It’s entirely predictable that governments worldwide will do everything they can to discourage their citizens from using cash.
After all, cash is virtually untraceable. Cash transactions are inherently private. That makes it easy for governments to justify cracking down on cash transactions in the name of the War on Drugs, the War on Crime, the War on Terrorism, etc.
Governments and government apologists have a new ally in discouraging citizens from using cash: credit card companies. Last month, Andy Gerlt, a spokesman for Visa, said, "We're declaring a war on cash."
Visa’s War on Cash consists of incentives to 50 US merchants who agree to prohibit customers from paying for goods or services in cash. In the Visa “Cashless Challenge,” merchants who put together a winning plan to make their business cashless will be awarded $10,000 (presumably, not paid in banknotes with pictures of Ben Franklin on them). Visa plans to roll out the campaign in the UK and possibly other countries as well.
It’s easy to see how Visa and other credit card issuers would benefit from a cashless society. After all, they take a cut of every payment made through their system. Here at The Nestmann Group, for instance, we pay anywhere from 1.5% to 4% to credit card issuers, including Visa, when we process an electronic payment.
But the costs to everyone else could be monumental. A cashless society means your bank – and the US government – can freeze your account at will, leaving you destitute with just a few taps on a keyboard. Not to mention the threat from hackers. In a cashless society, a cyber-attack could instantly render you penniless.
And don’t forget: if your bank becomes insolvent, the money you deposit there isn’t your own. Your savings could become subject to the dreaded “bail-in,” as savers in Cypress discovered in 2013. The Cyprus bail-in model has now been rolled out worldwide.
A cashless society also makes it easier for central banks to “go negative” – to impose negative interest rates in an effort to stimulate economic growth. By combining a cashless world and negative interest rates, governments could effectively flush out any hidden or saved wealth. In this scenario, you can’t save money because negative interest rates mean you’re paying the bank. You can’t bury your money in your backyard since there’s now no such thing as cash.
In the last year, the momentum toward a cashless world has escalated. In the economies of the EU, less than 9% of the combined GDP represents cash transactions.
The most ambitious effort has been by the government of India. In November 2016, the Indian government made 86% of the country’s cash worthless at the stroke of a pen by withdrawing all 500- and 1000-rupee notes from circulation.
The transition was anything but smooth. Tens of millions of Indian citizens who didn’t have bank accounts found themselves unable to pay for daily necessities. Dozens of them died.
A similar initiative in the US would have a disastrous impact as well. As in India, the poorest and least educated citizens would be the most seriously affected. More than one-quarter of Americans with an income of less than $15,000 annually have no bank account. That’s hardly surprising since most banks prefer to deal with wealthier customers. Banks also have very little incentive to build branches in low-income neighborhoods.
Still, most Americans have bank accounts, so an end to cash wouldn’t result in instant calamity. But it would give banks and the government the power to pull the plug on your financial existence at the click of a mouse. Not to mention the possibility of negative interest rates and the prospect of having savings bailed-in.
The momentum toward a cashless society is accelerating. But will Americans passively accept the outright confiscation of their assets through negative interest rates?
I doubt it. There are, after all, alternative stores of value available. This is one reason the price of tangible assets like real estate has soared in recent years. Six years ago, a prospective buyer offered me $40,000 for a condo I own here in Phoenix. Today, according to Zillow, it’s worth more than five times as much.
Prices for art, classic cars, rare wines, numismatic coins, and other collectibles are also soaring. A painting by impressionist artist Paul Gauguin sold for nearly $300 million in a private sale in 2015. A 1962 Ferrari 250 GTO sold at auction for an astonishing $38.1 million in 2014.
Personally, I prefer more traditional stores of wealth like gold, silver, and real estate owned without a mortgage.
Of course, most people don’t have this kind of money to invest. And thus, I predict that as governments continue their crackdown on cash, barter will flourish, as it always does when money is scarce.
And of course, banning cash will only encourage the growth of crypto-currencies such as Bitcoin. Perhaps that’s why the price of Bitcoin has soared from less than $10/BTC to over $4,300/BTC since 2010.
The momentum suggests a cashless society is inevitable. Be certain you’re ready with your own Plan B when it arrives.
