By Joseph Salerno
The Circle Bastiat
Wednesday, March 28, 2012
http://bastiat.mises.org/2012/03/laundered-money/
By repeatedly refusing to print money in larger bills, the Feds make it harder to make huge financial transactions and can more easily monitor the financial maneuverings of citizens.
Under cover of its multiplicity of fabricated wars on drugs, terror,
tax evasion, and organized crime, the US government has long been waging
a hidden war on cash. One symptom of the war is that the largest
denomination of US currency is the $100 note, whose ever-eroding
purchasing power is far below the purchasing power of the €500 note. US
currency used to be issued in denominations running up to $10,000
(including also $500; $1,000; $5,000 notes). There was even a $100,000
note issued for transactions among Federal Reserve banks. The United
States stopped printing large denomination notes in 1945 and officially
discontinued their issuance in 1969, when the Fed began removing them
from circulation. Since then the largest currency note available to the
general public has a face value of $100. But since 1969, the
inflationary monetary policy of the Fed has caused the US dollar to
depreciate by over 80 percent, so that a $100 note in 2010 possessed a
purchasing power of only $16.83 in 1969 dollars. That is less purchasing
power than a $20 bill in 1969!
Despite this enormous depreciation, the Federal Reserve has
steadfastly refused to issue notes of larger denomination. This has made
large cash transactions extremely inconvenient and has forced the
American public to make much greater use than is optimal of
electronic-payment methods. Of course, this is precisely the intent of
the US government. The purpose of its ongoing breach of long-established
laws regarding financial privacy is to make it easier to monitor the
economic affairs and abrogate the financial privacy of its citizens,
ostensibly to secure their safety from Colombian drug lords, Al Qaeda
operatives, and tax cheats and other nefarious white-collar criminals
Now the war on cash has begun to spread to other countries. As
reported
a few months ago, Italy lowered the legal maximum on cash transactions
from €2,500 to €1,000. The Italian government would have preferred to
set a €500 or even €300 maximum limit but reasoned that it should permit
Italians time to adjust to the new limit. The rationale for this limit
on the size of cash transactions is the fact that the profligate Italian
government is trying to reduce its €1.9 trillion debt and views its
anticash measures as a means of cracking down on tax evasion, which
"costs" the government an estimated €150 billion annually.
The profligacy of the Italian ruling class is in sharp contrast to
ordinary Italians who are the least indebted consumers in the eurozone
and among its biggest savers. They use their credit cards very
infrequently compared to citizens of other eurozone nations. So deeply
ingrained is cash in the Italian culture that over 7.5 million Italians
do not even have checking accounts. Now most of these "bankless"
Italians will be dragooned into the banking system so that the
notoriously corrupt Italian government can more easily spy on them and
invade their financial privacy. Of course Italian banks, which charge 2
percent on credit-card transactions and assess fees on current accounts,
stand to earn an enormous windfall from this law. As controversial
former prime minister Berlusconi noted, "There's a real danger of
crossing over into a fiscal police state." Indeed, one only need look at
the United States today to see what lies in store for Italian citizens.
Meanwhile the
war on cash
in Sweden is accelerating, although the involvement of the state is
less overt. In Swedish cities, cash is no longer acceptable on public
buses; tickets must be purchased in advance or via a cell-phone text
message. Many small businesses refuse cash, and some bank facilities
have completely stopped handling cash. Indeed in some Swedish towns it
is no longer possible to use cash in a bank at all. Even churches have
begun to facilitate electronic donations from their congregations by
installing electronic card readers. Cash transactions represent only 3
percent of the Swedish economy, while they account for 9 percent of the
eurozone and 7 percent of the US economies.
A leading proponent of the anticash movement is none other than Bjorn
Ulvaeus, former member of the pop group ABBA. The dotty pop star, whose
son has been robbed three times, believes that a cashless world means
greater security for the public! Others, more perceptive than Ulvaeus,
point to another alleged advantage of electronic transactions: they
leave a digital trail that can be readily followed by the state. Thus,
unlike countries with a strong "cash culture" like Greece and Italy,
Sweden has a much lower incidence of graft. As one "expert" on
underground economies instructs us, "If people use more cards, they are
less involved in shadowy economy activities," in other words, secreting
their hard-earned income in places where it cannot be plundered by the
state.
