-Caveat Lector- >From http://www.wired.com/news/politics/0%2C1283%2C32121-1%2C00.html {{<Begin>}} Cash and the 'Carry Tax' by Declan McCullagh 3:00 a.m. 27.Oct.1999 PDT WASHINGTON -- US currency should include tracking devices that let the government tax private possession of dollar bills, a Federal Reserve official says. The longer you hold currency without depositing it in a bank account, the less that cash will be worth, according to a proposal from Marvin Goodfriend, a senior vice president at the Federal Reserve Bank of Richmond. In other words, greenbacks will get automatic expiration dates. "The magnetic strip could visibly record when a bill was last withdrawn from the banking system. A carry tax could be deducted from each bill upon deposit according to how long the bill was in circulation," Goodfriend wrote in a recent presentation to a Federal Reserve System conference in Woodstock, Vermont. The 34-page paper argues a carry tax will discourage "hoarding" currency, deter black market and criminal activities, and boost economic stability during deflationary periods when interest rates hover near zero. It says new technology finally makes such a scheme feasible. "Systems would have to be put in place at banks and automatic teller machines to read bills, assess the carry tax, and stamp the bills 'current,'" the report recommends. Goodfriend said in an interview that banks might place a kind of visible "date issued" stamp on each note they distributed. "The thing could actually stamp the date when the bill comes out of the ATM," he said. Congressional critics say they would oppose any such move. "The whole idea is preposterous. The notion that we're going to tax somebody because they decide to be frugal and hold a couple of dollars is economic planning at its worst," said Representative Ron Paul (R-Texas), a free-market proponent who serves on the House Banking committee. "This idea that you can correct some of the evil they've already created with another tax is just ridiculous," Paul said. Other economists say a carry tax is not a wise plan. "This is going beyond taxing banks for holding reserves. It's taxing the public for holding currency too long. That's even more wild an idea," says George Selgin, a University of Georgia economics professor who specializes in monetary policy. 1 of 2 Next > Cash and the 'Carry Tax' page 2 3:00 a.m. 27.Oct.1999 PDT continued "There are sweeping implications of these suggestions beyond whatever role they might play in thwarting a deflationary crisis... I think it's a very dangerous solution to what may be a purely hypothetical problem," Selgin said. Goodfriend discusses an alternative: The Fed should at times prevent Americans from withdrawing cash from their bank accounts. "Suspending the payment of currency for deposits would avoid the cost of imposing a carry tax on currency." But he concludes that such a move would have "destabilizing" effects, and recommends that the Federal Reserve instead "put in place systems to raise the cost of storing money by imposing a carry tax." The idea has been discussed before. Economist John Keynes mentioned the possibility, but dismissed it because of the administrative hassles involved. Silvio Gesell, a Keynes contemporary and like-minded thinker, also suggested taxing money to allow lower interest rates. But Goodfriend says that technology has advanced since then. "In light of recent advances in payments technology and the less-than-satisfactory alternatives, imposing a carry tax on money seems an eminently practical and reasonable way [to proceed]," he writes. He said the Federal Reserve has technology that would make it "feasible," but refused to give details. One reason for a carry tax, he says, is the reduced influence of the US central bank when prices are not increasing and inflation is close to zero. During such a period, banks are less likely to make loans -- even if the Fed tries to spur an economic expansion through open market operations. But if the government taxes the currency holdings of individuals and banks through an occasional carry tax, they may be inclined to lend money even at a negative interest rate in order to avoid holding on to it. "This proposal is made well in advance of any problem we have in the US. It's not an emergency proposal at this point," he said. The report says Congress would have to pass legislation allowing such a tax. << Back 2 of 2 Have a comment on this article? Send it. Fax this from your computer for free Related Wired Links: Printing? Use this version. Email this to a friend. Fax this from your computer for free. Send us feedback | Work at Wired Digital | Advertise with us About Wired Digital | Our Privacy Policy Copyright © 1994-99 Wired Digital Inc. 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