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3rd November 2015, 11:19 AM
THE SECRET WAR
What the “War on Cash”
Is Doing To Your Income,
Savings, Life and Liberty,
And How To Survive It
by Craig R. Smith
& Lowell Ponte
A SWISS AMERICA WHITE PAPER
June 2015
Copyright © 2015 by Idea Factory Press
Introduction
“The anonymity of paper money is liberating.
The bottom line is, you have to decide
how you want to run your society.”
-- Prof. Stephen Cecchetti
Brandeis International Business School [1]
Denny Hastert is a casualty of war.
The former Speaker of the House was caught in a legal trap [2], one weapon being used in a “war against cash” our government and others are now waging. This trap was set to catch those who have the old-fashioned notion that they are free to withdraw their cash money from their bank as they wish.
You, too, are a casualty of this war if you have a bank account – and probably do not even know. Fasten your seat belt. We are taking you across a secret battlefield to a fast-approaching “cashless society,” a future where merely possessing cash might be a crime.
Cash is tangible money, bills and coins, and governments have always had at best a love-hate relationship with it.
Such money for thousands of years gave people a medium of exchange, a unit of account, and a store of value that governments could tax indirectly by debasing its coins with cheaper metals – or directly by confiscation.
But cash also gave people ways to buy, sell and enrich themselves without anyone knowing. Cash was anonymous money that often allowed people to move and carry away their earnings in complete privacy.
Cash was and is the money of the black market, drug dealers and other lawbreakers.
But in a young American Republic of low taxes, cash was also the currency of the free. It was the great equalizer where each person’s hard-earned, gold-backed dollar was as good as anyone else’s, almost regardless of the pedigree of their ancestors.
America’s founding values began to disappear in a fundamental transformation in 1913, as we discuss in our 2014 book Don’t Bank On It! The Unsafe World of 21st Century Banking. [3] In that year the new Democratic President Woodrow Wilson signed into law the “Progressive” income tax to tax previously-equal people very unequally in order to redistribute wealth in our society.
In practice, the largest redistribution has not been from rich to poor, but from the private sector to the government itself and its crony institutions such as giant banks.
Wilson also authorized the kind of European central bank opposed by many of America’s Framers and dismantled almost a century earlier by Democratic President Andrew Jackson.
Wilson’s Federal Reserve System was sold to the people as a way to protect the integrity of the U.S. Dollar by taking the politics out of monetary decisions. The Fed, however, was chartered to furnish an “elastic” currency.
Progressive politicians had been frustrated that the inelastic, hard money gold standard prevented them from printing endless quantities of dollars to expand the government. The Fed moved quickly to ease the golden handcuffs on politicians [4], and in 1933 another Progressive Democratic President, Franklin Delano Roosevelt, eliminated not only the gold standard but also the gold clauses that kept contracts honest -- and even the right of Americans to own gold bullion at all.
The Fed has protected our currency so well that today’s debased U.S. Dollar, no longer backed by anything except the “full faith and credit of the United States Government,” has roughly two pennies of the purchasing power of the 1913 dollar.
The fix for this, a growing number of economists now argue, is to eliminate pennies and dollars. They want to outlaw cash and usher in a “cashless society,” and to implement a totally digital facsimile.
Cashing In
Despite its apparent failure to protect the dollar’s value, the Fed in 102 years has acquired enormous influence and power. Under another Democratic President, Jimmy Carter, the Fed acquired a second “mandate,” to use monetary policy to maximize employment.
Critics have said that the Fed seems to have secret mandates as well – to “levitate” the stock market (Bernanke said as much in 2010), and even to help time the ups and downs in the market to benefit particular presidential candidates, incumbents or challengers.
The Fed has certainly become a central planner in the U.S. economy, redirecting vast flows of energy by how the Fed Open Market Committee acts to adjust available money and credit.
Most Fed policymakers, like those of President Barack Obama, are Keynesians. The late British economist John Maynard Keynes believed that the ups and downs of the business cycle could be smoothed if national governments and central banks raised aggregate demand by injecting stimulus money into a down economy and increased taxes during up times.
A dollar taxed from the rich and then given (via government) to the poor should generate a multiplier effect of up to $1.50 or more worth of economic stimulus, Keynes believed, because the poor had to spend this money immediately, not save it. This is supposed to increase the “velocity” of dollars from one hand to the next, thereby boosting prosperity.
By this same logic, Keynes wrote of the “paradox of thrift,” that it is bad when people save money because this slows its circulation in the economy.
Keynes was not necessarily a socialist for much of his life. He in fact came to dislike the Soviet Union and high deficit spending. And Keynes is that rare economist who actually invested in the market – made one fortune, lost it, and then made another as a practicing capitalist.
Yet because Keynes favored taxing the rich, high government spending (but only at times, not perpetually), and advocated redistributing money from rich to poor, he gave leftists the ability to pursue many of their Big Government policies while claiming to be Keynesians, not socialists.
Most of Keynes’ theories have failed in practice. In the real world, for example, stimulus works only in primitive economies. In advanced economies, government stimulus spending gets discounted – taken into everyone’s investment calculations – instantly.
Since the start of the continuing bad U.S. economy in 2008, the Fed and Obama Administration have conjured roughly $8 Trillion of stimulus out of thin air. This should have been enough money to stimulate almost everyone into prosperity, according to Keynes.
Oddly, however, all this money proved to be an “anti-stimulus,” as we predicted. [5] Its potential to create high inflation and more taxes made investors afraid to invest and businesses afraid to hire. Today, after all this stimulus and debt heaped onto present and future taxpayers, the velocity of money in the U.S. economy is at its slowest in nearly 50 years. The job participation rate shows 93 million working-age Americans without a needed full-time job – the lowest this indicator has been since President Carter’s “malaise” in 1977.
