Advances in technology are changing the way the world transacts making the physical dollar almost extinct.
The move to eliminate cash is global with some government responses being quite extreme. At midnight on November 8, 2016, the government of India announced a ban on 500 and 1,000 rupee notes with no warning. Each represents the equivalent of about $6 and $12 respectively. The ban was imposed in an effort to stomp out the cash economy where cash transactions go unreported and untaxed.
Subsequently, there was a run on gold. Reports came in that Indian citizens were willing to pay in excess of $2,000 (USD) for an ounce of gold which was more than a 50% premium over the current price of gold.
On November 24, 2016, an International Business Times report stated that Citibank’s Australian branches were going cashless along with about 900 of Sweden’s 1,600 branches. In other parts of Europe, several countries have banned transactions over certain amounts and ATMs are also disappearing from the banking landscape.
In the U.S., the war against cash is perhaps more covert. Yes, domestic banks are restricting the use of cash to make loan payments, prohibiting the storage of cash in certain safety deposit boxes and the withdrawal of cash from bank accounts is becoming more difficult. Just try giving a cashier $100 for a $25 purchase and see how many stores don’t have change.
Reasons to Ban Cash
It has long been argued that cash is a relic. It’s dangerous to carry large amounts; counterfeiting is still a threat; cash enables a myriad of illegal transactions especially when it comes to drugs and gang violence; and, to the extent one can earn cash and bypass tax laws - that hurts everyone.
Besides, the digital alternative is so much more convenient and efficient. Scan your wallet over the Starbuck’s payment device or transfer money to your college kid with two clicks of a mouse. These are the arguments in favor of eliminating cash and are compelling. Nonetheless, the dollar bills in your pocket are supposed to be legal tender for all debts public and private. A shift in sentiment is relegating the role of cash as obsolete without discussing some of the consequences.
Negative Consequences of Banning Cash
- Negative Interest Rates – Without cash, there would be no way to protect yourself against negative interest rates where your money diminishes over time because it costs you to keep it in the financial system. Today, it is estimated that near one third of all bonds held globally, pay negative returns. That is to say: it may cost $101 to purchase a bond that matures at $100 face value.
- The Power to Tax – Today politicians talk about the tax return filed on a post card. However, if there were no cash and all you earn and spend is digitally recorded, the potential exists for the IRS to simply take taxes from an account on an as-needed basis. Does this feel like a slippery slope?
- Bail-Ins – New laws, written to protect banks against failure, now allow failed banks to confiscate depositor funds to facilitate a bail-in. Holding cash in hand could insulate one from having to personally bailout their own bank.
- Hackability – Internet banking and digital fund transfers have given birth to a new kind of robber – The Hacker! Certainly the elimination of cash does not ensure the elimination of theft. While technology tries to keep up with the bad guys, they always seem to be one step ahead.
- Electronic System Failures – Occasionally, cell phones drop calls, satellite TV goes blank and cable internet stops working. When your wealth is converted to a collection of bits and bytes, how safe is it really? Will your money be accessible when systems are down?
- Privacy – As the argument goes, if you have nothing to hide why do you need privacy? Spending habits will create a detailed digital footprint and privacy will be compromised. Does it matter that your whereabouts and your activities are known?
I want part of my wealth in tangible form, such as gold. You can’t hack gold, you can’t digitally delete or erase gold, and you can’t infect it with a computer virus, because it’s physical.James Rickard
Why would you want to store something whose value can disappear or be reduced in a blink of an eye? Think about it, how much of your investments are reflected digitally. These are just accounting entries where you’re the unsecured creditor. Holding an asset with physical value is common sense and should be part of your investment diversification.