The mumbling and bumbling continues. More and more establishment voices can be heard supporting the idea of a ban on physical cash. The supposed justifications are pathetic, and smack of desperation. But the end of cash, in certain currencies at least, may be in sight. Does it matter? And who are the likely winners and losers?
Back in the early 1990s I was a fresh-faced graduate trainee in London at a leading British investment bank. In those days there was a richer mix of people co-existing in the Darwinian world of the trading floors, or “glorified call centres” as we used to call them.
The salespeople were the slick schmoozers that knew how to hold a knife and fork correctly, choose wine, and massage egos on yachts moored in Monte Carlo (I’m not exaggerating).
The stock analysts were more introverted and “bookish” types. They had to know how to add up and use a computer.
And then there were the traders – the East End “barrow boys”. If they hadn’t been working in the City then they’d have been selling vegetables on a street market stall or driving a black cab.
What the barrow boys lacked in formal education they more than made up for with aggression and ready wit – often at the expense of their colleagues.
If the markets were quiet, and there wasn’t much to do, and the tabloids had already been read, the barrow boys used to get up to mischief to keep themselves entertained.
A favourite activity was a game called “wad”. It was simple. Someone stood up and shouted “wad”. The traders would reach into their trouser pockets and pull out huge rolls of 50 pound notes, a hangover from the habits of their street trading days. The guy with the biggest wad of notes was the winner. Much alcohol followed, albeit outside the office (but not necessarily after office hours).
Nowadays the barrow boy traders have already gone the way of the dodo. They were replaced by earnest finance PhDs and impenetrable computer algorithms by the early 2000s. If some people have their way then their wads of cash could also be heading for extinction.
There’s a growing hubbub about the supposed benefits of phasing out cash over time. The starting point would be for central banks to stop printing high denomination bills.
Mario Draghi, president of the European Central Bank, says he’s thinking about getting rid of the 500 euro note (worth US$546 at the time of writing). On the other side of the Atlantic, Harvard professor Larry Summers recently put his name to a piece in the Washington Post advocating the withdrawal of the 100 dollar bill (worth 91 euros). It’s title says it all: “It’s time to kill the $100 bill. It’s time to go after big money.”
Draghi and Summers both epitomise the establishment, which means they like to herd the masses. Draghi was at the World Bank, Goldman Sachs and the Bank of Italy before his current job putting sticking plasters on the eurozone. Summers was chief economist to the World Bank and the US finance minister (“Treasury Secretary”) before settling into the musty halls of elite academia.
So what’s in it for them and their government and banking pals? Why do they want to phase out cash?
The main reason cited in both cases is risible. It says that because large bills are used by criminals and terrorists that we’d be better off without them. Less cash supposedly means a harder life for the bad guys. I think they underestimate the bad guys.
Obviously this is a stupid argument that treats people with disdain. Criminals also use private cars, but I don’t hear Draghi asking for them to be banned, to be replaced by a public transport monopoly. Terrorists also use guns, but I don’t hear Summers insisting that weapons shouldn’t be sold to private individuals.
This kind of move against cash is just the thin end of the wedge. Actually it’s the thick end, and the thin end will come later.
That’s because, when it comes to cash in circulation, most of the value is held in higher denomination notes, even if most of the transaction volume is with smaller bills. Once they’ve got us used to the idea of fewer big bills, no doubt they would soon come after the smaller denominations as well.
Obviously the real motives have very little to do with curtailing criminal activity. Even if they were it won’t work. The criminals will just move to alternatives such as notes of other currencies, gold and silver coins, even crypto currencies such as bitcoin (see here for more).
The real reason for getting rid of cash is extra government control of the general populace. In particular it’s the ability to force us to keep our savings and transactions within the banking system.
The real reason for getting rid of cash is extra government control of the general populace. In particular it’s the ability to force us to keep our savings and transactions within the banking system. If they achieve that then they have carte blanche to steal any money we leave parked in their currency.
