Economists and governments have long had a very low opinion of the cash you carry in your wallet or stash in a safe place for a rainy day.
Economists hate cash because people can’t be forced to spend it. That means in an economic downturn, consumers who hoard cash make it more difficult for governments to stimulate the economy by lowering interest rates.
In his seminal 1936 article, The General Theory of Employment, Money, and Interest, economist John Maynard Keynes lamented consumers’ habit of hoarding cash during hard times. He endorsed the idea of a “carry tax” so that, in effect, hoarded cash would have a tax deducted from its face value.
Governments hate cash for the same reason Keynes did. And they have additional incentives to crack down on it: to ensure that cash transactions are taxed, and to help trace the proceeds of criminal activity.
Thus, in 1945, as World War II was drawing to a close, the US Treasury Department imposed a rule which required financial institutions to file monthly reports of cash transactions of $1,000 or more, in denominations of $50 or higher, or transactions involving $10,000 or more, in any denomination.
Over time, the reporting rules were tightened. Then in 1969, President Nixon withdrew the $500 bill, the $1,000 bill, and the $10,000 bill from circulation due to concerns that criminals would use these denominations for illegal activity.
The next year, in 1970, Congress passed a wide-ranging statute called the Bank Secrecy Act. Among other provisions, this law required financial institutions to report to the Treasury any cash deposits or withdrawals from customer accounts that exceeded $5,000. The $5,000 threshold was increased to $10,000 in 1972, where it remains today.
But Americans continued to hoard cash and use it in everyday transactions. This trend greatly frustrated those who viewed cash as an existential threat to the state’s power over its citizens. Thus, in 1978, Congress passed a law authorizing the civil forfeiture of the proceeds of narcotics transactions.
In a civil forfeiture, the government doesn’t need to find you guilty of any crime to seize your property. It merely needs to establish probable cause that your property was somehow used illegally. It is then up to you to prove the contrary. This is especially problematic in the case of cash transactions which were already considered quasi-criminal; especially those over $10,000.
But despite this draconian law, Americans continued to stubbornly use and hoard cash. So in 1984, Congress enacted a deficit reduction law which enlisted ordinary businesses into the War on Cash. They were now obligated to follow the same cash reporting rules as financial institutions. And to ensure businesses got the message, federal prosecutors brought a series of cases against car dealerships and other enterprises that accepted cash, alleging criminal violations of this law.
That law also wasn’t especially effective in persuading Americans to part with cash. So in 1990, former Treasury Secretary Donald Regan recommended that all $20, $50 and $100 bills be recalled and replaced with a new currency. The changeover would occur over a 10-day period and the old money would no longer be legal tender after that time. Regan also recommended that anyone turning in more than $1,000 in old bills be forced to prove that they had paid all taxes on the cash and that it had not been generated through illegal activity. Otherwise, the cash would be confiscated.
Nothing came out of Regan’s proposal. But in 1999, Marvin Goodfriend, a senior vice president at the Federal Reserve Bank of Richmond, revived Keynes’ proposal for a carry tax on cash. Goodfriend suggested that all US bills contain a magnetic strip containing information about the last time the bill entered the banking system along with an “expiration date.” When the bill was deposited in a bank, if the expiration date had passed, a tax would be imposed on the depositor.
This proposal was never adopted, but in the meantime, a growing number of countries imposed their own cash controls. For instance, in 2005, rules came into effect requiring individuals transporting more than €10,000 of cash in or out of the European Union to make a declaration to customs authorities.
Then in 2008, the global financial crisis began. Global central banks responded by cutting interest rates to zero – and in some cases, below zero. In December 2008, the Federal Reserve reduced interest rates to a range between 0% and 0.25%. The Swedish Central Bank was the first to go negative when it imposed a -0.25% rate on its “deposit interest rate” in 2009. The much larger European Central Bank (ECB), which sets monetary policy throughout the eurozone, followed suit in 2014 when it imposed a negative rate of -0.1%. Over the next five years, it continued to cut interest rates, all the way to -0.5% in 2019. And in 2016, the Japanese Central Bank began imposing a -0.1% interest rate on cash held by some lenders in its accounts.
Naturally, in response to zero or even negative interest rates on bank deposits, people began converting their bank deposits into cash. The Wall Street Journal reported that sales of safes rose 250% in Japan.
Nor should it come as a surprise that when bank depositors attempted to defend themselves against negative rates by withdrawing cash, more coercive measures were proposed. Harvard Professor Kenneth Rogoff warned of the dangers of paper currency in reference to negative interest rates and suggested the recall of $20, $50 and $100 bills to enforce them.
No cash recall occurred in the United States, but in November 2016, the Indian government made a shock announcement and recalled the country’s largest-denomination bills – the 500 rupee note (then worth about US$7.50) and the 1,000 rupee note. If you had these bills in your possession, you had until December 30 to take them to a bank and either deposit them in an account or exchange them for smaller notes or a newly issued 2,000 rupee note. Those exchanging more than 250,000 rupees had to prove how they got them and that they’d paid tax on the income. Without a satisfactory explanation, they faced a penalty of 200% of the supposedly unpaid tax.
In the meantime, most EU member nations also tightened cash restrictions. For instance, in Italy and Spain, you’re only allowed to make cash transactions up to €1,000. And last December, the EU proposed banning cash transactions over €10,000.
The United Kingdom also has significant cash restrictions in effect. We found one story in which a British shopper tried to exchange a £20 note for pound coins at a post office. He was informed that that wasn’t permitted due to unspecified money laundering regulations. The only way he could get change would be to withdraw the cash from his own bank account.
Finally, in Australia, the government has banned all cash transactions over A$10,000. The Australian Taxation Office has issued a warning to cash-only businesses, telling them that they will face intensified audits unless they begin permitting transactions with cards or other digital payment methods. And one of the country’s largest financial institutions, Macquarie Bank plans to eliminate all cash, check and phone payment services by the end of 2024.
We suspect the “end game” with respect to the War on Cash is to replace cash with a digital currency – the central bank digital currency (CBDC) we’ve long warned of. We base our conclusion on a research paper published in 2022 by the European Central Bank, in which it asserted that cash was “not fit” for a digital economy. In the United States, the Fed has taken the first step towards a CBDC through its FedNow initiative, as we discussed in this article.
Of course, your friendly central banker will never tell you it wants to abolish cash so that you have no alternative but to keep all your money in CBDC. In either case, your deposits can be confiscated, bailed in, frozen, deemed expired, or geographically restricted at the click of a mouse. Instead, the motivations are made to sound loftier – to “fight crime” and “facilitate tax compliance.”
The situation in the EU, United Kingdom, and Australia appears dismal for those who want to hold cash “just in case.” But for Americans, the news isn’t all bad. When the Fed introduced FedNow, its precursor to a CBDC, earlier this year, there was a huge outcry against it. Presidential candidate Ron DeSantis went as far as proclaiming, “cash is independence” and that he would abolish FedNow on the first day of his administration.
We’ve long advocated that one of the first things you should do to prepare yourself for a financial crisis in which bank deposits are bailed in or ATMs stop working is to store cash securely in your home. Keep it in a fire-resistant safe, where it’s protected from intruders.
Today wouldn’t be too soon to begin.