The next weapon in the war on cash: capital controls

Walking past Poundland this week, I saw a sign in the window: “Free to use cash”. Gosh, I thought, has it come to that already? Let me explain. I had been thinking about Haruhiko Kuroda introducing negative interest rates at the Bank of Japan. I’d been thinking about just how much of the bond market in Europe offers a negative yield to maturity (about 30%, UBS’s Bill O’Neill told me this week). And I had been reading an article written by one of my colleagues about what might bring negative interest rates to the UK.

So my convoluted thought process went a bit like this: when interest rates are negative – that is, you have pay the bank to keep your money in an account rather than the other way around — no one wants to have cash in the bank. Why would you want to see the nominal value of it fall every day? So it makes sense to use physical cash instead: no one has yet figured out how to take interest off actual notes and coins.

If the point of negative interest rates is to force people into spending money by taking their money away from them if they don’t, this use of real cash clearly stops the policy working particularly well. And that in turn means that our central bankers need to find ways to prevent us holding and using cash.

The obvious way is something I have written about here before – banning cash outright. But you could also make it something no one wants by perhaps putting a surcharge on using it, rather like the plastic bag charge recently introduced across the UK. You could for example insist that an extra 1p was charged on for every £1 of physical cash used.

And if you really wanted to get the nation’s cash out from under its mattresses you could make it very clear that the charge would rise to 50p over, say, a five-year period. That would have the benefit of being forward guidance that you could deliver on (a pleasant change); but it would also get most of the cash in the UK into someone’s tills pretty sharpish – and very probably give central bankers the inflation they so crave.

However, in the short term it would also give the likes of Poundland a wonderful opportunity to run an advertising campaign along the lines of “A pound is still a pound at Poundland” or “Free to use cash at Poundland.” It would cut their margins a bit too, of course, but think of the love they would win from the one-time cash hoarders (me included). So that’s where my mind was going as I processed the fine. And why I went into Poundland to investigate further. It turns out the sign actually said “Free to use cash machine here”.

You think I’m crazy. Who goes out to have their hair cut (yes, finally – thanks for all your emails on the matter) and can’t make it back without having dark visions of extreme financial repression via cash confiscation? But it isn’t crazy.

First, negative interest rates are no longer unusual – although they aren’t yet much aimed at the retail market. You have them in Switzerland, in Denmark, Sweden, in the eurozone and now in Japan. The US has stress tested for them and in the UK senior central bankers have long been discussing how they might work. They are just part of the modern banker’s toolkit — one we could easily see used here if sterling started to strengthen or if deflation really took hold (let’s not forget that mountains of government debt don’t sit well with deflation) and one I’d be amazed not to see in the US next time recession hits.

And banning cash? When I last wrote about this I told you that it would happen, but that it would be introduced as a protection against money laundering terrorism and the like. That’s not crazy. There is talk about banning the €500 note (you haven’t been able to get this at bureaux de change in the UK since 2010) and this week Germany’s deputy finance minister said that he could imagine a national limit on cash transactions of €5,000.

It has begun. When I last wrote about this – negative interest rates and a possible ban on cash – not everyone was convinced. None of this will happen, said a reader in the comments section last time I wrote about this here. If the Bank of England made interest rates negative and then banned cash “we would all move our savings out of the UK and start using dollars or euros for cash transactions.” There’d be capital flight.

Unfortunately that’s something you can only believe if you haven’t ever had good root around in a central banker’s toolbox. If you have, you’ll know what they might be reaching for next: capital controls. You think that preventing people from moving their own money around the world as and when they want is archaic nonsense?

Then think back to the UK’s own long history of capital controls. Even in the early 1960s you couldn’t buy enough foreign currency to bag a house abroad unless you could prove “good medical reason” for needing to move to the sun. And even then you were only allowed to take “reasonable provision for furniture” with you when you fled. The IMF issued a report suggesting approval of capital controls under some circumstances in 2012. A primer on the matter from the St Louis Fed is so high up the search results on Google that I can only conclude that every junior central banker in the world has recently downloaded it.

And of course several countries already have them in place (in particular, China is tightening controls in an attempt to stop its rich moving their money out). Could controls come back in the UK? That depends on what our central bank might be trying to do. Capital flight is nice if you are trying to collapse your currency to create inflation. It’s rubbish if you want to force people to spend and invest inside your own borders in order to create inflation.

So you want a bit, but not too much. Start thinking down this route (trust me, you aren’t alone) and you will soon come up with other reasons why we might see capital controls again (most forms of extreme monetary intervention eventually prompt capital flight). It may never happen – perhaps some kind of government wisdom will intervene. But I’m making a mental list of possible medical reasons why I need to be allowed to hold enough foreign currency to finance a trip to Tenerife every year. Just in case.

• This article was first published in the Financial Times

  • Ana Prada

    Every day, the more I love physical bullion. This appears to me the only method to fight central banks/governments wealth confiscation. But bullion still has so much apathy from the general public, hardly anyone has it. As Max Kaiser, put it “but silver, crash JP Morgan”, perhaps he does have a point. Although he (Stacy Herbert) have been a key proponent of digital money, perhaps RT/Russia is in the act too of getting us to dislike paper money & give another one of our freedoms. I don´t trust Max Kaiser, too much.

    The big question still remains, the solvency of many of these banks. Wells Fargo, Citigroup, Santander, Deutsche Bank, to name but a few. Capital controls are already in place in Spain. You cannot purchase anything in cash over €2k. It´s entirely possible local currencies, which are underpinned by silver, a sort of cooperative. This sort of idea could potentially do very well!

    What is the world coming too, when central banks/governments don´t wish for people to save?