The deputy governor of the Swedish central bank, Lars Nyberg, gloated
before his retirement last year that cash will survive "like the
crocodile, even though it may be forced to see its habitat gradually cut
back." But not everyone in Sweden is celebrating the dethronement of
cash. The chairman of Sweden's National Pensioners' Organization argues
that elderly people in rural areas either do not have credit or debit
cards or do not know how to use them to withdraw cash. Oscar Swartz, the
founder of Sweden's first Internet provider, a supporter of the phasing
out of cash, argues that without the adoption of anonymous payment
methods, people who send money and make donations to various
organizations can be "traced every time." But, of course, what the
artless Mr. Swartz does not see is that this is the whole point of a
cashless economy — to make even the most intimate economic affairs of
private citizens transparent to the state and its fiscal and monetary
apparatchiks, who themselves hate and fear transparency like vampires do
sunlight. And then there are the benefits that accrue to the
government-privileged banking system from the demise of cash. One
Swedish small businessman shrewdly noted the connection. While he gets
charged 5 kronor (80¢) for every credit-card transaction, he is
prevented by law from passing this on to his customers. In his words,
"For them (the banks), this is a very good way to earn a lot of money,
that's what it's all about. They make huge profits."
Fortunately, the free market provides the prospect of an escape from
the fiscal police state that seeks to stamp out the use of cash through
either depreciation of central-bank-issued currency combined with
unchanged currency denominations or direct legal limitation on the size
of cash transactions. As Carl Menger, the founder of the Austrian School
of economics, explained over 140 years ago, money emerges not by
government decree but through a market process driven by the actions of
individuals who are continually seeking a means to accomplish their
goals through exchange most efficiently. Every so often history offers
up another example that illustrates Menger's point. The use of sheep,
bottled water, and cigarettes as media of exchange in Iraqi rural
villages after the US invasion and collapse of the dinar is one recent
example. Another example was Argentina after the collapse of the peso,
when grain contracts (for wheat, soybeans, corn, and sorghum) priced in
dollars were regularly exchanged for big-ticket items like automobiles,
trucks, and farm equipment. In fact Argentine farmers began hoarding
grain in silos to substitute for holding cash balances in the form of
depreciating pesos.
As has been widely
reported
recently, an unlikely crime wave has rapidly spread throughout the
United States and has taken local law-enforcement officials by surprise.
The theft of Tide liquid laundry detergent is pandemic throughout
cities in the United States. One individual alone stole $25,000 worth of
Tide detergent during a 15-month crime spree, and large retailers are
taking special security measures to protect their inventories of Tide.
For example, CVS is locking down Tide alongside commonly stolen items
like flu medications. Liquid Tide retails for $10–$20 per bottle and
sells on the black market for $5–$10. Individual bottles of Tide bear no
serial numbers, making them impossible to track. So some enterprising
thieves operate as arbitrageurs buying at the black-market price and
reselling to the stores, presumably at the wholesale price. Even more
puzzling is the fact that no other brand of detergent has been targeted.
What gives here? This is just another confirmation of Menger's
insight that the market responds to the absence of sound money by
monetizing highly salable commodities. It is clear that Tide has emerged
as a subsidiary local currency for black-market, especially drug,
transactions — but for legal transactions in low-income areas as well.
Indeed police report that Tide is being exchanged for heroin and
methamphetamine and that drug dealers possess inventories of the
commodity that they are also willing to sell. But why is laundry
detergent being employed as money, and why Tide in particular?
Menger identified the qualities that a commodity must possess in
order to evolve into a medium of exchange. Tide possesses most of these
qualities in ample measure. For a commodity to emerge as money out of
barter, it must be widely used, readily recognizable, and durable. It
must also have a relatively high value-to-weight ratio so that it can be
easily transported. Tide is the most popular brand of laundry detergent
and is widely used by all socioeconomic groups. Tide also is easily
recognized because of its Day-Glo orange logo. Laundry detergent can
also be stored for long periods without loss of potency or quality. It
is true that Tide is somewhat bulky and inconvenient to transport by
hand in large quantities. But enough can be carried by hand or shopping
cart for smaller transactions while large quantities can easily be
transported and transferred using automobiles.
Just like the highly publicized war on drugs that the US government
has been waging — and losing — for decades, it is doomed to lose its
surreptitious war on cash, because the free market can and will respond
to the demand of ordinary citizens for a reliable and convenient money.
Reprinted with permission.
For further reading:
"The end of the cash era",
The Economist, February 15, 2007
