There have been a lot of back page reports about the so called “war on cash”. India is the best example, since they severely restricted cash use last October. But they’re not alone. A cash clampdown also seems to be taking shape in Australia and several European countries already have plans in place to restrict cash use. Will it happen in the US? Probably not. I believe that the war on cash is unlikely to reach America’s shores.
Why write about the war on cash on a personal finance blog? Because the elimination of cash would be a certified game-changer, were it to actually happen. But that’s my point, that it’s highly unlikely to happen here. People shouldn’t spend time worrying about it. It’s like the misguided notion that Social Security is going broke. It makes for sensational headlines, despite the fact that the chances of it happening are completely remote.
So let’s dare to take a close look at the war on cash, and then layout why it’s entirely unlikely to happen here in the US.
Why a War on Cash?
There are two basic stated reasons why the war on cash subject comes up, including here in the US.
The first is criminal activity. Since the use of cash is common by criminals – to eliminate any “paper trail” of their activity – it’s thought that banning cash will substantially reduce the rate of crime.
The second is the elimination of income tax evasion. Since it’s very difficult to collect taxes on income that’s received in cash, it’s thought that eliminating it will force businesses to go to traceable payment sources. That will increase incomes, and also income tax revenue to the government.
There’s some legitimacy to implementing a ban on cash, but mostly in regard to income tax evasion. There are no hard and fast numbers on the size of the cash economy, but in 2013 the ”shadow economy” was estimated at $2 trillion. That’s more than 10% of current US total gross domestic product (GDP).
If just 10% of that amount could be collected in income taxes, it would result in $200 billion in extra tax revenue (which would only reduce, but not eliminate, the current near $600 billion annual federal government budget deficit).
The claims that it will reduce crime, in my opinion, are completely misguided. Criminals are criminals precisely because they are always one step ahead of the authorities. Ban cash, and they’ll simply find a different way to operate.
So now that we’ve established the primary stated reasons for the war on cash, let’s turn to why it’s probably not going to happen in the US. In fact, I have five reasons why it won’t.
1. The US Dollar is the International Reserve Currency
International reserve currency means that international obligations are settled primarily in US dollars. This means that if France buys oil from Saudi Arabia, they will pay the bill in US dollars, and not in euros.
Having the international reserve currency is not just a convenience or a matter of national pride for the US. It’s probably the single biggest reason why the US occupies such a dominant position in the world. Having a world dependent upon your currency is a greater source of power even than the strongest military force.
For example, international reserve currency status enables the US to run perpetual (very large) annual budget and trade deficits. After all, since we can pay our international obligations in our own currency, the twin budget deficits are not nearly the burdens that they would be for other countries.
The international reserve currency status also gives us tremendous influence over other countries. The US government is even able to enact laws that apply to both foreign governments, and to business organizations that don’t even have operations on American soil.
But in order to maintain international reserve currency status, the US dollar must be completely and utterly liquid. That is, it must be more transferable and readily usable in the international economy than any other currency. That means that there have to be as few restrictions on its use as possible.
Cash is a big part of the liquidity of the US dollar. The fact that dollar cash is able to be traded and accepted in the board rooms and marketplaces of the entire globe is a major reason for its consideration as the reserve currency. But if the government moves to limit the use of cash, that liquidity will be impaired.
I’ve heard it reported from different sources that approximately two-thirds of all US cash currency is circulating outside of the country. A 2013 report by NPR indicates that two-thirds of all US $100 bills are held internationally.
The US government may want to ultimately eliminate cash, but it is entirely unlikely to do so if it would in any way threaten or impair the status of the dollar as the international reserve currency.
Countries like India, Australia and Venezuela can eliminate cash, precisely because their currencies are primarily domestic affairs. That is, most of their cash circulates at home. Banning it then would be a domestic issue, and not have a major impact on their international positions.
2. Keeping Cash Legal in a Cash-less World Will Bring a Flood of Money to the US
Let’s say that most of the countries in the world, particularly the developed rich countries, decide to go cash-less. Will the US follow suit? Almost certainly not.
As other countries go cash-less, the attraction of the US dollar, and of the US as a safe haven, will only increase. That will increase the value of the dollar, drawing more wealth into the country.
Any country that eliminates cash runs the risk of seeing a capital flight into the countries that still accept it. Once again, it’s about the free flow of money, which is critical to economics at all levels. The countries where money is most widely accepted in all forms, and with the fewest restrictions, are likely to gather increasing amounts of capital, as well as economic activity. By keeping cash in circulation, while other countries go cash-less, America wins by default.
