Negative interest rates are a first step toward what economist Ludwig von Mises once described as a “crack-up boom,” a flight to hard assets. The demand for bank deposits plummets. People pull their money out of the system in large numbers by either withdrawing cash or buying “hard assets.” Yet for the former, it appears the European Central Bank (ECB) already found a solution. The ECB suggested this solution en passant, mere months after the ECB lowered interest rates to negative for the first time ever. And what this solution looks like, is certainly not a reassuring thought for middle-class savers.

Please Meet Silvio Gesell

By pure coincidence, a colleague of mine sent me this speech of French economist Benoît Cœuré, member of the executive board of the ECB. Cœuré delivered this speech mere months after Draghi made history by lowering interest rates on excess bank reserves to negative for the first time in European history.

And it was precisely this speech that revived the ideas of our good old Silvio Gesell (1862 – 1930).

Back in the days considered a “monetary crank,” nowadays as popular as ever. At least within ECB circles.

Silvio Gesell was one of the first to advocate a “levy” on leaving paper money “idle.” Paper money, in those days of even greater importance than today, would need a fixed duration. What Gesell advocated, is in essence a system in which bank notes (a type of credit, or bank liability!) are required to have a maturity date. The idea is that bank notes, when given a maturity date, will gradually lose value over time. The closer to maturity, the less the bank note is worth.

But as Cœuré notes, Gesell’s theories were not widely accepted:

In fact, the idea of negative interest rates, or “taxing money”, goes back to the late nineteenth century, to Silvio Gesell, the German founder of “Freiwirtschaft”. The historic academic opinion on Gesell is divided. Irving Fisher supported him and John Maynard Keynes called him “a strange, unduly neglected prophet”, others a “typical monetary crank”.

Yet there you have it: the model for negative rates on paper euro bills.

ECB Is Destroying the System and They Know It

The ECB is fully aware of the great risks it is running because of their negative interest rate policy (NIRP). The risk that people pull their money out of the system, especially when savings rates go negative, is increasing. When savings rates go further north, people´s initial reaction will be to convert bank credit into cash money. Remember that, in essence, paper money yields zero. Its nominal amount does not increase nor decline.

Until the ECB introduces the “Gesell rule.”

Central bankers want to dilute the nominal value of cash money, with the social costs of “cash money” as (alleged) justification.

And that is exactly what the speech of Cœuré (Life below zero: Learning about negative interest rates) was about. The ECB is looking for a (pseudo-scientific) defense for increasing the carrying cost of cash money. The carrying cost of cash money currently consists of transport and storage, and is generally negligible.

The Justification for a Tax on Cash

What is the justification for this “Gesell tax”?

Cash money represents a gigantic societal cost, argues Cœuré. The ECB estimates that the private cost of cash money (bank notes and coins) amounts to, on average, 1,1% of gross domestic product (GDP). Put differently, the social cost of cash transactions would amount to 2,3-eurocent for every transaction.

So what should governments and the ECB do to fix this “market failure?” The answer is simple. Impose a tax on cash money.

That their real intentions have nothing to do with fixing “market failures” and/or lowering imaginary “social costs,” but with the fact that the ECB wants absolute power over money, is left unmentioned.

Of course, the argument is absurd. If tomorrow the government publishes a study in which it claims that everyone is completely irrational, because a majority of consumers prefers iPhones, that cost $300 more, over comparable alternatives, and consequently decides to start taxing iPhones to lower “social costs,” than everyone would say the government has gone absolutely mad.

But when this alleged market failure involves medium of exchange instead of iPhones, it becomes suddenly a justification for a tax on holding cash money?


The war on cash – cash being one of the few ways in which citizens are able to limit the power of the ECB without switching to alternative currencies ­– is a great danger to our freedom. The greater the power of the ECB, the more limited our freedom to choose.

Flight to Safety

Of course, this is just a first step toward the abyss. Because when they begin charging negative interest rates on cash, then people will look to hard assets, such as gold. Trade in the most popular hard asset will probably be discouraged by taxes and purchase / import restrictions (this actually happened in India, where taxes were levied on gold and import restrictions were imposed, leading to a premium over spot price of more than 20%!).

And they’ll probably not stop there. As long as ECB decision makers are convinced that they, by manipulating the money supply, can “stimulate” an economy, they will not stop.

The consequences will be devastating. Economically, there is no doubt that the bill will be footed in the future. Socially, our freedom to choose will be increasingly restricted.

Do You Remember This Trial Balloon?

Earlier, the IMF already floated another idea. With the increasingly high public debt burden on the horizon, they opted publicly for diluting savings accounts. If we skim off everyone’s bank account at the same time with, let’s say, 10%, on the pretext of an “emergency,” nobody will kick a fuss. The skimmed off 10% will then be transferred to the governments. In other words, with a simple adjustment in accounting entries, governments would be able to lower public debt.

Ironically, at the same time proponents of “helicopter money” are advocating increasing everyone’s bank balance. You probably have been overwhelmed with the term “helicopter money” over the past weeks. It is one of the last tools left in the Keynesian toolbox to “stimulate the economy.” Central bankers will not shun this policy instrument. The only thing they are doing right now, is to find out as quickly as possible how the implementation should look like in practice.

The ECB will succeed in her quest to lift inflation one way or another. But it will never stimulate the economy. At most, it will trigger a temporary “boom,” followed by a period of decay and suffering. With the additional danger that they will destroy the euro in the process; a danger that will loom the entire time with rates at negative.

It would not be the first time in history that a central bank, in its enthusiasm, oversteps its boundaries and blows up the entire currency, of which they have monopolized its production.

In this light, gold investors would do well to store gold outside the European Union, for instance in Switzerland. The above also means gold investors are well positioned to profit from a flight into hard assets as it unfolds.

So stay put, gold investors.


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