As the saying goes, you can know a person by the quality of his or her
enemies. This is also true of societies, where moral evolution can be traced
by simply listing the things on which they declare war. Not so long ago, for
instance, the world's good guys -- the US, Europe's democracies and a few
others -- fought existential battles against fascism and communism. Then they
went after poverty and discrimination. They were, at least in terms of their
ideals, on the side of personal freedom and opportunity and against
institutionalized control.
But then came the war on drugs, in which the US imprisoned millions of
non-violent people guilty only of voluntary transaction. Not long after that
we declared war on "terror," using the enemies created by our own
incompetent foreign policy as an excuse for a vast expansion of surveillance
and police militarization.
And now, seemingly out of nowhere, comes a new enemy: cash. Around the
world, governments and banks are making it harder to save and transact with
paper and coin. The ultimate goal seems to be the elimination of private
tools of commerce, in favor of transparent (to governments and banks)
plastic, checks and online payment systems. The following excerpts are from
longer articles that should be read in their entirety:
The
Death of Cash
(Bloomberg) - Could negative interest rates create an existential crisis
for money itself?
JPMorgan Chase recently sent a letter to some of its large depositors
telling them it didn't want their stinking money anymore. Well, not in those
words. The bank coined a euphemism: Beginning on May 1, it said, it will
charge certain customers a "balance sheet utilization fee" of 1
percent a year on deposits in excess of the money they need for their
operations. That amounts to a negative interest rate on deposits. The targeted
customers--mostly other financial institutions--are already snatching their
money out of the bank. Which is exactly what Chief Executive Officer Jamie
Dimon wants. The goal is to shed $100 billion in deposits, and he's about 20
percent of the way there so far.
Pause for a second and marvel at how strange this is. Banks have always
paid interest to depositors. We've entered a new era of surplus in which
banks--some, anyway--are deigning to accept money only if customers are
willing to pay for the privilege. Nick Bunker, a policy analyst at the
Washington Center for Equitable Growth, was so dazzled by interest rates'
falling into negative territory that he headlined his analysis after a Doors
song, Break on Through (to the Other Side).
Now comes the interesting part. There are signs of an innovation war over
negative interest rates. There's a surge of creativity around ways to drive
interest rates deeper into negative territory, possibly by abolishing cash or
making it depreciable. And there's a countersurge around how to prevent rates
from going more deeply negative, by making cash even more central and useful
than it is now. As this new world takes shape, cash becomes pivotal.
The idea of abolishing or even constraining physical bank notes is
anathema to a lot of people. If there's one thing that militias and Tea
Partiers hate more than "fiat money" that's not backed by gold,
it's fiat money that exists only in electronic form, where it can be easily
tracked and controlled by the government. "The anonymity of paper money
is liberating," says Stephen Cecchetti, a professor at Brandeis
International Business School and former economic adviser to the Bank for
International Settlements in Basel, Switzerland. "The bottom line is,
you have to decide how you want to run your society."
As long as paper money is available as an alternative for customers who
want to withdraw their deposits, there's a limit to how low central banks can
push rates. At some point it becomes cost-effective to rent a warehouse for
your billions in cash and hire armed guards to protect it. We may be seeing
glimmerings of that in Switzerland, which has a 1,000 Swiss franc note
($1,040) that's useful for large transactions. The number of the big bills in
circulation usually peaks at yearend and then shrinks about 6 percent in the
first two months of the new year, but this year, with negative rates a
reality, the number instead rose 1 percent through February, according to
data released on April 21.
Bank notes, as an alternate storehouse of value, are a constraint on
central banks' power. "We view this constraint as undesirable,"
Citigroup Global Chief Economist Willem Buiter and a colleague, economist
Ebrahim Rahbari, wrote in an April 8 research piece. They laid out three ways
that central banks could foil cash hoarders: One, abolish paper money. Two,
tax paper money. Three, sever the link between paper money and central bank
reserves.