Cashing Out in Wonderland
The Fed has largely used up its bag of monetary tricks. Like an addictive drug, its fixes of money no longer stimulate. Its debt manipulations such as Quantitative Easing no longer work.
And the Fed now finds itself painted into a corner. It dealt with the crisis by adopting ZIRP, a Zero Interest Rate Policy, driving the interest rate at which government and the giant corporations can borrow to almost zero.
This essentially-free money has kept the stock market casino open and above 18,000 – but this is mostly based on companies using the free money to buy back their own stock or other companies. The GDP during the first Quarter of 2015 was at minus 0.7 percent. Only the building of unsold inventories and oil fracking on private land, contrary to President Obama’s policies, have narrowly kept the U.S. out of full-blown recession. The economy is not growing.
Even the Fed’s economists know that ZIRP in the long run will destroy the economy for those needing interest income, such as elderly bank savers. The government, however, is totally addicted to borrowing at zero interest and lacks the revenue to cover its huge debts if interest rates rise.
The Fed and many other central banks around the world have an odd solution that brings us back to cash: let the interest rates fall below zero.
Fall through the looking glass with Alice in Wonderland, many neo-Keynesians now promise, and somehow even more negative interest rates will cause amazing new economic stimulus.
“Like chemotherapy, negative interest rates are a harsh medicine,” writes Bloomberg Business reporter Peter Coy. “It’s disorienting when people are paid to borrow and charged to save.” [6]
Only one thing stands in the way of this Central Bank miracle solution, writes Coy, and that thing is cash.
“As long as paper money is available as an alternative for customers who want to withdraw their [bank] deposits, there’s a limit to how low central banks can push rates,” writes Coy. “At some point it becomes cost-effective to rent a warehouse for your billions in cash and hire armed guards to protect it.” [7]
What negative rates mean to bank savers is that they not only receive no interest for taking the 20 major banking risks we describe in Don’t Bank On It! To add insult to injury, savers are now starting to be required to pay the bank a fee for the honor of lending it their money for free.
The War Against Cash
If people wish to withdraw their cash, why would the banks not just let them take their dollars and go? The answer is that doing this might unravel today’s economic grand illusion and bring the whole game crashing down.
As one research firm put it, “Cash is a MAJOR problem for the central banks.” Here, as they explained, is why:
“The total currency (actual cash in the form of bills and coins) in the U.S. financial system is a little over $1.36 trillion.” [8]
Include digital money in short and long-term accounts and we have roughly $10 Trillion in “money” in the financial system, they write.
U.S. stock market equity is over $20 Trillion. The U.S. bond market, including various government bonds, is around $38 Trillion.
Total credit market instruments (“mortgages, collateralized debt obligations, junk bonds, commercial paper and other digitally-based ‘money’ that is based on debt”) is, they calculate, $58.7 Trillion.
And atop it all, as we’ve discussed in our books, “Unregulated over the counter derivatives traded between the big banks and corporations is north of $220 trillion.” [9]
“[A]ctual physical money or cash (as in bills or coins you can hold in your hand),” they write, “comprises less than 1% of the ‘money’ in the financial system.... [I]f investors/depositors were ever to try and convert even a small portion of this ‘wealth’ into actual physical bills, the system would implode. (There is simply not enough actual cash.)” [10]
“[W]hen the 2008 Crisis hit, one of the biggest problems for the Central Banks was to stop investors from fleeing digital wealth for the comfort of physical cash,” they note. “Indeed, the actual ‘thing’ that almost caused the financial system to collapse was when depositors attempted to pull $500 billion out of money market funds.” [11]
(In Don’t Bank On It! we analyzed this threat in the context of Money Market Mutual Funds - not to be confused with what some banks call Money Market Funds - where in 2008 frightened customers withdrew $300 Billion in one week. The SEC has endeavored to put withdrawal delays in place to prevent a recurrence, but could these prompt some simply to withdraw even sooner? [12])
The “War Against Cash” is happening because cash has become intolerably dangerous to the giant illusion built mostly out of debt paper. See the paper moon? See the cardboard sea? It’s all make-believe, Alice.
Our un-backed fiat currency itself is also an illusion. Do not be surprised in October 2015 when the five-year special meeting of the International Monetary Fund (IMF) takes away the U.S. Dollar’s monopoly as the Global Reserve Currency and gives the Chinese Yuan/Renminbi a share of that once-exclusive status. You will not want to be wholly invested in dollars or dollar-denominated stocks, etc., if or when that day comes – unless you have taken prior actions.
There are far more real and time-proven alternatives to paper money, as America’s Framers knew and affirmed in the Constitution.
As Austrian economist Ludwig von Mises remembered watching during the Weimar hyperinflation of the early 1920s, the wise made a “flight into things,” exchanging their evaporating German Marks for inherently valuable things such as gold that could not be run off a government printing press by the trillions and thereby debased, like fiat currency.
Even in its debased status, the physical dollar still commands more faith than most other faith-based currencies.
To use Thomas Jefferson’s term, your bank account may be only “the ghost of money,” mere flickering electrons in a computer memory bank somewhere waiting to be hacked or erased. Cash you at least can hold in your hand.
It is not hard to see a run on banks and digital funds, with millions of panicked people demanding dollars instead of the investment paper they already have.
This, say its critics, is why cash ultimately must be killed.
People must stop believing that they have the choice to flee into cash. That option must soon be diverted, thwarted, blocked and ultimately eliminated forever. This is what the “War Against Cash” means.
Stigmatizing Cash
Who is behind the “War on Cash?”
The United States Government is fighting against cash on many fronts, including its apprehension of former Republican Speaker of the House Dennis J. Hastert. Since 1970 the government has required banks to report any cash withdrawal or deposit of $10,000 or more.
