Banning ‘Big Note’ Cash

It was only a matter of time….  In the wake of last week’s announcement by the Indian government to ban larger denomination bank notes the good folks at UBS think Australia should do the same.

Earlier this year the European Central Bank (ECB) floated the idea of withdrawing the Eur500 note on the basis only criminals and the corrupt use them.  So rather than the fact, in a region where negative interest  rates exist, that you can’t apply negative rates to currency not in a bank account, they dress it up as stamping down on corruption….oh please!  You may recall too we reported not long ago the surge in safe sales as Japanese stored their cash outside the banks given negative rates.

The backlash saw the ECB put that on the back burner but India last week went ahead with it, withdrawing the 500 and 1000 rupee notes (worth just $9.80 and $19.65 respectively).  What ensued was incredible.  There was a bank run of epic proportions where people were simply swapping them for smaller notes rather than trusting the banks with their deposits.  Nearly half the country’s 202,000 ATMs were shut down as they ran out of cash.  Not too surprisingly this saw gold demand skyrocket and premiums with it.  Gold premiums rose between 15-20% over night as long lines formed to those selling it.

As a side note, we often speak of gold being real money, it ticks all 7 pillars of what constitutes money.  Currency is a little shaky on one pillar, and that is Intrinsic Value as clearly a piece of paper has none.  The basis of ‘intrinsic value’ for currency is the trust and confidence of the government promise backing it’s ‘value’ and use.  Indians and Chinese probably get this more than most, it’s almost cultural.  In the wake of the announcement and the ensuing chaos an Indian reporter said it perfectly as follows:

“Our entire monetary system depends on trust. A banknote is a piece of paper that says the RBI [Reserve Bank of India] will give the bearer another similar piece of paper, or make an entry in an electronic ledger for that amount. The system works because everybody believes that those pieces of paper will be accepted by everybody else and therefore, money serves as a useful medium of exchange. This move has shaken that trust.”

So back to UBS’s idea that Australia should follow suit…   They cite that 92% of all currency value in Australia is locked up in $50 and $100 notes and that the latter is “rarely seen”.  They list the benefits as reduced crime and welfare fraud, increased tax revenue and a “spike” in bank deposits.  The latter would see an average 4% rise in household deposits on $100 notes alone.  So of course the good folk at UBS are just thinking in our interests… nothing to do with shoring up an over leveraged banking system and ultimate government control of our ‘money’….  We are reminded of some famous quotes:

“All previous attempts to base money solely on government edict or fiat have ended in inflationary panic and disaster” – Winston Churchill

“Betting against gold is the same as betting on government – He who bets on governments and government money bets against 6000 years of recorded history” – Charles De Gaulle

You have to choose between trusting the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold. – George Bernard Shaw