Abolishing paper money and forcing people to use electronic accounts could
free central banks to lower interest rates as much as they feel necessary
while crimping the underground economy, Buiter and Rahbari write: "In
our view, the net benefit to society from giving up the anonymity of currency
holdings is likely to be positive (including for tax compliance)." Taxing
cash, an idea that goes back to German economist Silvio Gesell in 1916, is
probably unworkable, the economists conclude: You'd have to stamp bills to
show tax had been paid on them. The third idea involves declaring that all
wages and prices are set in terms of the official reserve currency--and that
paper money is a depreciating asset, almost like a weak foreign currency.
That approach, the Citi economists write, "is both practical and likely
to be effective." Last year, Harvard University economist Kenneth Rogoff
wrote a paper favoring exploration of "a more proactive strategy for
phasing out the use of paper currency."
Pushing back against the cash-abolition camp is a group of people who want
to make cash more convenient, even for large transactions. Cecchetti and
co-author Kermit Schoenholtz, of New York University's Stern School of
Business, suggest a "cash reserve account" that would keep people
from having to pay for things by sending cash in armored trucks. During the
day, funds in the account would be payable just like money in a checking
account. But every night they'd be swept into cash held in a vault, sparing
the money from the negative interest rate that would apply to money in an
ordinary checking account. In a way, physical cash would take on a role
similar to that played by gold in an earlier era of banking.
The "War on
Cash" Migrates to Switzerland
(Acting Man's Pater Tenebrarum) - The war on cash is proliferating
globally. It appears that the private members of the world's banking cartels
are increasingly joining the fun, even if it means trampling on the rights of
their customers.
We just come across a small article in the local European press (courtesy
of Dan Popescu), in which a Swiss pension fund manager discusses his plight
with the SNB's bizarre negative interest rate policy. In Switzerland this
policy has long ago led to negative deposit rates at the commercial banks as
well. The difference to other jurisdictions is however that negative interest
rates have become so pronounced, that it is by now worth it to simply
withdraw one's cash and put it into an insured vault.
Having realized this, said pension fund manager, after calculating that he
would save at least 25,000 CHF per year on every CHF 10 m. deposit by putting
the cash into a vault, told his bank that he was about to make a rather big
withdrawal very soon. After all, as a pension fund manager he has a fiduciary
duty to his clients, and if he can save money based on a technicality, he has
to do it.
A Legally Murky Situation - but Collectivism Wins Out
What happened next is truly stunning. Surely everybody is aware that
Switzerland regularly makes it to the top three on the list of countries with
the highest degree of economic freedom. At the same time, it has a central
bank whose board members are wedded to Keynesian nostrums similar to those of
other central banks. This is no wonder, as nowadays, economists are trained
in an academic environment that is dripping with the most vicious statism
imaginable. As a result, withdrawing one's cash is evidently regarded as
"interference with the SNB's monetary policy goals".
One large Swiss bank recently responded to a pension fund's withdrawal
request with a letter stating: "We are sorry, that within the time
period specified, no solution corresponding to your expectations could be
found."
Although we all know that fractionally reserved banks literally don't have
the money their customers hold in demand deposits, the contract states clearly
that customers may withdraw their funds at any time on demand. The maturity
of sight deposits is precisely zero.
Some thoughts
·
A well-run economy operating without cash would require a
trustworthy government. That is, the people who know where we are and what
we're buying and selling 24/7 would have to be decent, competent and honest.
Otherwise we're giving near-absolute power to folks who might use it for
their own enrichment at our expense. Which is of course to state the
blindingly obvious. The fact that power both corrupts and attracts the
already corrupt means that the more power we hand the government, the
further we push it towards absolute evil. A cashless society would pretty
much guarantee a dictatorship in a single generation.
·
If a cashless society is a means to the end of total government
control of interest rates, i.e., the price of money, then the resulting
deeply-negative rates would distort the pricing signals that make capitalism
work. The system would devolve into a centrally-planned malinvestment-fest
resembling bigger, more chaotic versions of the past century's collectivist
experiments, all of which crashed and burned in short order.
·
An environment in which cash is illegal and interest rates are
negative would be both insanely good and catastrophically bad for gold. Good
because the removal of cash leaves only gold and silver as
historically-trusted private stores of value. Terrified capital would pour
into bullion, sending its relative price through the roof. But then of course
it would become an overt (rather than a covert) target of the same forces
that made cash illegal. When "the war on gold" begins, the world as
we knew it will have already ended.
