When this article was originally published, readers were encountering growing commentary about ending large-denomination notes and perhaps cash itself. Another concern at publication was whether the Federal Reserve might adopt a negative interest rate policy, or NIRP. Supporters described a cashless society as a way to limit funding for terrorism and illegal activity, including drugs and prostitution, while requiring people who were not paying taxes to do so. By then, Japan, Switzerland, and parts of Europe had adopted NIRP to encourage spending, with the hope of supporting GDP growth and financial markets. The original article characterized both approaches as troubling, restrictive of freedom, and potentially damaging to financial markets. It set out to examine those possible disadvantages and explain why gold & silver might have been viewed as a response to those potentially serious policies.
The War on Cash
The move away from cash had developed gradually over many years. The original article noted that U.S. currency had once included bills as large as $10,000, last issued in 1945, compared with $100 at the time of publication. It added that, after adjusting for inflation, $10,000 in 1945 would equal $131,620 at publication. Although $100 had limited purchasing power then, the article said financial elites were advocating the removal of these “large bills.” The original article reported that, one week earlier, Larry Summers, described there as a former Treasury Secretary, had written an Op-Ed for the Washington Post supporting elimination of the $100 bill. It presented that as one recent example and pointed to others here and here. It also reported that Citigroup’s chief economist recommended it was time to eliminate cash. The article viewed those comments as self-interested because greater credit-card use could increase profits for Citigroup and other payment-processing companies.
Issues
At the time of original publication, the article described the following: The article identified privacy as a major concern with removing cash, because credit-card companies and other organizations could track every financial purchase. It also said cashless payments could make it harder for low-margin businesses to remain profitable. Private transactions between individuals, including vehicle purchases and other high-value sales, could become more difficult as well. At publication, few people were said to accept personal checks for valuable property, and even cashier’s checks or certified funds could be counterfeited relatively easily.
The article also raised the possibility that eliminating cash could make a Federal Reserve bank holiday or capital controls easier to impose. It defined a bank holiday as a freeze on bank accounts and capital controls as limits on using or withdrawing account funds. Although that possibility could seem far-fetched, the article observed that citizens of Cyprus and Greece may have felt the same before it became real for them.
Greece & Cyprus
In Greece, the article reported that many businesses or vendors would not accept credit, a situation it said harmed numerous small businesses. It argued that people with access to cash or gold and silver were in a substantially better position than 98% of the population. It also referred to the bank bail in imposed in Cyprus in 2013. The article contrasted that event with U.S. bank bailouts led by Treasury Secretary Hank Paulsen during the prior recession, then explained “bail in.” A bank bail-in, it said, could be more harmful to personal wealth because a share of deposits is confiscated to support the banking system; generally, larger deposits faced larger assessments. The article did not advocate taking all funds out of banks, storing money in a mattress, or using all funds for gold and silver. Instead, it warned that tying life savings entirely to banking could carry risks and expressed the view that holding some physical gold and silver coins or bullion could hedge that risk.
Why Gold & Silver
Because gold and silver had served as money for thousands of years, the article reasoned that they might be broadly accepted during a financial crisis and could allow transactions for goods and services to continue. It also described the metals as vehicles for preserving purchasing power and suggested they could, in some respects, offer an alternative to cash when currencies are devalued during a bank holiday. When the article was originally published, it had recently shared with readers the value of gold in major currencies, many of which it said had performed poorly in foreign-exchange markets over the preceding years. It stated that gold had risen most against the weakest currencies and suggested gold and silver could react similarly in dollar terms if the dollar were further debased in the future.
Negative Interest Rate Policy
The article connected the removal of cash, particularly large bills, with negative interest rate policy. It explained that when central banks adopted NIRP—as the article said the Bank of Japan, European Central Bank, Switzerland, Denmark, and Sweden had recently done—they charged depositors for keeping money in banks. The article called that outcome absurd. At the time of publication, it reported that the referenced countries and central banks assessed negative interest rates to depositors of -.1%, -.3%, -.75%, -.65% and -.5%, respectively. Under that illustration, after one year, $100,000 deposited in a Swiss bank would become $92,500. The article said withdrawing cash and holding it outside banks would seem logical under negative rates, but eliminating large notes or cash would prevent that choice. It described NIRP’s goals as encouraging spending to raise GDP or directing savers to equities and higher stock prices. Central bankers, it said, could view both results favorably because they supported an appearance of economic health. The article argued that retirees with fixed incomes could be especially affected because they might be pushed toward more risk than they could manage.
NIRP in the U.S.
Up to that point, the article said, the Federal Reserve had followed a zero interest rate policy, or ZIRP, to hold rates artificially low in hopes of stimulating the economy. It stated that the desired effect had not materialized and that the Federal Reserve was reportedly considering NIRP. The article argued that if ZIRP could debase a currency, NIRP could cause the dollar to fall sharply. Because gold and silver were described as generally moving inversely to dollar strength, while acknowledging exceptions, it predicted that the metals could rise if the Federal Reserve adopted negative rates. It also said currency debasement reduced purchasing power and generally raised prices, particularly for imports. At publication, the article recommended considering physical gold and silver coins or bullion rather than the highly leveraged gold futures market.
For readers who regarded a U.S. negative-rate policy as unlikely, the original article suggested reviewing this chart from Zero Hedge. It said the material could be read in several ways but appeared to show investors betting that the Federal Reserve could impose negative rates as early as 2017. The author noted that a local banker, that banker’s CEO, and CNBC commentators would deny a move toward NIRP, while advising readers at publication to follow the money.
Summary
In closing, the article considered the then-current debate over cash and the prospect of Federal Reserve negative rates. It interpreted the actions of financial elites as evidence of movement toward a cashless society, likely starting with the removal of large bills. Less cash, it argued, could make bank holidays, capital controls, and bail-ins easier for central banks to use if needed. The article further said this would complement NIRP by forcing savers either toward equities, lifting stock prices, or toward spending, increasing GDP. Higher stock prices, it added, could reinforce a narrative of a fundamentally strong economy. In either case, the article’s historical view was that gold and silver could preserve purchasing power and offer options outside banking, while holding some cash was also described as sensible.