    • Will Madden

      Bitcoin. The djinni’s out of the bottle it’s going to change things in 10-50 years.

      • Ana Prada

        No, I don´t believe it Bitcoin, it is just another Fiat currency. Turn off the internet, Bitcoin is as good as dead. Historically the only decent currency that holds value is gold possibly silver, although no central bank owns silver no more.

        You can have Bitcoin 1,2,3 & then 4. The original Bitcoin becomes worthless. & more importantly who in god´s name accepts Bitcoin?????? It´s incredibly difficult to buy.

        • SandwichOfEarl

          Fiat currency is “legal tender by government decree”. Bitcoin doesn’t fit that definition at all. Sure, you can maybe kill bitcoin if the internet was turned off, but the internet would have to be turned off absolutely EVERYWHERE and PERMANENTLY.

          You can try making your bitcoin 1, 2, 3, 4, but the only real one is going to be the one with the most hashing power securing it, the others will simply die due to being insecure. This is how bitcoin is defined, the longest blockchain with the most proof of work.

          A good number of companies accept bitcoin: Overstock, Dell, Microsoft, Tigerdirect, Newegg, Expedia, Reddit, Okcupid, and soon Valve. Those are just he big companies that I can recall from the top of my head. So it seems that bitcoin is currently more usable than gold. It is also easy to buy bitcoin, just use a service like coinbase or circle.

        • Neil Pattison

          Bitcoin is quite easy to acquire, though you do need to go through basic KYC and AML procedures. There are a large number of people trading it, in a variety of ways, from large exchanges to p2p transactions. Any “difficulty” is primarily down to barriers in the interface between bitcoin and conventional banking.

          The number of companies accepting bitcoin is also increasing every day (though take-up in the UK seems relatively limited). Quite a lot do not accept bitcoin directly, but use intermediary services, where the purchaser uses bitcoin and the merchant receives fiat (with the intermediary taking the exchange rate risk).

          As for “turning off the internet” (unless it’s a complete “collapse of civilization” scenario – in which case physical gold and silver will be much less valuable than food, fuel, clothes and shelter), it’s going to become increasingly hard for a Western government to do that, not only because internet access is now considered to be a human right, but also because peer-to-peer networking technologies are coming along that could, if needed, be used to provide alternatives to a centrally controlled network. The internet itself is, of course, based on network technology designed to survive a nuclear war.

  • SandwichOfEarl

    we already have the tools to defend against capital controls: gold, silver, and bitcoin.

    • jaizan

      Anyone who owns physical gold which the authorities are not aware of can at least avoid negative interest rates.
      However, it would still be very difficult to move that out of the country if export of gold were ever banned & airport scanners checked for it.

      Also, if the government ever bans gold holdings and knows you have the stuff, then that is no protection.
      I think the best protection against capital controls is some offshore investment, all above board & declared.

      • SandwichOfEarl

        you mention the limitations of gold, but I believe bitcoin solves them. Bitcoin can be moved out of the country extremely easily – very fast and very cheap, and the transaction can’t be censored/blocked. and bitcoin can bypass airport scanners because you can have your bitcoins stored simply as a pass phrase that exists only in your head.

  • Victor Fomin

    Bitcoin will come to the rescue – it already does in China, where capital controls are getting worse by the day.

  • cornishtinmine

    … I think there will be a rise of more local currencies like the Totnes Pound which encourage people to trade locally, and exchanging skills – e.g. I’ll decorate your house if you do my plumbing. Who needs cash then? But that could cause a problem for the Chancellor as there would be less income tax and VAT! Time for a Land Value Tax perhaps?

  • Jason

    Why are we even thinking about negative rates and all the other **bs such as QE that is going on. We are now in year 16 of the new millennium. Can we go back to 1999 and pretend the last 16 years of economic madness didn’t happen? A bit like Bobby Ewing waking up from a dream in Dallas.

    Someone needs to press the reset button and put the money printing Genie back in the bottle. The source of all these problems seems to be the massive credit expansion that the greedy Banksters were allowed to embark upon after deregulation in the 1990’s. The West has been living beyond it means for years now, and all these credit expansion schemes are trying to cover up this fundamental fact. The fractional reserve banking rules were in place for reason, but our wise politicians of the day thought they knew better.

    If you can’t trust the value of pound in your pocket and make some interest from your savings, then it is a sad sad situation we have got ourselves in. I have no mortgage to pay and savings in the bank. I buy everything with money I have earned, not on debt or credit. The pot of money I have in savings is now under attack. I don’t want to buy any more ‘stuff’ in particular. I don’t want a bigger house, a better car or anything expensive in particular. I just want to enjoy living with few money worries. But apparently that’s wrong from the Central Bankers view, I am not a good consumer and I shouldn’t have money in the bank!! Their untested extreme intervention policies is exactly the reason why savers save. We don’t know what crazy idea they will come up with next!! Let Capitalism work as it should, there is no ‘too big to fail’ in true Capitalism!!

    My father and grandmother taught me the value of saving and not buying things on ‘tick’ years ago. Those of us that save and are careful with money are now next in the firing line to have our pockets legally picked. Despicable!!

    • nowill

      Reference gold,bitcoin etc,an SOE operative parachuted into Greece in early 1945 found that his gold sovereigns were of no interest to the locals as payment but the silk from his parachute most definitely was-it could be turned into comfortable underwear .
      A recent visitor to the North Korean border with the south found that miniature shampoo bottles taken from the Koryo hotel in Pyongyang were very valuable with border guards when exchanged for the right to take forbidden photographs.
      It seems that conventional [central] banking is an industry on its way out on account of its inability to understand human resourcefulness or basic economics.Do economists never visit shops or street markets?

    • Andy

      Spot on!