First it was the confiscation of all gold coins, followed by the retirement (demonetization) of silver coins. Each of these events led to federal governments around the world deeming their legal tender backed by bullion (typically called “gold certificates” and “silver certificates”) no longer valid.
Now, governments are trying to do away with cash just like it got rid of gold and silver as money.
The Wall Street Journal put it this way: “Politicians and central bankers fear that holders of currency could undermine their brave new monetary world of negative interest rates. Why wouldn’t they eventually ban all cash transactions much as they banned gold and silver as mediums of exchange?”
The End of Cash
The widely publicized “War on Cash” is taking a variety of forms.
First, there is general decline in cash transactions. This is touted as a grand convenience for consumers—just swipe your card, voila! No need to carry around a bunch of bills (as if those slices of cotton paper are such a burden to lug around). For these reasons, most transactions are paid for by debit bank cards or simply credit cards.
There’s a contradiction involved in the use of electronic money cards, though: you would think this cuts down on the cost of doing business since no physical items need to be moved, yet credit card transactions involve a merchant’s fee (usually about 3.5%) that leads to higher prices.
Moreover, cash can’t be tracked. All transactions on a credit card are digitally archived. Some view this as an added measure of security, but it also gives financial institutions detailed information about your purchases and habits that you may not want to share.
The First Step
Now, multiple voices in the banking community are calling for an end to large-size banknotes. ECB President Mario Draghi has expressed his desire to discontinue the 500-euro note, while former U.S. Treasury Secretary Larry Summers similarly suggested we get rid of $50 and $100 bills. (Significantly, the euro and the dollar are the two most commonly held world reserve currencies.)
Why? Ostensibly, they want to make it harder for organized crime to conduct business, as the black market deals almost exclusively in cash (and large amounts of it). This objective seems a bit irrelevant when you consider that many of the largest financial scams (Bernie Madoff, Libor, etc.) centered around moving digital numbers on a screen rather than suitcases full of paper.
David Stockman, one of the most famous market contrarians who served as President Reagan’s director of the Office of Management and Budget as well as a U.S. congressman, laid out the truth behind the War on Cash on his Contra Corner blog:
“In short, there is one reason alone for the sudden campaign to abolish large denomination bills. It is a necessary predicate for the imposition of NIRP [negative interest rate policy]. That is to say, it would pave the way for central bank mandated confiscation of the wealth and savings of millions of American citizens in the pursuit of a cockamamie theory that would bring about the final destruction of honest price discovery and financial discipline in the Wall Street casino.”
The War on Cash is a direct punishment on savers and honest dealers. With this in mind, the appeal of tangible assets like precious metals is even greater than it would normally be. In countries where the value of the national currency has rapidly lost value—such as Russia—these are the first items that people rush to get their hands on. The same ought to hold true if a currency is destined for an entirely digital existence.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.