Don’t Be a Casualty in the “War on Cash”

This article was submitted by Joel Bauman, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.

In the last few decades, we have seen an international trend towards a “cashless world.” Physical currency is becoming relatively scarce and the world’s money supply is made up of almost entirely electronic funds. Governments and banks are waging a war on cash and you don’t want to become a victim.

According to the Federal Reserve, in July of 2013, the total amount of physical currency in the world equaled $1.2 trillion, most of it held outside the United States. This accounted for a mere 7.7% of the total $15.5 trillion money supply. (Cash, checking/savings accounts, money market accounts, stocks and bonds) The percentage of physical cash in relation to electronic funds has been steadily decreasing over the last 50 years.

Interestingly, even with the diminishing purchasing power of the US dollar, the face value of Federal Reserve notes has also been decreasing. Today the highest denomination produced by the Federal Reserve is the one hundred dollar note. US currency used to include denominations of $500, $1,000, $5,000, and even $10,000. In 1969, the Federal Reserve began taking these higher denominations out of circulation. Recently, a former US Treasury Secretary floated the idea of doing away with the $100 bill as well.

This active elimination of cash by the government is supposedly being done in the name of security. The government claims electronic cash is preferable because it deters terrorism, money laundering, and counterfeiting. While this sounds rosy, I would argue the primary agenda has little to do with security, but is focused instead on keeping wealth within the financial system. With fewer exchanges involving physical cash and more electronic transfers, the government can easily observe and tax financial transactions. A cashless system also allows central planners to more effectively utilize negative interest rates to “encourage” people to spend instead of save.

While the elimination of cash benefits governments with more efficient taxation and central planning, banks favor it because of the increase in fees and regulatory power a cashless society offers.  Less physical currency also means larger bank deposits. The increase in banks deposits correlates with an in increase in the money supply. This is true because banks are only required to hold a fraction of the deposits when they lend out and invest deposits, i.e. fraction reserve banking.

When you boil it down, the cashless society ultimately means you have less control over your own wealth.

In the coming years, I believe we will see increasing pressure by governments and large banks to discourage liquid wealth held outside the banking system. Physical cash and precious metals will likely become harder to acquire in the future. There may even come a time when coins and Federal Reserve notes are no longer considered legal tender and the world moves into a completely cashless society. It was Citibank’s chief economist, Willem Buiter, who advocated for the removal of all physical cash in circulation.

The good news is unlike paper Federal Reserve notes, the intrinsic value of precious metals can never truly be condemned by any government. Gold’s value and its use as money was determined by the free market, not the government. In fact, the market has selected gold and silver as money for thousands of years.

As we continue to progress further into a cashless society it’s wise to move electronic dollars into physical gold and silver. It’s one sure way to protect yourself and not become a casualty in the “war on cash.”

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