In recent years a secondary crime was created called “structuring,” which means withdrawing or depositing some amount less than $10,000 with the intent of avoiding the transaction being reported to the government. As we noted in a research paper, this is almost Orwellian, the sort of thought crime one finds in George Orwell’s dystopian novel 1984. Hastert was indicted for “structuring,” for the crime of withdrawing less than the amount that must be reported to the government. [13]
Your bank actually is now required to report to the government any financial behavior on your part it deems “suspicious” or “unusual.” If you withdraw $500 over several weeks for big weekend yard sales, your bank might report this as “unusual,” flagging you for government surveillance.
Your bank is under threat of regulatory punishment if it does not spy on you for the government. The government, so far as we know, gives only vague guidelines, not exacting standards, as to what in your finances might be unusual or suspicious.
It is clear, however, that withdrawals and deposits in cash – and especially in $100 bills, the favorite currency of drug dealers – will arouse more suspicion than doing your banking by check, credit card or electronic transfer.
The government justifies such scrutiny by invoking the RICO anti-racketeering statues and 2001 Patriot Act, claiming to need to monitor your once-private transactions to fight organized crime and terrorism. (This is ironic in Hastert’s case, because he has been indicted via a law he helped enact.) Does anyone seriously believe, however, that 73-year-old Denny Hastert is either a terrorist or a racketeer?
A larger, logical government motive in going after cash is tax evasion. As we wrote in our 2012 book The Great Debasement: The 100-Year Dying of the Dollar and How to Get America’s Money Back:
A 2011 study by Edgar Feige of the University of Wisconsin-Madison and Richard Cebula of Jacksonville University in Florida concluded that between 18 and 19 percent of total reportable income in the United States is effectively off the books, hidden from the government.
This income – from drugs, prostitution, private gambling, home repairs, and a thousand other things paid in cash – could, Feige and Cebula estimate, have harvested half a trillion dollars in tax revenue for the government.
Cash makes it easy for criminals to thrive in an economic underworld of untraceable illicit transactions. A cashless society, say advocates, would drag this underworld out of the shadows and into disinfecting sunlight. In a cashless society, they say, crime would not pay as well as it does today.
Civil libertarians, however, are troubled that cashless crusaders now seem to be demonizing cash.
“We’re trying to use industrial age money to support commerce in a post-industrial age. It just doesn’t work,” David Birch, a director of Consult Hyperion, a firm that specializes in electronic payments, told Slate Magazine.
“Sooner or later,” Birch continued, “the tectonic plates shift and then, very quickly, you’ll find yourself in this new environment where if you ask somebody to pay you in cash, you’ll just assume that they’re a prostitute or a Somali pirate.”
“Do you see what is happening?” libertarian journalist Lew Rockwell wrote in April 2012. “Simply using cash is enough to get you branded as a potential criminal these days.”
The Federal Government now tightly limits how much cash citizens are allowed to carry through border checkpoints into or out of the United States. When you withdraw or deposit $10,000 in cash, your bank reportedly is to notify the government of this transaction, thereby marking you for potential surveillance. [14]
Denny Hastert was initially flagged by his bank for withdrawing cash – reportedly as hush money for a blackmailer – in increments of $50,000. He might be a free man today if he had read our books. We continued:
Merely doing transactions with $100 bills, the standard currency of illicit drug dealers, can attract government attention. The law has authorized the asset forfeiture of objects carrying detectable traces of cocaine, however small, which reportedly is the case with as much as 90 percent of U.S. currency notes in circulation. This law has been used to confiscate currency on those grounds. [15]
Choking Off Cash
Our federal, state and local governments have also made it more risky to carry cash because of their growing use of asset forfeiture laws. Many have had sizeable amounts of cash in their possession confiscated by law enforcement officials.
In many cases, the person whose cash has been taken is not charged with any crime. Instead, his or her cash is declared to be an accessory to criminal activity, and the burden of proof is put on the owners to prove that the cash is legitimately theirs. In some cases, the targets of such asset forfeiture are told they will get back a third or half of their cash if they sign an agreement that the government is entitled to the rest. Your money, which it took a piece of your lifetime to earn, is now guilty until proven innocent.
The Obama Administration Justice Department implemented what it calls “Operation Choke Point.” Banks have been given a list of approximately 30 types of business it associates with “high-risk.” Bankers are then asked to divulge detailed information about the finances of any customers who fit the list and to close the bank accounts of any the banker deems to be engaged in “suspicious” activities.
Here, too, the Obama Administration offers only vague notions of what might cost a business its bank account. As we reported in Don’t Bank On It!:
“Operation Choke Point” throws a very wide net. It requires banks to impose government policy in ways that may be ideological, unethical or even illegal against people and legal businesses that have been convicted of no crime whatsoever. [16]
The Obama Administration, for example, seems obsessed with restricting the constitutional rights of gun owners, and two of the businesses targeted by Operation Choke Point are firearms and ammunition sellers.
When such government pressure on banks takes away a small company’s ability to have bank accounts, the business to survive may start operating in cash. But if it deals in cash, it might then become a target for asset forfeiture by government.
The message sent by such government policies is that cash is risky. People have known for thousands of years that carrying cash might make you a target for thieves. During today’s “War Against Cash” it can also make you a target for law enforcement officers.
The Anti-Cash Ideology
The “War on Cash” is also an ideological war. According to longtime Pace University economist Joseph T. Salerno, it should be seen as nothing less than “a despotic attack by the ruling elites on the personal privacy and liberties of their citizens.”
A central combatant in this push towards a “Cashless Society” is “The Better Than Cash Alliance,” which Professor Salerno describes as “initiated and funded by the left-leaning Ford Foundation in 2012.” [17]
Among its “partners,” writes Salerno, are “the U.S. Agency for International Development (USAID); the Bill and Melinda Gates Foundation; and (surprise, surprise) the failed and bailed-out Citi [bank] as well as credit card companies Mastercard and Visa.”
