Secret Federal Reserve Paper Discusses Adding Demurrage to US Cash

Financial analysts are looking with horror at the concept of demurrage, but the central banks are seriously considering it as part of their worldwide war on cash. Republished from ZeroHedge, submitted by Phoenix Capital Research, May 16, 2015.

The Secret Fed Paper That Advocated a “Carry Tax” on All Physical Cash

Many commentators have noted that mainstream economists are calling to do away with cash entirely.

It would be easy to scoff at these proposals as completely insane — if the Fed hadn’t published a paper back in 1999 suggesting the implementation of a “carry tax”: taxing actual physical cash, using an expiration date, if depositors aren’t willing to spend the money.

The author of this idea is a visiting scholar with the ECB, the Fed, the IMF, and the Swiss National Bank. The fact that two of those institutions (the ECB and SNB) have already imposed negative interest rates should serve as a warning that these sorts of ideas are taken very seriously by central banks.

The paper, written sixteen years ago, suggested that if the Fed were to find that zero interest rates didn’t induce economic growth, it could try one of three things:

1. A carry tax — taxing the value of physical cash that is taken out of the system;
2. Buying assets — what we now know as quantitative easing (QE);
3. Money transfers — literally handing out money through various vehicles.

Regarding the first: since it costs relatively little to store physical cash (the cost of buying a safe), the idea is that the Fed should be permitted to “tax” physical cash in order to force cash holders to spend it (put it back into the banking system) or invest it.

The way this would work is that the cash would carry some kind of magnetic strip recording the date it was withdrawn. Whenever the bill was finally deposited in a bank again, the receiving bank would use this data to deduct a percentage of the bill’s value as a “tax” for holding it. For instance, if the rate were 5% per month and you took out a $100 bill for two months before depositing it, the receiving bank would register the bill as being worth only $90.25 ($100 × 0.95 = $95 for the first month, then $95 × 0.95 = $90.25 for the second).

It sounds like absolute insanity, but central banks take these proposals very seriously. QE sounded completely insane back in 1999 — and we’ve already seen three rounds of it, amounting to over $3 trillion. No one would have believed in 1999 that the Fed could get away with printing $3 trillion, but it has already happened. And given that it has failed to boost consumer spending or economic growth, I wouldn’t be at all surprised to see the Fed float one of the other ideas in the coming months.

Chase Has Already Started

Indeed, JP Morgan has already begun implementing a similar scheme by forbidding the storage of cash in its safe deposit boxes:

As of March, Chase began restricting the use of cash in selected markets, including Greater Cleveland. The new policy restricts borrowers from using cash to make payments on credit cards, mortgages, equity lines, and auto loans. Chase even goes as far as to prohibit the storage of cash in its safe deposit boxes.

In a letter to its customers dated April 1, 2015, pertaining to its “Updated Safe Deposit Box Lease Agreement,” one of the highlighted items reads: “You agree not to store any cash or coins other than those found to have a collectible value.” Whether or not this pertains to gold and silver coins with no numismatic value is not explained.
— Mises Institute: Chase Joins the War on Cash

Here is the single largest bank in the US forbidding depositors from storing cash in a safe deposit box at their own bank — and virtually no one responded in outrage.

Again: the Fed has declared a War on Cash, and a “carry tax” is coming.

Phoenix Capital Research closes with an offer of their free report, Financial Crisis “Round Two” Survival Guide (archived).