First published in the March 2016 edition of The Gold Standard
Cash dollars have more value than bank account dollars. The many negatives of holding the latter include not only loss of privacy and anonymity, but also a variety of taxes, bank fees, accounting fees, pension considerations, credit card fraud, account hacking and bank insolvency.
Most people, to one degree or another, will value bank dollars less than cash in the hand. Ask a salary person if they would like to earn some cash and see their eyes light up. The usual 10 – 20{781366457d9c05ca9285c5eb3e04ac75968647e24436986cab65f74e6f4b3aad} discount for cash by tradesmen gives a clue as to the approximate difference in market value.
This, or some similar percentage, would be the instant devaluation of the currency in the event of a ban on cash – as measured by Gold of course.
Privacy is the embodiment of many Gold holders. Though many Gold bugs would seize their ‘profits’ and exit the game, most others would be reluctant to exchange their Gold for depreciating bank digits. For many the transaction would come with uncomfortable tax and legal liabilities.
There are many countries where banning paper cash would be politically unacceptable. It is not just the major economies of Germany and Japan where paper cash is still king. What about Turkey, Eastern Europe, much of South and Central America, India, Thailand, Vietnam and Indonesia etc.? The abolition of cash would cause severe hardships in these economies. In some of these places, many people don’t have bank accounts, nor do they have any intention of opening one. Many villages don’t even have banks.
Banning cash could only happen in the ‘advanced’ economies. Even there it could become a damaging election issue. The established political parties are wary of giving voters even more reason to be angry. The new populist parties, particularly in the Eurozone, don’t carry the baggage of Electile Dysfunction – having been often elected, but never performing.
A cash ban would create a demand for the currencies of some of the countries where sound (ish) paper was still circulating. During the Weimar hyperinflation, the currencies of other countries (along with Gold and silver) commonly circulated in Germany.
A further impediment to a cash ban is that a large part of all western economies consists of cash exchanges. Participants in the black economy would be left with three choices: 1/ Accept bank digits, 2/ go out of business, or 3/ find another cash. The drug trade in NY City alone is estimated at around 800 million dollars a year, with the global trade at 320 billion a year “If the drug trade were a country, it would have the 19th largest economy in the world.” As option 1 and 2 are out of the question for those engaged in criminal activities, logic suggests that they would choose the third option. As the drug trade is globalised, there can be little doubt that they would choose globalised money – Gold and silver. This is predicated on the assumption that no country would be foolish enough to agree a cash ban that did not include the US dollar.
That is a lot of circulating Gold and silver.
The IMF estimates the size of the black economy (not just drugs) as 35 – 44{781366457d9c05ca9285c5eb3e04ac75968647e24436986cab65f74e6f4b3aad} in developing economies, 21 – 30{781366457d9c05ca9285c5eb3e04ac75968647e24436986cab65f74e6f4b3aad} in transition economies and 14 – 16{781366457d9c05ca9285c5eb3e04ac75968647e24436986cab65f74e6f4b3aad} in the OECD. It seems likely that some proportion of the non-drug black economy would also be conducted in Gold and silver.
If governments ban paper cash, they will simultaneously ban transacting in Gold or silver. It goes without saying that it won’t work. The present cash business model already carries heavy penalties and that clearly hasn’t worked. Goods would assume three prices – the first in Gold or silver, the second in foreign paper currencies and the third in bank digits. As all sellers would prefer Gold or silver, prices in bank digits and to a lesser degree foreign currencies would begin to soar.
It would be nigh on impossible for governments and central banks to coordinate a worldwide ban on cash. They will not be able to reach agreement, either practically or politically. To do it separately, or even in blocks of nations, would precipitate, at the very least, a severe degradation in the value of their currencies.
These are dangerous and desperate times however, and there is another angle to the proposed ban on cash.
Governments would salivate at the prospect of being able to have access to all digits at all times – to be able to tax at source. It would be a tax on all digital wealth accumulated, created and transacted. It could be sold, albeit disingenuously and cynically, as a tax on ‘cash hoarders’. It would be a strong inducement for people to spend their digits immediately – a central banker’s dream. A further inducement to spend would be the continuous lessening of the digits courtesy of negative interest rates. Another lash across people’s back would be the certainty that the new bank monopoly on all cash storage and transactions would see banks raise fees. Bankers would also be salivating.
It could be anticipated that, at this point, activity in the black economy would substantially increase.
There can be little doubt that any cash ban would speed the arrival of Permanent Backwardation (a buddy of the Grim Reaper). In this scenario, Gold would no longer be available for any amount of digital currency. People would become acquainted with the idea that currency only has validity in proportion to the amount of Gold that it can be exchanged for. Currencies are not backed by the ‘full faith and credit of blah, blah’- their value is derived from the certainty that at some amount they can be exchanged for Gold. When that backing completely fails, then so does the currency – completely.
A cash ban? Should it happen, it will be a disaster for everyone concerned, including governments and banks. The seeming potential to gouge even more tax will make it hard for governments to resist though.
Don’t bet on a cash ban, but don’t ignore the possibility.
What you can bank on is that Gold and silver will return as circulating money, one way or another.