Negative Interest Rates And The War On Cash (Part 2)

<<Read Part 1: Negative Interest Rates And The War On Cash

This is part 2 of a 4-part series by Nicole Foss entitled “Negative Interest Rates and the War on Cash”.

by Nicole Foss 

Closing the Escape Routes

History teaches us that central authorities dislike escape routes, at least for the majority, and are therefore prone to closing them, so that control of a limited money supply can remain in the hands of the very few. In the 1930s, gold was the escape route, so gold was confiscated. As Alan Greenspan wrote in 1966:

In the absence of the gold standard, there is no way to protect savings from confiscation through monetary inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods.

The existence of escape routes for capital preservation undermines the viability of the banking system, which is already over-extended, over-leveraged and extremely fragile. This time cash serves that role:

Ironically, though the paper money standard that replaced the gold standard was originally meant to empower governments, it now seems that paper money is perceived as an obstacle to unlimited government power….While paper money isn’t as big impediment to government power as the gold standard was, it is nevertheless an impediment compared to a society with only electronic money. Because of this, the more ardent statists favor the abolition of paper money and a monetary system with only electronic money and electronic payments.

We can therefore expect cash to be increasingly disparaged in order to justify its intended elimination:

Every day, a situation that requires the use of physical cash, feels more and more like an anachronism. It’s like having to listen to music on a CD. John Maynard Keynes famously referred to gold (well, the gold standard specifically) as a “barbarous relic.” Well the new barbarous relic is physical cash. Like gold, cash is physical money. Like gold, cash is still fetishized. And like gold, cash is a costly drain on the economy. A study done at Tufts in 2013 estimated that cash costs the economy $200 billion. Their study included the nugget that consumers spend, on average, 28 minutes per month just traveling to the point where they obtain cash (ATM, etc.). But this is just first-order problem with cash. The real problem, which economists are starting to recognize, is that paper cash is an impediment to effective monetary policy, and therefore economic growth.

Holding cash is not risk free, but cash is nevertheless king in a period of deflation:

Conventional wisdom is that interest rates earned on investments are never less than zero because investors could alternatively hold currency. Yet currency is not costless to hold: It is subject to theft and physical destruction, is expensive to safeguard in large amounts, is difficult to use for large and remote transactions, and, in large quantities, may be monitored by governments.

The acknowledged risks of holding cash are understood and can be managed personally, whereas the substantial risk associated with a systemic banking crisis are entirely outside the control of ordinary depositors. The bank bail-in (rescuing the bank with the depositors’ funds) in Cyprus in early 2013 was a warning sign, to those who were paying attention, that holding money in a bank is not necessarily safe. The capital controls put in place in other locations, for instance Greece, also underline that cash in a bank may not be accessible when needed.

The majority of the developed world either already has, or is introducing, legislation to require depositor bail-ins in the event of bank failures, rather than taxpayer bailouts, in preparation for many more Cyprus-type events, but on a very much larger scale. People are waking up to the fact that a bank balance is not considered their money, but is actually an unsecured loan to the bank, which the bank may or may not repay, depending on its own circumstances.:

Your checking account balance is denominated in dollars, but it does not consist of actual dollars. It represents a promise by a private company (your bank) to pay dollars upon demand. If you write a check, your bank may or may not be able to honor that promise. The poor souls who kept their euros in the form of large balances in Cyprus banks have just learned this lesson the hard way. If they had been holding their euros in the form of currency, they would have not lost their wealth.

Even in relatively untroubled countries, like the UK, it is becoming more difficult to access physical cash in a bank account or to use it for larger purchases. Notice of intent to withdraw may be required, and withdrawal limits may be imposed ‘for your own protection’. Reasonsfor the withdrawal may be required, ostensibly to combat money laundering and the black economy:

It’s one thing to be required by law to ask bank customers or parties in a cash transaction to explain where their money came from; it’s quite another to ask them how they intend to use the money they wish to withdraw from their own bank accounts. As one Mr Cotton, a HSBC customer, complained to the BBC’s Money Box programme: “I’ve been banking in that bank for 28 years. They all know me in there. You shouldn’t have to explain to your bank why you want that money. It’s not theirs, it’s yours.”

In France, in the aftermath of terrorist attacks there, several anti-cash measures were passed, restricting the use of cash once obtained:

French Finance Minister Michel Sapin brazenly stated that it was necessary to “fight against the use of cash and anonymity in the French economy.” He then announced extreme and despotic measures to further restrict the use of cash by French residents and to spy on and pry into their financial affairs.

These measures…..include prohibiting French residents from making cash payments of more than 1,000 euros, down from the current limit of 3,000 euros….The threshold below which a French resident is free to convert euros into other currencies without having to show an identity card will be slashed from the current level of 8,000 euros to 1,000 euros. In addition any cash deposit or withdrawal of more than 10,000 euros during a single month will be reported to the French anti-fraud and money laundering agency Tracfin.

Tourists in France may also be caught in the net:

France passed another new Draconian law; from the summer of 2015, it will now impose cash requirements dramatically trying to eliminate cash by force. French citizens and tourists will only be allowed a limited amount of physical money. They have financial police searching people on trains just passing through France to see if they are transporting cash, which they will now seize.

This is essentially the Shock Doctrine in action. Central authorities rarely pass up an opportunity to use a crisis to add to their repertoire of repressive laws and practices.

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Gary Anderson 4 years ago Contributor's comment

This of course, is a brilliantly written article that infuriates me. The statists want complete control. They are not yet in the majority, but we are heading their direction. This article is a must read that should be shared among the young people of this nation.