Central Banks Would Love to Abolish Cash

The war on cash is a growing collection of laws and banking regulations that discourage or prevent citizens from doing business in physical currency. Last month, we reported on new laws in France that will limit the size of cash transactions. On a smaller scale, the state of Louisiana has recently made it illegal to use cash when transacting secondhand goods. For years now, American banks have been required to file “Suspicious Activity Reports” when cash transactions or withdrawals of more than $5,000 occur.

According to lawmakers, these regulations ostensibly ensure that business transactions are properly reported and taxed. They don’t want any potential tax revenue slipping through the cracks. They tell the public that these laws will help to prevent white collar crime, organized crime, and terrorism.

However, the privacy of financial transactions is simply the tip of the iceberg when it comes to the war on cash. Grabbing more tax revenue may be the reason smaller entities like Louisiana are enacting such laws, but on a grander scale the war on cash leads back to the problems of central banking.

In order to more effectively manipulate the economy, central banks would prefer to not just limit your use of cash, but to abolish it entirely.

Willem Buiter, Chief Economist at Citigroup, recently published a piece explaining the central bank rationale for abolishing cash. Central bankers today are fixated on stimulating economies by artificially suppressing interest rates. The Federal Reserve has effectively set zero-percent interest rates for years, while The Swiss National Bank instituted negative rates earlier this year. In fact, the SNB just expanded the number of institutions required to charge negative rates.

The idea is that by charging depositors to store money, depositors are more likely to not leave that money sitting in an account doing nothing. Bankers hope that savings will instead be used to borrow more money for investments, thereby stimulating business activity and the economy.

The problem is that negative interest rates only discourages people who aren’t investing from keeping their money in banks. All the money that isn’t recorded and kept in the banking system effectively prevents banks from dropping interest rates too low. That’s why Buiter thinks it would be simpler to just get rid of cash entirely.

An added benefit of a cashless society (at least for the financial elite) would be to prevent bank runs. If a financial crisis spooked the populace, citizens would simply be incapable of pulling their money out of the system. Even irresponsible financial institutions would therefore be protected from a bank run that could destroy their business.

This might sound outlandish, but 78% of the value of United States currency is in physical, $100 bills. That’s a lot of money that banks cannot directly manipulate and control.

Banks are slowly creeping in the direction of eliminating cash payments. JPMorgan Chase just told large depositors that they would be charged a “balance sheet utilization fee” for deposits over a certain amount. Of course, depositors are therefore pulling their funds from the bank. In the Cleveland area, Chase is countering this trend by no longer allowing cash payment towards credit cards, mortgages, equity lines, and auto loans.

One of the most popular reasons for owning physical gold and silver is the ability to keep your savings safely in your possession in a liquid form that the government cannot manipulate. With these latest rumblings of a cashless society, investors have even more reason to keep some of their wealth in physical bullion. If cash were abolished on a large scale, your savings would dwindle not just with inflation, but also with the negative interest rates banks might charge on large deposits.

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