“The United Nations is also involved,” writes Professor Salerno, “with the UN Capital Development Fund serving as the alliance’s secretariat…. One of the key initiatives promoted by the Alliance is to induce governments of developing countries to deliver welfare electronically.”
The positive spin of The Better Than Cash Alliance depicts a Third World with young female entrepreneurs in isolated rural farming villages able to have a business by using a cell phone as their bank and credit card link.
Because they use only the phone, not cash, the Alliance contends that such business people are far less likely to get robbed or shaken down by government officials for bribes.
In such a cashless future, it probably will be harder for an ordinary petty thief to rob you, but it will be much easier for the government to rob you. When every transaction must go through a government-monitored digital financial link via a cellphone, all financial privacy will vanish. As we speculated about a “cashless” future in The Great Debasement:
To make such a system work, its advocates quietly add, all transactions must be equal and each one must be a taxable event. Give your son $100 for high school graduation? The 20 percent tax is automatically deducted. Buy an old lamp at a neighbor’s yard sale? Pay 20 percent. Lose a sports bet with a co-worker? Pay 20 percent. Give to a hungry poor family? Or to your church or synagogue? Or to the politician demanding a bribe to approve your building permit? Pay 20 percent. No exceptions….
Much as gold was replaced by inflation-plagued paper fiat money, the cashless society envisioned by such advocates could replace paper fiat money with magical digital money that is always connected to the government – and that loses another 20 percent of its value to the government every time you use it.
In such a Brave New World, of course, there will be no place to hide. You cannot purchase food or fuel without the transaction being monitored. Your cell phone, by government mandate, contains a locator chip that makes you easy to find (unless you remove its battery).
Could the American Revolution have been won if our Founders lived in such a cashless society? If every transaction must be cleared by a central computer, then whoever controls that computer can monitor or block any transaction a targeted individual attempts to make.
The George Washingtons and Thomas Jeffersons of a future cashless America could easily be neutralized by Progressive redcoats. [18]
Cash allows individual autonomy. What does a cashless society allow?
Cash and Carry Tax
In a future cashless society, as we wrote in Don’t Bank On It!, everything will be hackable, trackable and taxable. [19] If a government official wishes, he can know within seconds your whereabouts and everything you have recently bought or sold. Indeed, he can probably turn off your ability to buy and sell. As we wrote in The Great Debasement:
Anyone, whether Christian or not, might find it disquieting that the Bible (Book of Revelation 13:17) foresaw a coming day when only those who carry the mark of the ruler’s number on their bodies will be able to “buy and sell.” [20]
This much seems likely: the face on the invisible coin of the cashless society will be that of Caesar.
Cashless advocates such as the Alliance will try to persuade you to voluntarily abandon cash for the greater convenience of a cashless future. But make no mistake: cash will eventually be outlawed or restricted, with capital controls already coming down hard in Sweden, Denmark, France, Greece, and many other places. Eventually those caught carrying cash might be subject to its forfeiture….or even imprisonment. Call it “CashCrime.”
And understand that what has happened to Speaker Hastert is merely a variant of this….withdrawing his own cash contrary to government surveillance laws.
Cash can be killed or made impractical in other ways, of course. In his General Theory, John Maynard Keynes toyed with issuing paper money that included a device so that this cash kept losing value. Because the worth of such cash was evaporating, the holder had a huge incentive to spend it immediately, not save it.
Keynes liked the idea of money that could not be saved, that was being depleted by a built-in “carry tax.” With the technology available at the time, however, Keynes saw the idea as impractical.
In 1999, another version of such a “Carry Tax” on cash was set forth by Marvin Goodfriend, a Senior Vice President of the Federal Reserve Bank of Richmond, Virginia. Such a tax, he wrote, “would serve as a powerful deterrent to hoarding currency.” He argued that such a tax was feasible. [21]
Goodfriend understood full well that our money already has a time-bomb tax ticking away inside it and lowering its value. That tax is the inflation deliberately created by the Federal Reserve by printing money in excess of our nation’s productivity.
Today the Federal Reserve compounds the punishment of savers with “financial repression,” the technical economics term for deliberately holding the rate of interest banks pay below the rate of inflation. This guarantees that savers in America today lose part of the value of their savings every day they keep their cash in the bank, which once again benefits banks and government but not savers.
Most investors now painfully understand that the Fed is punishing nearly every traditional safe haven for savers – who are now losing value by having a savings account, by keeping their money in dollars, and who hoped to have a pleasant retirement by investing their earnings into a home.
Most now recognize that Americans are being systematically herded, like sheep, into higher risk investments full of moral hazard – especially the stock market.
Perhaps everything is going through Alice’s looking glass and being reversed. We used to save, but saving is now by design a path to financial punishment.
The new game appears to be to get us away from cash and into the equivalent of casino chips – which we will spend digitally with no recognition that they actually are a kind of money. This, after all, is what credit cards are – casino cash.
And we, whose ancestors knew the value of saving, are now expected via student loans and other offerings, to spend our lives not accumulating cash but accumulating credit, which we convert into debt. As Tennessee Ernie Ford used to sing: “St. Peter, don’t you call me ‘cause I can’t go. I owe my soul to the company store.”
Your Social Security card and number are now your ear tag in this herd of sheep. Welcome to the new “cashless” feudalism that Friedrich Hayek warned was at the end of our road to serfdom.
Hayek, of course, wanted us free to use whatever currency, cash or money we wish – to end the dollar monopoly and make these denationalized moneys compete with each other, as we explained in our 2011 book The Inflation Deception: Six Ways Government Tricks Us…And Seven Ways to Stop It! [22]
Instead, even cash will soon be banished….and we will live in a world haunted by the digital ghosts of money.
