Professor Salerno has often written and spoken on the war on cash that has been developing in Western economies—predominantly in the U.S. and Scandinavian countries—as a means to track citizens’ private financial dealings and enable negative interest rate policy. This phenomenon is part of the larger scheme through which governments cover their tracks in terms of monetary policy and prop up the banking system.
In a system of fiat money and fractional reserves, there are very few limitations on the expansion of the money supply and bank credit. The prospect of a breakdown of the entire monetary system, with hyperinflation and a crack-up boom, broadly curtails the assiduousness of governments and banking system in driving down the purchasing power of money and the interest rate—but its likelihood is rather low. More importantly, the inflationary potential of monetary policies is attenuated by banks holding excess reserves, and/or by the public preferring cash to checking accounts, i.e. hoarding the currency out of the banking system. These latter actions reduce the ‘money multiplier’, and thus restrict the ability of the banking system to further inflate the supply of money and credit. By penalizing cash transactions, governments are in fact enabling looser monetary policies.
Mises became aware of this mechanism with the introduction of the gold exchange standard, although he had been unaware of its dangers at first. As Professor Hülsmann (2007, 650) notes, earlier in his career Mises “had come close to poking fun at the simpletons who believed coins of precious metal were money in some stronger sense than banknotes were”, but had eventually come to realize the importance of the actual circulation of gold—or, in the present day, the circulation of cash—in restraining monetary policy. Mises himself recounted in private correspondence that “I changed my mind concerning the functioning of the gold exchange standard as it happened more than 30 years ago.”
In 1948, Mises presented his arguments in favor of gold coin circulation—which he would later expand in Human Action (p. 780)—in a roundtable discussion (Hülsmann 2007, 651):
If gold coins are employed in daily transactions, if everybody is used to receiving and giving away gold pieces, if people are accustomed to carrying gold coins for retail purposes, the public becomes aware of the fact that gold is the nation’s standard money and that the country is under a gold standard. This cognizance has not merely pedagogic value. It enables the average citizen to realize in time whether his government is clinging to sound monetary policies or whether it is tampering with the currency system.
The weakness of a gold standard without effectual circulation of gold coins consists precisely in the fact that it makes it extremely difficult for the average citizen to discern inflation in its early stages. . . . An effectual gold coin circulation makes the voter the guardian of the gold standard. This is its main function.
Thus, the added shortcoming of a fiat money standard with no effectual cash circulation (like the current one is aiming to become) is that the central bank is given absolute free reign of the monetary system. In Rothbard’s words, “the more the public is willing to hold checking accounts rather than cash, the greater the inflationary potential of the central banking system (2008, 132). With the last hindrance removed, the likelihood of a breakdown of whatever remains of the monetary system is rapidly increasing.
