Joe Salerno: The War on Cash is the attempt by governments to phase cash out of their economies. Governments hate cash because they hate the financial privacy cash makes possible. And they prefer that you keep your money in a bank to help prop up an unsound fractional reserve banking system.
Nick: How did you get interested in this topic?
Joe: I noticed that every time there was a war on something—a war on crime, a war on drugs, a war on terror and so forth—the more the government encroached on financial privacy. The US government has long been waging a hidden war on cash.
One symptom of the war is that the largest denomination of US currency is the $100 note. US currency used to be issued in denominations running up to $10,000 (including also $500; $1,000; $5,000 notes). The US government stopped printing large denomination notes in 1945 and officially discontinued their issuance in 1969, when the Fed began removing them from circulation.
Since then, the largest currency note available has a face value of $100. But since 1969, the inflationary monetary policy of the Fed has caused the US dollar to depreciate by over 80%, so that a $100 note today has less purchasing power than a $20 bill in 1969.
So in addition to lowering the nominal size of the largest bill, they also reduced the bill’s purchasing power through inflation.
Despite this enormous depreciation, the Federal Reserve has steadfastly refused to issue notes of larger denomination. This has made large cash transactions extremely inconvenient and has forced the American public to make much greater use than is optimal of electronic-payment methods. Of course, this is precisely the intent of the US government.
Nick: Looking around, what are the latest examples of the War on Cash?
Joe: One right here in the United States occurred in 2011. It flew under the radar for a while. The State of Louisiana banned “secondhand dealers” from making more than one cash transaction per week. The term has a broad definition and includes Goodwill stores, specialty stores that sell collectibles like baseball cards, flea markets, garage sales and so on. Anyone deemed a “secondhand dealer” is forbidden to accept cash as payment. They are allowed to take only electronic means of payment or a check, and they must collect the name and other information about each customer and send it to the local police department electronically every day.
Nick: What about Europe?
Joe: In France recently, the limit on cash transactions was lowered from €3,000 to €1,000. The reason given was the attacks on Charlie Hebdo. It turns out that those attacks were financed in part by cash. Well, what a big shock that criminals use cash to finance their operations. They also use, of course, public sidewalks and automobiles, they buy clothing and so on. So this whole thing is ridiculous. It’s just a way of obscuring the government’s true goal, which is to get rid of financial privacy. Governments don’t really think that by lowering the limit of legally allowable cash payments that it’s somehow going to cut down on terrorist attacks. That’s just the narrative we’re given.
Nick: What is the mindset of someone who would advocate the elimination of cash?
Joe: Let me give you an example. Recently Willem Buiter—a prominent economist for Citibank—came out with a proposal to abolish cash. The reason is to enable the Fed to push interest rates into negative territory. He suggested that we could have avoided a lot of the problems with the financial crisis if the Fed could have set the interest rate at negative 6%.
But of course the availability of hand-to-hand currency would get in the way of that plan. People would say “I’m not going to put my money in the bank and have them take 6% every year.” They would avoid the bite of negative interest rates simply by holding hundred-dollar bills.
This really shocked me, that a prominent economist would make a case for abolishing cash, so that the central bank could set interest rates at a negative level. This is really crazy thinking, but it’s their mindset. It’s nuts.
Nick: Harvard economist Kenneth Rogoff made a similar argument. Did you hear about that?
Joe: Yes, I did. In fact, Buiter took his cue from Rogoff. But there are a number of hyper-Keynesian economists who want to remove all barriers to negative interest rates, so that you’ll hurry up and spend whatever cash you have. But the only way they can do that is to corral everyone’s money in to the banking system.
It’s absurd, and they’ve gone way beyond Keynes with this craziness.
Nick: It reminds me of how Paul Krugman advocated for faking a space alien invasion as an excuse for the government to waste money on countering it. Or how he later supported minting a trillion-dollar coin. The real scary part is that he—and his juvenile solutions—are taken seriously by many people. Krugman, Buiter, Rogoff and their ilk have the government’s ear, they are presented respectfully by the mainstream media and are given Nobel prizes in economics. How do people not see what they are advocating, like eliminating cash, as transparently totalitarian?
Joe: I think that harkens back to the progressive era, from 1900 or so to the end of World War I. Government-employed experts supposedly were disinterested and dispassionate and would apply their knowledge and skills to do what was best for society. They would be the technocrats.
That’s how they pulled the wool over the American people’s eyes, by saying, well, you know, we are fixing the economy’s problems. This has nothing to do with politics. This has nothing to do with totalitarianism. We are trying to make the economy better for you and for everyone else.
That was just a bunch of nonsense, and it still is. People who believe it are still living in the 1930s, always worried about deflation, rather than worrying about the real problem, which is, of course, the Fed’s monopoly control of money and the inflation the Fed promotes.
Nick: What is the response of Austrian economists to this way of thinking?
Joe: Fortunately, the free market provides the prospect of an escape from the fiscal police state that seeks to stamp out the use of cash through either depreciation of central-bank-issued currency combined with unchanged currency denominations or direct legal limitation on the size of cash transactions. As Carl Menger, the founder of the Austrian School of economics, explained over 140 years ago, money emerges not by government decree but through a market process driven by the actions of individuals who are continually seeking a means to accomplish their goals through exchange most efficiently.
Every so often history offers up another example that illustrates Menger’s point. The use of sheep, bottled water, and cigarettes as media of exchange in Iraqi rural villages after the US invasion and collapse of the dinar is one recent example. Another example was Argentina after the collapse of the peso, when grain contracts priced in dollars were regularly exchanged for big-ticket items like automobiles, trucks, and farm equipment. In fact, Argentine farmers began hoarding grain in silos to substitute for holding cash balances in the form of depreciating pesos.
Austrian economists would think that the War on Cash is really absurd and unscientific. We would say, allow people to choose the form of payment they want to use, whether that be cash, gold, debit card, or something else. We want to remove all barriers to people using different kinds of currency, take all excise taxes, sales taxes, capital gains taxes off gold and silver and off foreign currencies. And also get rid of all legal tender laws. You can keep the dollar in existence, but allow people to use currencies that compete with the dollar.
So we want to move in the exact opposite direction from abolishing cash. In fact, we want to encourage people to withdraw money from banks they don’t trust. Fractional reserve banking, apart from the ethical question, is unsound economically.