We would do much better by cashing in our chips, and then investing in real assets. We need to understand that the “War Against Cash” is actually a war against all of us.
http://www.swissamerica.com/secretwar.php
What the “War on Cash”
Is Doing To Your Income,
Savings, Life and Liberty,
And How To Survive It
by Craig R. Smith
& Lowell Ponte
A SWISS AMERICA WHITE PAPER
June 2015
Copyright © 2015 by Idea Factory Press
Introduction
“The anonymity of paper money is liberating.
The bottom line is, you have to decide
how you want to run your society.”
-- Prof. Stephen Cecchetti
Brandeis International Business School [1]
Denny Hastert is a casualty of war.
The former Speaker of the House was caught in a legal trap [2], one weapon being used in a “war against cash” our government and others are now waging. This trap was set to catch those who have the old-fashioned notion that they are free to withdraw their cash money from their bank as they wish.
You, too, are a casualty of this war if you have a bank account – and probably do not even know. Fasten your seat belt. We are taking you across a secret battlefield to a fast-approaching “cashless society,” a future where merely possessing cash might be a crime.
Cash is tangible money, bills and coins, and governments have always had at best a love-hate relationship with it.
Such money for thousands of years gave people a medium of exchange, a unit of account, and a store of value that governments could tax indirectly by debasing its coins with cheaper metals – or directly by confiscation.
But cash also gave people ways to buy, sell and enrich themselves without anyone knowing. Cash was anonymous money that often allowed people to move and carry away their earnings in complete privacy.
Cash was and is the money of the black market, drug dealers and other lawbreakers.
But in a young American Republic of low taxes, cash was also the currency of the free. It was the great equalizer where each person’s hard-earned, gold-backed dollar was as good as anyone else’s, almost regardless of the pedigree of their ancestors.
America’s founding values began to disappear in a fundamental transformation in 1913, as we discuss in our 2014 book Don’t Bank On It! The Unsafe World of 21st Century Banking. [3] In that year the new Democratic President Woodrow Wilson signed into law the “Progressive” income tax to tax previously-equal people very unequally in order to redistribute wealth in our society.
In practice, the largest redistribution has not been from rich to poor, but from the private sector to the government itself and its crony institutions such as giant banks.
Wilson also authorized the kind of European central bank opposed by many of America’s Framers and dismantled almost a century earlier by Democratic President Andrew Jackson.
Wilson’s Federal Reserve System was sold to the people as a way to protect the integrity of the U.S. Dollar by taking the politics out of monetary decisions. The Fed, however, was chartered to furnish an “elastic” currency.
Progressive politicians had been frustrated that the inelastic, hard money gold standard prevented them from printing endless quantities of dollars to expand the government. The Fed moved quickly to ease the golden handcuffs on politicians [4], and in 1933 another Progressive Democratic President, Franklin Delano Roosevelt, eliminated not only the gold standard but also the gold clauses that kept contracts honest -- and even the right of Americans to own gold bullion at all.
The Fed has protected our currency so well that today’s debased U.S. Dollar, no longer backed by anything except the “full faith and credit of the United States Government,” has roughly two pennies of the purchasing power of the 1913 dollar.
The fix for this, a growing number of economists now argue, is to eliminate pennies and dollars. They want to outlaw cash and usher in a “cashless society,” and to implement a totally digital facsimile.
Cashing In
Despite its apparent failure to protect the dollar’s value, the Fed in 102 years has acquired enormous influence and power. Under another Democratic President, Jimmy Carter, the Fed acquired a second “mandate,” to use monetary policy to maximize employment.
Critics have said that the Fed seems to have secret mandates as well – to “levitate” the stock market (Bernanke said as much in 2010), and even to help time the ups and downs in the market to benefit particular presidential candidates, incumbents or challengers.
The Fed has certainly become a central planner in the U.S. economy, redirecting vast flows of energy by how the Fed Open Market Committee acts to adjust available money and credit.
Most Fed policymakers, like those of President Barack Obama, are Keynesians. The late British economist John Maynard Keynes believed that the ups and downs of the business cycle could be smoothed if national governments and central banks raised aggregate demand by injecting stimulus money into a down economy and increased taxes during up times.
A dollar taxed from the rich and then given (via government) to the poor should generate a multiplier effect of up to $1.50 or more worth of economic stimulus, Keynes believed, because the poor had to spend this money immediately, not save it. This is supposed to increase the “velocity” of dollars from one hand to the next, thereby boosting prosperity.
By this same logic, Keynes wrote of the “paradox of thrift,” that it is bad when people save money because this slows its circulation in the economy.
Keynes was not necessarily a socialist for much of his life. He in fact came to dislike the Soviet Union and high deficit spending. And Keynes is that rare economist who actually invested in the market – made one fortune, lost it, and then made another as a practicing capitalist.
Yet because Keynes favored taxing the rich, high government spending (but only at times, not perpetually), and advocated redistributing money from rich to poor, he gave leftists the ability to pursue many of their Big Government policies while claiming to be Keynesians, not socialists.
Most of Keynes’ theories have failed in practice. In the real world, for example, stimulus works only in primitive economies. In advanced economies, government stimulus spending gets discounted – taken into everyone’s investment calculations – instantly.
Since the start of the continuing bad U.S. economy in 2008, the Fed and Obama Administration have conjured roughly $8 Trillion of stimulus out of thin air. This should have been enough money to stimulate almost everyone into prosperity, according to Keynes.
Oddly, however, all this money proved to be an “anti-stimulus,” as we predicted. [5] Its potential to create high inflation and more taxes made investors afraid to invest and businesses afraid to hire. Today, after all this stimulus and debt heaped onto present and future taxpayers, the velocity of money in the U.S. economy is at its slowest in nearly 50 years. The job participation rate shows 93 million working-age Americans without a needed full-time job – the lowest this indicator has been since President Carter’s “malaise” in 1977.