Obviously it would means every electronic transaction could be tracked and monitored, for tax purposes if nothing else. But that’s nothing new and could have been done years ago. And in any case tax evasion is very much a minority sport in most developed countries.
The bigger driver, the real motive, is that removing cash allows even more experimental monetary policy. In particular it opens the door for deeply negative interest rate policy (“NIRP”). That could mean banks charging you interest on your deposits.
Physical cash pays zero interest, but even that’s better than losing, say, 3% a year in a bank deposit. As long as folding money still exists then NIRP is restrained. It’s the ability to switch out of deposits and into notes in future that protects us from its negative consequences.
Only a small portion of the money supply is in the form of cash. In the case of dollars there are about US$1.4 trillion worth of dollar bills in the world, compared with US$12.5 trillion of M2 money stock in the USA. M2 is a measure of money supply made up mainly of bank deposits.
A 1996 paper by the US Federal reserve estimated that 60% of dollar notes by value circulated outside the issuing country’s borders. If that percentage still holds it would leave around US$0.6 trillion within US borders, meaning the US money stock is about 21 times as big as physical cash in circulation.
The Bank of England reckons that British transaction value using debit cards went up by a factor of five between 2000 and 2014, whereas cash value stayed flat. Debit cards are the kind that take money straight from your bank account.
In 2014 the value of debit card transactions in Britain were over twice as much as cash transactions and the gap widens each year. There is a similar trend across the developed world. Paper money is in slow, relative decline in transactions.
Given the huge disparity between total money supply and physical cash, and paper’s falling share of transactions, it’s tempting to think there’s no big deal if cash is phased out. Especially for the big bills which are mostly used for saving (or “hoarding” as the establishment likes to call it).
Most people, most of the time – at least in developed countries – could get by without cash. We have bank cards and new electronic advances like Apple Pay, so why bother with paper notes unless you’ve got something to hide?
The crucial point here is that the mere existence of cash is a control on the power of banks and government. If there is no cash alternative then there is nothing to stop us being charged to have bank deposits. Whereas, if cash still exists but bank deposits pay negative interest, we can always make the switch.
That switch would be impractical on a large scale. Central banks don’t have the facilities to print the extra trillions of physical paper. Commercial banks don’t want to handle and distribute it. Governments don’t want to lose the transparency of electronic transaction records, which they can use to levy taxes on income and wealth.
Also we shouldn’t forget that bank “deposits” are really loans to a bank. When you “pay money into” your deposit account, really you’re just lending money to the bank. They don’t keep a box of cash with your name on it. It’s just an electronic entry in their accounting ledgers.
If huge numbers of customers decide to withdraw their deposits and convert to physical cash then there’s a massive problem. Bank funding dries up. It would be a system-wide bank run.
This is what could happen in a NIRP world with notes. So bankers and governments are increasingly talking about phasing out paper. In fact they’d be the winners even if we never get to negative deposit rates. They’d have more control, more oversight, and lower costs.
And the losers? That would be mainly you, the ordinary honest citizen who’s trying to save in his own country’s currency. The criminals are just a side show.
NIRP aside, if you there’s another major banking crisis there would be no way out of bank deposits. Your precious savings will be locked in the banking system and a sitting duck for confiscation.
This happened in Argentina in 2001 when US dollar deposits were converted to Argentine pesos and sharply devalued, and in Cyprus in 2013 when 40% of large deposits were just seized outright (see here). Smart savers saw the writing on the wall and withdrew cash in time. Without cash that exit will be closed.
You may not use much cash these days in your day to day transactions. But if you ever lose the ability to convert your deposits to cash then the government and bankers will have free rein to steal your money, via negative interest rates on those deposits.
For now the momentum is building for a cash phase out. I have some ideas on how you can prevent yourself from being one of the losers and even profit from this trend. More to come…
Stay tuned OfWealthers,