It’s unlikely that the US will be alone in not banning cash. Russia and China, looking to replace the dollar with their own currencies as the international reserve currency, are also very unlikely to ban cash. And while the government of the UK has a long history of making boneheaded decisions in such matters, they usually do the right thing on legislation that truly matters. Just consider that the UK never abandoned its own currency in favor of the euro.
Any countries that continue to issue and welcome cash will make things extremely uncomfortable for those who attempt to ban it. I can even see most of the cash-less countries eventually reversing their cash bans.
3. The Poor are More Cash Dependent than Everyone Else
While the elites like to associate the use of cash with criminals and income tax evasion, no segment of American society is more dependent on cash for their daily survival than the poor. Unable to have bank accounts or credit cards, they’re consigned to paying for their wants and needs with cold hard cash.
A 2015 FDIC survey found that there are 9 million households in the United States that do not have a bank account. They are referred to as “unbanked” in official circles. An additional 24.5 million households were described as “underbanked”. That refers to households that ”…had a checking or savings account but also obtained financial products and services outside of the banking system.”
A ban on cash would fall most heavily on this group. Absent traditional banking relationships, their circumstances would get much worse if cash is restricted or banned.
It’s not just the desperately poor will be affected by this either. My wife, who has spent many years working in banking, has told me on different occasions how people in low income jobs commonly show up at the bank and cash their paychecks upon receipt.
This is just my speculation of course, but I believe that such people are cashing their paychecks because they also have credit issues that force them to make payments in cash.
Whatever the cause, and whatever the methodology, a ban on cash – or even a severe restriction – would fall heavily on tens of millions of people on the bottom rungs of the economic ladder.
4. The Bad Guys Will Always Find Ways Around Any Restrictions
I’m not at all sure that the people in ruling circles in America get this concept, or are willing to admit to its truth. But the fact of the matter is that the bad guys will always find a way around any law, regulation, or threat of death or imprisonment that’s imposed.
Every society has a class of people who simply won’t comply. No war on cash – or any other restriction – will put an end to that outcome. Ban cash completely, and the bad guys will simply find another method of payment.
There’s a dark side to this as well. Restricting or banning cash will almost certainly cause the criminal element to become even more brutal and dangerous than they are right now. Simply put, these are people who don’t play by the rules, and they won’t play by this one either.
5. Elimination of Cash Will Lead to Use of Alternative Currencies
From a government standpoint, a war on cash is not without risks. The greatest risk is that an absence of cash will force people into seeking other means of buying and selling. That raises the risk of alternative currencies, and that’s a forbidden place where no government wants to go.
The reason why governments carefully worked to create and preserve currency monopolies is that having complete control over the money supply makes it far easier for governments to tax income. It also makes it easier for governments to create money out of thin air. That’s been true ever since the creation of paper money, and is even more true with digital money.
But as much as we think that a government monopoly on currency is normal, it’s actually a relatively recent phenomenon (only since 1933 in the US).
Up until the 20th century, there was no exclusive legal currency. People transacted in gold and silver, as well as a variety of notes that represented a claim against the precious metals. Examples include silver certificates and banknotes. Various foreign currencies may also have been accepted for exchange, even within the US.
And for thousands of years, barter was also a viable means of exchange. One could for example, exchange deer skins or tobacco for grain or a winter coat.
All of those mediums of exchange are exactly what governments don’t want to go back to. But ban cash, and that’s exactly what could happen.
A Monetary Shift is More Possible Today than Anyone Thinks
Today we even have potentially new and unique mediums of exchange. For example, crypto currencies – like Bitcoin and Ethereum – are growing rapidly, even if the average person has little knowledge of them. I don’t claim to know much about crypto currencies, but I have a strong feeling that all governments, especially the US, are very wary of them.
The war on cash could be the mystical force that causes crypto currencies to make a rapid advance into the mainstream economy. This is now possible since the majority of people in the US have access to the internet. As cash becomes less welcome, people could gradually shift to other mediums of exchange, including crypto currencies, gold, silver, barter, the currencies of foreign nations that haven’t banned cash, or even some as yet undiscovered means of trade. Local currencies have also come into existence, just as they have in the past.
Human ingenuity and flexibility in the face of adverse circumstances can cause magical things to happen. Given the history of monetary systems, along with the prospect of rapid advances in technology, the war on cash could go horribly wrong from a government standpoint.
My guess is that cooler heads will prevail in Washington DC, and in other national capitals, and the whole ugly episode will be avoided. Cash is convenient, and we’re familiar with it. And as the saying goes, if it ain’t broke, don’t fix it. Cash may not be the perfect system from a government standpoint, but it will be a lot better than what might replace it.
What are your thoughts? Should we be worried about a war on cash here in the US? Or do you agree with me that it’s unlikely to happen? All thoughts are welcome!