Cashing Out in Wonderland
The Fed has largely used up its bag of monetary tricks. Like an addictive drug, its fixes of money no longer stimulate. Its debt manipulations such as Quantitative Easing no longer work.
And the Fed now finds itself painted into a corner. It dealt with the crisis by adopting ZIRP, a Zero Interest Rate Policy, driving the interest rate at which government and the giant corporations can borrow to almost zero.
This essentially-free money has kept the stock market casino open and above 18,000 – but this is mostly based on companies using the free money to buy back their own stock or other companies. The GDP during the first Quarter of 2015 was at minus 0.7 percent. Only the building of unsold inventories and oil fracking on private land, contrary to President Obama’s policies, have narrowly kept the U.S. out of full-blown recession. The economy is not growing.
Even the Fed’s economists know that ZIRP in the long run will destroy the economy for those needing interest income, such as elderly bank savers. The government, however, is totally addicted to borrowing at zero interest and lacks the revenue to cover its huge debts if interest rates rise.
The Fed and many other central banks around the world have an odd solution that brings us back to cash: let the interest rates fall below zero.
Fall through the looking glass with Alice in Wonderland, many neo-Keynesians now promise, and somehow even more negative interest rates will cause amazing new economic stimulus.
“Like chemotherapy, negative interest rates are a harsh medicine,” writes Bloomberg Business reporter Peter Coy. “It’s disorienting when people are paid to borrow and charged to save.” [6]
Only one thing stands in the way of this Central Bank miracle solution, writes Coy, and that thing is cash.
“As long as paper money is available as an alternative for customers who want to withdraw their [bank] deposits, there’s a limit to how low central banks can push rates,” writes Coy. “At some point it becomes cost-effective to rent a warehouse for your billions in cash and hire armed guards to protect it.” [7]
What negative rates mean to bank savers is that they not only receive no interest for taking the 20 major banking risks we describe in Don’t Bank On It! To add insult to injury, savers are now starting to be required to pay the bank a fee for the honor of lending it their money for free.
The War Against Cash
If people wish to withdraw their cash, why would the banks not just let them take their dollars and go? The answer is that doing this might unravel today’s economic grand illusion and bring the whole game crashing down.
As one research firm put it, “Cash is a MAJOR problem for the central banks.” Here, as they explained, is why:
“The total currency (actual cash in the form of bills and coins) in the U.S. financial system is a little over $1.36 trillion.” [8]
Include digital money in short and long-term accounts and we have roughly $10 Trillion in “money” in the financial system, they write.
U.S. stock market equity is over $20 Trillion. The U.S. bond market, including various government bonds, is around $38 Trillion.
Total credit market instruments (“mortgages, collateralized debt obligations, junk bonds, commercial paper and other digitally-based ‘money’ that is based on debt”) is, they calculate, $58.7 Trillion.
And atop it all, as we’ve discussed in our books, “Unregulated over the counter derivatives traded between the big banks and corporations is north of $220 trillion.” [9]
“[A]ctual physical money or cash (as in bills or coins you can hold in your hand),” they write, “comprises less than 1% of the ‘money’ in the financial system.... [I]f investors/depositors were ever to try and convert even a small portion of this ‘wealth’ into actual physical bills, the system would implode. (There is simply not enough actual cash.)” [10]
“[W]hen the 2008 Crisis hit, one of the biggest problems for the Central Banks was to stop investors from fleeing digital wealth for the comfort of physical cash,” they note. “Indeed, the actual ‘thing’ that almost caused the financial system to collapse was when depositors attempted to pull $500 billion out of money market funds.” [11]
(In Don’t Bank On It! we analyzed this threat in the context of Money Market Mutual Funds - not to be confused with what some banks call Money Market Funds - where in 2008 frightened customers withdrew $300 Billion in one week. The SEC has endeavored to put withdrawal delays in place to prevent a recurrence, but could these prompt some simply to withdraw even sooner? [12])
The “War Against Cash” is happening because cash has become intolerably dangerous to the giant illusion built mostly out of debt paper. See the paper moon? See the cardboard sea? It’s all make-believe, Alice.
Our un-backed fiat currency itself is also an illusion. Do not be surprised in October 2015 when the five-year special meeting of the International Monetary Fund (IMF) takes away the U.S. Dollar’s monopoly as the Global Reserve Currency and gives the Chinese Yuan/Renminbi a share of that once-exclusive status. You will not want to be wholly invested in dollars or dollar-denominated stocks, etc., if or when that day comes – unless you have taken prior actions.
There are far more real and time-proven alternatives to paper money, as America’s Framers knew and affirmed in the Constitution.
As Austrian economist Ludwig von Mises remembered watching during the Weimar hyperinflation of the early 1920s, the wise made a “flight into things,” exchanging their evaporating German Marks for inherently valuable things such as gold that could not be run off a government printing press by the trillions and thereby debased, like fiat currency.
Even in its debased status, the physical dollar still commands more faith than most other faith-based currencies.
To use Thomas Jefferson’s term, your bank account may be only “the ghost of money,” mere flickering electrons in a computer memory bank somewhere waiting to be hacked or erased. Cash you at least can hold in your hand.
It is not hard to see a run on banks and digital funds, with millions of panicked people demanding dollars instead of the investment paper they already have.
This, say its critics, is why cash ultimately must be killed.
People must stop believing that they have the choice to flee into cash. That option must soon be diverted, thwarted, blocked and ultimately eliminated forever. This is what the “War Against Cash” means.
Stigmatizing Cash
Who is behind the “War on Cash?”
The United States Government is fighting against cash on many fronts, including its apprehension of former Republican Speaker of the House Dennis J. Hastert. Since 1970 the government has required banks to report any cash withdrawal or deposit of $10,000 or more.
