes the $100 bill a preferred choice for saving or storing wealth, rather than spending.

Proposals

In light of these issues, some experts have suggested reevaluating the range of denominations in circulation. While Kenneth Rogoff pushes for the discontinuation of the $100 bill, others have proposed bringing back the $500 bill. The argument for reintroducing the $500 bill is that it could reduce the need for multiple $100 bills during large transactions, streamlining cash payments without flooding the economy with more currency. However, this idea also raises concerns about counterfeiting and misuse in illicit activities, echoing the fears tied to the $100 bill.

The Future

As digital payments continue to rise, the role of cash and, specifically, the $100 bill remains a topic of debate. While its use in illicit activities and counterfeiting is worrisome, the psychological and practical value attached to large-denomination currency means it is likely to remain a key part of the cash economy for the foreseeable future. Any decision to discontinue or reintroduce higher denominations will need to carefully balance the pros and cons, considering both the needs of the economy and the risks of illegal activities.

Although the $100 bill sparks a variety of concerns, its durability and psychological appeal help it persist in everyday use. Whether its fate lies in elimination or adaptation, the future of large-denomination bills remains closely tied to both policy and consumer behavior.

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