Will War On Cash Boost Gold?

Some economists call for the outright abolition of cash. What would it mean for the gold market?

War on Cash

Today, cash is under attack like never before. More and more countries are disallowing cash payments for lower and lower amounts. In Sweden, the progress toward a cashless society is probably the quickest. Many businesses do not accept cash any longer. There are few ATMs. Even priests in churches and homeless people carry card scanners.

The ECB has recently intensified its actions against cash. According to The Financial Times, the ECB has informally decided that the 500 bill will be withdrawn from circulation. The official motivation is to fight crime/terrorism/money laundering/tax evasion and to make life extremely difficult for criminals. As Mario Draghi put it last week:

“There is a pervasive and increasing conviction in world public opinion that high-denomination bank notes are used for criminal purposes”.

Unfortunately, not just central bankers fight with cash. A recent study by Harvard’s Kennedy School called for the elimination of high denomination, high-value currency notes, such as the €500 note, the $100 bill, the CHF 1,000 note and the £50 note to “make life harder for those pursuing tax evasion, financial crime, terrorist finance and corruption”. Surely, cash, especially high-denominated banknotes, is used by criminals. As well as food, furniture, knifes and many other useful things. Is it a good reason for the ban? We agree that the declining use of cash can be partially explained by the convenience and the development of mobile technology. However, there can be something more behind the recent calls for a cashless society.

Keynesian Dream of Massive Spending

The war on cash cannot be analyzed in isolation from negative interest rates. Why? It’s simple. When there are negative interest rates, people can always withdraw their cash from bank accounts. However, in a cashless society, there are only two options. People can either accept the negative interest rates or spend their money. This is the ultimate goal of Keynesian economists. It’s not a conspiracy theory, we just draw conclusions from the Keynesian model, in which savings magically leak out from circulation and are not part of aggregate demand. Hence, only spending stimulates the economy. We should stimulate the economy, shouldn’t we? Thus, we have to euthanize rentiers and force savers and cash hoarders to spend their money, for their own good and for the sake of the Holy Aggregate Demand. How do central banks stimulate spending? By lowering interest rates. However, there is a zero interest rate bound. Thus, all we need to do is to remove the zero lower bound on interest rates. You do not believe in this explanation? Let us cite Kenneth Rogoff, a recognized economist from Harvard University:

“It is precisely the existence of paper currency that makes it difficult for central banks to take policy interest rates much below zero (…) If all central bank liabilities were electronic, paying a negative interest on reserves (basically charging a fee) would be trivial. But as long as central banks stand ready to convert electronic deposits to zero-interest paper currency in unlimited amounts, it suddenly becomes very hard to push interest rates below levels of, say, -0.25 to -0.50 percent, certainly not on a sustained basis. Hoarding cash may be inconvenient and risky, but if rates become too negative, it becomes worth it (...) With many central banks now near or at the zero interest rate bound, there are increasingly strong arguments for exploring how [paper currency] might be phased out of use”.

            It sounds scary, isn’t?

War on Cash and Gold

Negative interest rates are so far negligible for ordinary Joe (except for lower returns of his pension fund and insurance company). However, the idea of negative interest rates brought to its logical completion, i.e. a cashless society, would threaten our financial security. In such an extreme scenario, the demand for gold should rise. Indeed, what would the alternative be for gold in a world with assets bearing zero or negative yields and without cash?

On the other hand, if we live to see such crazy times when cash is banned, gold could be prohibited as well. Gold is a monetary asset, it used to serve as money for thousands of years, therefore, it would be a natural substitute for cash. If a cashless society worked, gold would also have to be banned. However, regarding precious metals, the wind of history is now blowing in the opposite direction, as more states shall endeavor to define gold coin as legal tender (e.g. last week, there was a bill introduced in the Kentucky House to define gold, platinum and silver coins as legal tender and encouraging their use as currency).

Conclusions

Summing up, a cashless society is a logical extension of negative interest rates. Sufficiently negative interest rates (i.e. below about -0.35 basis points according to the Fed Staff Memo), will cause a liquidity preference for cash on the part of the consumers. It is thus necessary to ban cash, to force people to spend instead of stashing banknotes under the bed. A cashless society would be the end of financial privacy and personal freedom, which should boost demand for gold as investors would seek currency alternatives and safe havens… unless it were banned too.