In recent years a secondary crime was created called “structuring,” which means withdrawing or depositing some amount less than $10,000 with the intent of avoiding the transaction being reported to the government. As we noted in a research paper, this is almost Orwellian, the sort of thought crime one finds in George Orwell’s dystopian novel 1984. Hastert was indicted for “structuring,” for the crime of withdrawing less than the amount that must be reported to the government. [13]
Your bank actually is now required to report to the government any financial behavior on your part it deems “suspicious” or “unusual.” If you withdraw $500 over several weeks for big weekend yard sales, your bank might report this as “unusual,” flagging you for government surveillance.
Your bank is under threat of regulatory punishment if it does not spy on you for the government. The government, so far as we know, gives only vague guidelines, not exacting standards, as to what in your finances might be unusual or suspicious.
It is clear, however, that withdrawals and deposits in cash – and especially in $100 bills, the favorite currency of drug dealers – will arouse more suspicion than doing your banking by check, credit card or electronic transfer.
The government justifies such scrutiny by invoking the RICO anti-racketeering statues and 2001 Patriot Act, claiming to need to monitor your once-private transactions to fight organized crime and terrorism. (This is ironic in Hastert’s case, because he has been indicted via a law he helped enact.) Does anyone seriously believe, however, that 73-year-old Denny Hastert is either a terrorist or a racketeer?
A larger, logical government motive in going after cash is tax evasion. As we wrote in our 2012 book The Great Debasement: The 100-Year Dying of the Dollar and How to Get America’s Money Back:
A 2011 study by Edgar Feige of the University of Wisconsin-Madison and Richard Cebula of Jacksonville University in Florida concluded that between 18 and 19 percent of total reportable income in the United States is effectively off the books, hidden from the government.
This income – from drugs, prostitution, private gambling, home repairs, and a thousand other things paid in cash – could, Feige and Cebula estimate, have harvested half a trillion dollars in tax revenue for the government.
Cash makes it easy for criminals to thrive in an economic underworld of untraceable illicit transactions. A cashless society, say advocates, would drag this underworld out of the shadows and into disinfecting sunlight. In a cashless society, they say, crime would not pay as well as it does today.
Civil libertarians, however, are troubled that cashless crusaders now seem to be demonizing cash.
“We’re trying to use industrial age money to support commerce in a post-industrial age. It just doesn’t work,” David Birch, a director of Consult Hyperion, a firm that specializes in electronic payments, told Slate Magazine.
“Sooner or later,” Birch continued, “the tectonic plates shift and then, very quickly, you’ll find yourself in this new environment where if you ask somebody to pay you in cash, you’ll just assume that they’re a prostitute or a Somali pirate.”
“Do you see what is happening?” libertarian journalist Lew Rockwell wrote in April 2012. “Simply using cash is enough to get you branded as a potential criminal these days.”
The Federal Government now tightly limits how much cash citizens are allowed to carry through border checkpoints into or out of the United States. When you withdraw or deposit $10,000 in cash, your bank reportedly is to notify the government of this transaction, thereby marking you for potential surveillance. [14]
Denny Hastert was initially flagged by his bank for withdrawing cash – reportedly as hush money for a blackmailer – in increments of $50,000. He might be a free man today if he had read our books. We continued:
Merely doing transactions with $100 bills, the standard currency of illicit drug dealers, can attract government attention. The law has authorized the asset forfeiture of objects carrying detectable traces of cocaine, however small, which reportedly is the case with as much as 90 percent of U.S. currency notes in circulation. This law has been used to confiscate currency on those grounds. [15]
Choking Off Cash
Our federal, state and local governments have also made it more risky to carry cash because of their growing use of asset forfeiture laws. Many have had sizeable amounts of cash in their possession confiscated by law enforcement officials.
In many cases, the person whose cash has been taken is not charged with any crime. Instead, his or her cash is declared to be an accessory to criminal activity, and the burden of proof is put on the owners to prove that the cash is legitimately theirs. In some cases, the targets of such asset forfeiture are told they will get back a third or half of their cash if they sign an agreement that the government is entitled to the rest. Your money, which it took a piece of your lifetime to earn, is now guilty until proven innocent.
The Obama Administration Justice Department implemented what it calls “Operation Choke Point.” Banks have been given a list of approximately 30 types of business it associates with “high-risk.” Bankers are then asked to divulge detailed information about the finances of any customers who fit the list and to close the bank accounts of any the banker deems to be engaged in “suspicious” activities.
Here, too, the Obama Administration offers only vague notions of what might cost a business its bank account. As we reported in Don’t Bank On It!:
“Operation Choke Point” throws a very wide net. It requires banks to impose government policy in ways that may be ideological, unethical or even illegal against people and legal businesses that have been convicted of no crime whatsoever. [16]
The Obama Administration, for example, seems obsessed with restricting the constitutional rights of gun owners, and two of the businesses targeted by Operation Choke Point are firearms and ammunition sellers.
When such government pressure on banks takes away a small company’s ability to have bank accounts, the business to survive may start operating in cash. But if it deals in cash, it might then become a target for asset forfeiture by government.
The message sent by such government policies is that cash is risky. People have known for thousands of years that carrying cash might make you a target for thieves. During today’s “War Against Cash” it can also make you a target for law enforcement officers.
The Anti-Cash Ideology
The “War on Cash” is also an ideological war. According to longtime Pace University economist Joseph T. Salerno, it should be seen as nothing less than “a despotic attack by the ruling elites on the personal privacy and liberties of their citizens.”
A central combatant in this push towards a “Cashless Society” is “The Better Than Cash Alliance,” which Professor Salerno describes as “initiated and funded by the left-leaning Ford Foundation in 2012.” [17]
Among its “partners,” writes Salerno, are “the U.S. Agency for International Development (USAID); the Bill and Melinda Gates Foundation; and (surprise, surprise) the failed and bailed-out Citi [bank] as well as credit card companies Mastercard and Visa.”
