Capitalism without Cash

Pre-debased for your convenience.

We are so screwed:

One obvious side effect of negative rates is that people would withdraw money from their banks and hold cash. That practical problem means that it is very difficult for banks to push a “real” interest rate on consumers past about -0.5%. Once the negative penalty starts to bite, people just hold bank notes which don’t cost fees.

So how could banks force people to spend hard cash? Ken Rogoff of Harvard University has suggested banning cash altogether. According to the Economist:

Ken Rogoff of Harvard University calculates that there is $4,000 of currency in circulation for every person in America. Much of it is used to hide transactions from tax authorities or the police. Abolishing it would curb such activities, as well as helping central bankers.

Alternatively, Gregory Mankiw, also of Harvard, has made a tongue in cheek suggestion that the Fed hold a lottery in which it periodically declares that notes with serial numbers ending in a given number from 0-9 suddenly be declared worthless. In that scenario, the expect return of holding any notes would be -10%.


Debasing the currency has been the practice of decadent governments since at least the Roman Empire. This was easy enough to do with hard currency. From Wikipedia:

For example, the value of the denarius in Roman currency gradually decreased over time as the Roman government altered both the size and the silver content of the coin. Originally, the silver used was nearly pure, weighing about 4.5 grams. From time to time, this was reduced. During the Julio-Claudian dynasty, the Denarius contained approximately 4 grams of silver, and then was reduced to 3.8 grams under Nero. The Denarius continued to shrink in size and purity, until by the second half of the third century, it was only about 2% silver.

That’s a neat trick, paying back old debts with new currency worth only 2% of the old currency the debt holders were promised.

The problem with debasing hard currency is that it’s pretty obvious. Shrink a coin, and people notice. Reduce the gold content, and people will devise means like the acid test to reveal the scam.

Fiat currencies are even easier to debase, which is one reason — maybe the primary reason — decadent governments love them so. Print up oodles of extra dollars and inflate away the old debts just as sure as shrinking the Denarius. The U.S. dollar retains about 2% of the purchasing power it enjoyed when the Federal Reserve was created a century ago. What took Rome three centuries to do to silver coinage the Fed did in a third that time to paper money.


The problem Europe’s central bankers face now (and our Fed does to a smaller degree) is that their decadent governments have screwed up the economy so much that debasement no longer “works” at getting people to spend money. And if people aren’t spending money, there’s no inflation.

Low interest rates didn’t get people to spend, so Europe is trying negative interest rates. That isn’t working, so the new trick is to outlaw cash, and then tax the digital money people don’t spend.

At which point, of course, people will turn to barter.

And let’s be totally honest here: What Harvard’s Ken Rogoff wants is to give Washington total control over who spends or saves and how much. Because Ken Rogoff thinks that people like Ken Rogoff know best, and ought to be given that much arbitrary power over every single person. I’d also add that it was people who know better and armed with too much power who got us into this mess in the first place.

Islamic groups like ISIS want to return to the 7th century, but central bankers already have us well along the road back to a feudal economy.


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