This article from INTERNATIONAL MAN describes the progress of the war against cash and how it is playing out thus far in Ecuador.
by Jeff Thomas
As is now common knowledge, some of the world’s most powerful countries are insolvent due to ever-increasing sovereign debt. At this point, the economies are being held together through only one factor: continued faith in the currency by the average citizen. As soon as that faith disappears, the economies will crash.
Not surprisingly, the leaders of these countries and their close associates (particularly the banks) are actively seeking means by which they can escape the effects of the crisis they have created and still retain some sort of control.
For some time, I’ve predicted that one way in which they will accomplish this will be the elimination of cash, that in order to prevent a run on the banks in which the average citizen simply removes his money from the system, such a removal would be made impossible by ending the existence of bank notes. It would be replaced with an electronic currency system, so that the only “cash” that exists is a credit in a bank account.
When this prediction was first suggested, it seemed to many to be both alarmist and ridiculous. Mankind has always had hard currency in some form, something physical that could be held in the hand. But with computerisation, the elimination of physical currency is possible.
Banks, with the support of legislation, can require that all transactions (even the purchase of a candy bar) be electronically performed by the account holder. Once this has been achieved, two other advantages (to the bank, not to the account holder) become possible.
First, paper currency can be eliminated, which assures that, no matter how bad things get, account holders can’t remove their cash from the bank and stuff it in a mattress at home, since no physical cash exists. Second, banks could then charge account holders interest for their savings accounts, since transactions could take place only through the banks.
Now the concept of electronic currency is no longer the stuff of fairy tales. Most of the world’s governments have passed laws restricting the amount of cash an individual might use. Those who use cash over the designated amount are, in some cases, harassed or even investigated (generally for money laundering or drug dealing).
Ecuador’s War on Cash
In December 2014, Ecuador instituted its Sistema de Dinero Electrónico (SDE), the world’s first government-controlled electronic monetary system. (Other countries have electronic banking systems, but they are not state run.) And it is US-dollar based.
Back in 2000, Ecuador adopted the US dollar as its official currency, dumping the sucre, which, as a result of hyperinflation, had become devalued to the point of 25,000 to one US dollar. So, the Ecuadoran government scheme will be dollar based.
The system is being promoted as a new, easier way to make payments (either by card or cell phone), eliminating the need to carry cash and making it harder for thieves to steal.
It is also being touted as a way to benefit the poor, although no reasons are being offered as to why this might be so. (If this were their true goal, Quito officials might instead allow for competing private-sector systems, to drive down costs.)
The system is being introduced piecemeal. At present, you can pay for a taxi and some services with the SDE, as well as send money between individuals. By year’s end, it will be possible to pay your taxes with it.
To date, each of the steps taken by Ecuador follow the playbook as I originally put forward. Should Ecuador continue to follow the prediction, when the SDE reaches the point that virtually everyone in the country has an account and is making the majority of their payments by either a debit card or cell phone, the government will announce that paper currency is to be eliminated.
The explanation given at the time might be that cash would no longer be necessary and would be a drain on the economy. (Ecuador spends three million dollars annually replacing worn-out bills.)
Sceptics both within and outside of Ecuador have suggested that the new system may simply be a way of dumping the dollar, but, if anything, the Ecuadoran government is enhanced by the continued use of the dollar.
First, the dollar has allowed relatively low inflation and low interest rates. Second, the dollar is less likely to hyperinflate than a reinstated sucre. Third, the sceptics are overlooking the fact that, once the dollar is electronic only, Ecuador never need buy dollars again. The electronic dollar would be a dollar in name only. In reality, it would not exist. It would be an electronic concept.
(That last bit will take some getting used to, not only in Ecuador, but worldwide.)
Monkey See, Monkey Do
As Ecuador demonstrates the workability of its electronic system, I believe that neighbouring countries will jump on the bandwagon quickly. Each government will say to itself, “Government control of all monetary transactions? Where do we sign up?”
An additional benefit will be the apparent stability of the US dollar. As long as the dollar holds up, governments like Ecuador (and other countries, such as Uruguay and Argentina, that use the dollar as a second currency) will gladly base deposits in dollars.
So, that covers the larger, critically indebted countries, plus the Third-World countries. What of the smaller, prosperous countries whose currencies are presently sound?
It’s entirely possible that smaller, more stable countries, such as Bermuda, the Cayman Islands and Hong Kong, will get on board with the electronic system. They’ll need to, in order to continue international banking.
However, if their own currencies are stable, there’s no real reason for them to eliminate their own currencies for local usage. These currencies may therefore continue, although there’s the danger that either the banks (realising that they can only charge interest on deposits, not on cash kept at home) or governments (who, above all, seek control over their people and recognise monetary control as a primary control) may very well opt to eliminate paper currency.
But is the loss of physical currency really such a bad thing? After all, the elimination of cash does create convenience and might just limit theft in the world to some degree.
Yes, it is indeed quite a bad thing. The overriding effect that the elimination of cash will have on people will be that they will lose their freedom of monetary movement. They will be subject to government and banking surveillance of every transaction and, increasingly, will be subject to legislation that limits currency movement.
Once this point is reached, governments will be free to move to a stage in which they declare that money is not the possession of the individual or company. It’s the possession of the government and the government “allows” the public to use its currency in order to conduct commerce. As such, individuals and companies had best “behave,” or they might find the privilege taken away and the money confiscated.
Of course, the reader may well find this final step to be beyond the pale, even for today’s overreaching governments. Just a year ago, the very concept of a War on Cash itself was considered to be a mere fantasy, yet we are already clearly transitioning into the End of Cash.
And so, anyone who wishes to retain control of his own economic life will soon be facing the realisation that:
- All currency (in most, if not all countries) may soon be held solely in banks and transacted solely through banks.
- All currency that is in banks will be subject to bank and government scrutiny, increasing bank and governmental controls and limitations and possible confiscation and increased taxation.
- All wealth that remains within the control of the individual will be wealth that is held in a non-currency form and held outside banks.
The field for such ownership is becoming increasingl
y limited. It consists primarily of precious metals and real estate, and even those stores of wealth are truly safe only if located in a jurisdiction that is not on the verge of insolvency and whose government is both stable and relatively benign.
Such jurisdictions do exist, but “cash,” as it exists today, must be moved out of hazardous jurisdictions and converted to a safer form of wealth protection before the final legislations have been passed, making cash illegal.
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