“The United Nations is also involved,” writes Professor Salerno, “with the UN Capital Development Fund serving as the alliance’s secretariat…. One of the key initiatives promoted by the Alliance is to induce governments of developing countries to deliver welfare electronically.”
The positive spin of The Better Than Cash Alliance depicts a Third World with young female entrepreneurs in isolated rural farming villages able to have a business by using a cell phone as their bank and credit card link.
Because they use only the phone, not cash, the Alliance contends that such business people are far less likely to get robbed or shaken down by government officials for bribes.
In such a cashless future, it probably will be harder for an ordinary petty thief to rob you, but it will be much easier for the government to rob you. When every transaction must go through a government-monitored digital financial link via a cellphone, all financial privacy will vanish. As we speculated about a “cashless” future in The Great Debasement:
To make such a system work, its advocates quietly add, all transactions must be equal and each one must be a taxable event. Give your son $100 for high school graduation? The 20 percent tax is automatically deducted. Buy an old lamp at a neighbor’s yard sale? Pay 20 percent. Lose a sports bet with a co-worker? Pay 20 percent. Give to a hungry poor family? Or to your church or synagogue? Or to the politician demanding a bribe to approve your building permit? Pay 20 percent. No exceptions….
Much as gold was replaced by inflation-plagued paper fiat money, the cashless society envisioned by such advocates could replace paper fiat money with magical digital money that is always connected to the government – and that loses another 20 percent of its value to the government every time you use it.
In such a Brave New World, of course, there will be no place to hide. You cannot purchase food or fuel without the transaction being monitored. Your cell phone, by government mandate, contains a locator chip that makes you easy to find (unless you remove its battery).
Could the American Revolution have been won if our Founders lived in such a cashless society? If every transaction must be cleared by a central computer, then whoever controls that computer can monitor or block any transaction a targeted individual attempts to make.
The George Washingtons and Thomas Jeffersons of a future cashless America could easily be neutralized by Progressive redcoats. [18]
Cash allows individual autonomy. What does a cashless society allow?
Cash and Carry Tax
In a future cashless society, as we wrote in Don’t Bank On It!, everything will be hackable, trackable and taxable. [19] If a government official wishes, he can know within seconds your whereabouts and everything you have recently bought or sold. Indeed, he can probably turn off your ability to buy and sell. As we wrote in The Great Debasement:
Anyone, whether Christian or not, might find it disquieting that the Bible (Book of Revelation 13:17) foresaw a coming day when only those who carry the mark of the ruler’s number on their bodies will be able to “buy and sell.” [20]
This much seems likely: the face on the invisible coin of the cashless society will be that of Caesar.
Cashless advocates such as the Alliance will try to persuade you to voluntarily abandon cash for the greater convenience of a cashless future. But make no mistake: cash will eventually be outlawed or restricted, with capital controls already coming down hard in Sweden, Denmark, France, Greece, and many other places. Eventually those caught carrying cash might be subject to its forfeiture….or even imprisonment. Call it “CashCrime.”
And understand that what has happened to Speaker Hastert is merely a variant of this….withdrawing his own cash contrary to government surveillance laws.
Cash can be killed or made impractical in other ways, of course. In his General Theory, John Maynard Keynes toyed with issuing paper money that included a device so that this cash kept losing value. Because the worth of such cash was evaporating, the holder had a huge incentive to spend it immediately, not save it.
Keynes liked the idea of money that could not be saved, that was being depleted by a built-in “carry tax.” With the technology available at the time, however, Keynes saw the idea as impractical.
In 1999, another version of such a “Carry Tax” on cash was set forth by Marvin Goodfriend, a Senior Vice President of the Federal Reserve Bank of Richmond, Virginia. Such a tax, he wrote, “would serve as a powerful deterrent to hoarding currency.” He argued that such a tax was feasible. [21]
Goodfriend understood full well that our money already has a time-bomb tax ticking away inside it and lowering its value. That tax is the inflation deliberately created by the Federal Reserve by printing money in excess of our nation’s productivity.
Today the Federal Reserve compounds the punishment of savers with “financial repression,” the technical economics term for deliberately holding the rate of interest banks pay below the rate of inflation. This guarantees that savers in America today lose part of the value of their savings every day they keep their cash in the bank, which once again benefits banks and government but not savers.
Most investors now painfully understand that the Fed is punishing nearly every traditional safe haven for savers – who are now losing value by having a savings account, by keeping their money in dollars, and who hoped to have a pleasant retirement by investing their earnings into a home.
Most now recognize that Americans are being systematically herded, like sheep, into higher risk investments full of moral hazard – especially the stock market.
Perhaps everything is going through Alice’s looking glass and being reversed. We used to save, but saving is now by design a path to financial punishment.
The new game appears to be to get us away from cash and into the equivalent of casino chips – which we will spend digitally with no recognition that they actually are a kind of money. This, after all, is what credit cards are – casino cash.
And we, whose ancestors knew the value of saving, are now expected via student loans and other offerings, to spend our lives not accumulating cash but accumulating credit, which we convert into debt. As Tennessee Ernie Ford used to sing: “St. Peter, don’t you call me ‘cause I can’t go. I owe my soul to the company store.”
Your Social Security card and number are now your ear tag in this herd of sheep. Welcome to the new “cashless” feudalism that Friedrich Hayek warned was at the end of our road to serfdom.
Hayek, of course, wanted us free to use whatever currency, cash or money we wish – to end the dollar monopoly and make these denationalized moneys compete with each other, as we explained in our 2011 book The Inflation Deception: Six Ways Government Tricks Us…And Seven Ways to Stop It! [22]
Instead, even cash will soon be banished….and we will live in a world haunted by the digital ghosts of money.
We would do much better by cashing in our chips, and then investing in real assets. We need to understand that the “War Against Cash” is actually a war against all of us.
http://www.swissamerica.com/secretwar.php