March 4, 2016

“The readies”, in British criminal slang, means cash. In Hebrew, both modern and rabbinic, the term is identical – “mezumanim”, with the Yiddish term ‘mezumener’ drawn straight from it. In Israeli street slang, and sometimes even in business circles, people speak of “kesh mahnee”. But all these terms come down to the same thing: wads of bank notes.

Of course, bank notes themselves are a relatively recent invention. In pre-modern times, “mezumanim” (cash) and “metsaltsalim” (coins, that jingle) were pretty much synonymous – and the value of those coins was defined by their metallic content, whether gold or silver or a lesser metal.

Bank notes, which have no intrinsic value but are in fact promissory notes representing the obligation of the issuer to pay real money to the holder of the note, were a much more convenient method of holding money — and also much more sophisticated, in that they required all the users to have faith in the issuer’s ability to stand behind that promise. That need for faith is a primary reason why note issuance gradually moved from the private to the public sphere, as periodic bank runs and consequent bankruptcies and collapses, taught people the hard way to distinguish between different institutions’ promises.

The twentieth century was marked by two parallel trends with regard to cash money. First, the gradual retreat from direct, legally defined relationships between notes issued by governments and gold or silver. After August 1971, when Richard Nixon terminated America’s obligation to deliver an ounce of gold to anyone presenting thirty-five US dollars to the US Treasury and demanding same, all key currencies have been “fiat money”, issued in the amount desired by the government of the issuing country, with no statutory link to any external, “objective” value.

Secondly, the use of cash, in the form of notes and coins of all sorts, has steadily declined as a share of economic activity, even at the household level, let alone in the corporate and financial spheres. First the cheque, then the plastic card in all its steadily-more-sophisticated forms, and then electronic money, have replaced cash and rendered it increasingly more primitive, inefficient and hence undesirable.

But even in the twenty-first century, there are clear and present advantages to “readies’. One is its anonymity, which is the reason why wads of cash are now automatically associated with illegal activity (“pay cash and avoid tax” is the motto of the underground economy everywhere). Suitcases full of cash used to be the hallmark of Mafia or other organized crime organizations, but are now more readily linked to terror groups and their financing – although oligarchs are also assumed to be users of cash-stuffed suitcases, notably for buying high-end properties in very sought-after locations for absurdly high prices.

Cash’s guilt by association with the  Mafia, terrorists, “oligarchs” and the like, is now being utilized by the governments of developed economies as a justification to systematically reduce the use of cash and, ultimately, to eliminate it altogether. However, although the big-time bad guys undoubtedly use and abuse cash, they are not the only, or even the main, reason why a global anti-cash drive is underway.

Rather, the need to kill cash is linked to the development of new, post-crisis forms of monetary policy. Specifically, it flows from the move from ZIRP (zero interest rate policy) to NIRP (negative etc.) by a growing list of central banks.

Economic theory used to teach that zero was the “lower bound” for interest rates, meaning that they could not fall or be pushed to negative levels, which would mean that lenders (eg depositors in banks) would be paying borrowers (banks) for the right to put their own money in their bank accounts. In this (formerly theoretical) situation, it was assumed that people would prefer to hold cash themselves rather than to pay the bank to hold it.

However, holding cash carries costs. For large firms and certainly for financial institutions, these costs are significant – pension funds cannot have tens or hundreds of millions of shekels, dollars or whatever sitting in their office safes. Even for households, holding tens of thousands of whatevers is not generally practical or desirable.

It is therefore becoming clear that pushing interest rates to minus 0.1%, or even 0.5%, is doable. Sweden has gone lower still, without triggering a “flight to cash” on the part of households and small businesses. Consequently, the discussion now (in professional circles and the blogosphere, not yet much in the mainstream media)  is how deeply negative interest rates can be pushed – with rates as low as minus 2% or even 3% being mooted as realistic.

Meanwhile, the world’s central banks are attacking cash directly, by eliminating high-denomination notes. The Mafia’s favorite, the 500-euro note, is set to be rubbed out, with Switzerland’s highest denomination and then the American $100 dollar bill next on the hit list.

As with every other aspect of current monetary policy, if you believe ‘they’ are working with your best interests at heart, then cheer. If you believe otherwise, or even suspect that this may end in tears, it might be a good idea to stock up on medium-denomination bills of strong currencies and find good places to safely stash your piles of readies.

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