The decline of physical paper assets has been one of the more troubling trends in the financial industry over the last couple of decades. And that is saying a lot, because there have been a number of alarming trends in the financial markets over that time. Now, when I talk about physical paper assets in this context, what I’m referring to are certificates indicating the ownership of financial assets – things like stock and bond certificates. But before I continue, I think some historical background and definitions are in order.
Although often taken for granted in the modern age, physical wealth has been the bedrock of Western society for hundreds of years. Farmland, houses, jewelry and bullion were just a few of the physical assets that traditionally underpinned middle class society from the Middle Ages to the 18th century. However, as the 19th century progressed and financial markets evolved, new types of financial institutions were created, along with the physical paper assets to match.
Corporations, in particular, were a major step forward in the development of modern economies. These large businesses raised substantial sums of money in order to channel huge amounts of labor and commodities into profitable ventures. As corporations came to dominate the business landscape, there naturally developed a need to keep track of who owned what.
Thus, the most fundamental of physical paper assets was born: the stock certificate. These certificates were often brightly colored and beautifully decorated with engravings in order to make them both visually pleasing and difficult to counterfeit. Although the holder of a stock certificate did not automatically gain ownership of those shares (that prerogative rested with a company’s stock transfer agent), a stock certificate was still an important symbol and confirmation of equity participation in a company.
The stock certificate was inevitably joined by its financial twin, the bearer bond. Bearer bonds were debt obligations issued by a government or corporation that made interest and principal payments to whoever had physical possession of the instrument. Unlike stock certificates, bearer bonds functioned exactly like cash. If you held a physical bearer bond, you were happy (and rich). If it was stolen or lost, you were exceedingly unhappy (and poor).
Now that the historical primers are out of the way, it is time for the crux of this article. For the last 150 years, American households have enjoyed access to four major types of physical paper assets based on the modern economy: stock certificates, bearer bonds, U.S. savings bonds and physical cash. These physical paper assets were perfect complements to more traditional physical assets like real estate, jewelry, antiques and bullion.
Our access to these time honored physical paper assets, however, is rapidly coming to an end. In fact, they are being systematically eliminated by the powers that be.
Bearer bonds were the first on the chopping block. These securities had the advantages of being both readily negotiable and having high face values. According to the government, this made them perfect for organized crime and tax evasion. Of course, it also made them perfect for honest citizens who wanted financial discretion. Predictably, the government didn’t like the idea of regular people being able to easily stuff a million dollars worth of bearer bonds into a suitcase. That sort of thing should be reserved for members of Congress!
As a result, the U.S. government banned the issuance of new bearer bonds in 1982. Existing bearer bonds were not redeemed, however, and remained outstanding until their original maturity dates passed. By now though, in the year 2018, pretty much all U.S. corporate or government bearer bonds have matured. These physical paper assets are effectively extinct today.
Physical stock certificates were the next to go. Between 2006 and 2010, a series of obscure changes in back-office operations dealing with stock settlement and registration slowly discouraged the issuance of physical stock certificates. This culminated in 2009, when the Depository Trust Company (DTC) – the centralized New York City clearinghouse for stock settlements – instituted a prohibitively expensive $500 fee for every new paper stock certificate issued.
Over the next few years, most brokerage firms, including Scottrade, Charles Schwab and eTrade, either passed on this exorbitant fee to their customers or ceased issuing physical stock certificates altogether. In 2013, the pace of change quickened when the Depository Trust & Clearing Corporation (DTCC) – the parent company of the DTC – proposed the elimination of all physical stock certificates. To make the proposed change sound less offensive to a reluctant public, the DTTC euphemistically refers to this draconian policy as “dematerialization”, claiming it will lower costs.
Although many investors have enjoyed the convenience of digital registration of stock ownership, it is not without drawbacks. Any stock you have in a brokerage account is always held in “street name”. Street name means that the legally recorded owner of the security is your broker, not you. This means that in some situations your broker can legally pledge these securities as collateral to a third party.
Under normal circumstances, securities held in street name by your broker are not a problem. But when the financial system is under duress and bankruptcies are commonplace, this practice transfers considerable risks to account holders. Yes, your assets would theoretically be covered under the Securities Investor Protection Corporation (SIPC), but I wouldn’t want to be forced to rely on government promises in such a situation.
Even staid U.S. savings bonds have not avoided the digital carnage waged on physical paper assets. These time-honored investments have been a fundamental building block of U.S. middle class wealth since the Great Depression. Available in denominations as small as $25, U.S. savings bonds have provided generations of Americans with a safe place to park their extra money.
U.S. savings bonds were traditionally issued in physical form. Much like physical stock certificates, U.S. savings bonds did not represent direct ownership. Instead, the U.S. government registered ownership upon issuing a savings bond. Physical savings bond certificates not only confirmed ownership, but also provided a tangible token of the act of saving that doesn’t exist with a regular bank account.
Or they used to, at least. The U.S. government discontinued the issuance of physical savings bonds back in 2012, claiming it would save the American people a paltry $70 million over five years. In my opinion, this act was the death knell of an already wounded U.S. savings bond program.
Even that final bastion of physical paper assets – paper money – is under widespread assault. Former U.S. Treasury Secretary Larry Summers has publicly come out in favor of discontinuing the $100 bill. The European Union recently followed his questionable advice by getting rid of their highest denomination bill, the €500 note, in 2016.
The argument in favor of removing high denomination bills from circulation is that they purportedly help fund organized crime and corruption. However, such a move also has the (fully intended) side effect of moving all financial transactions firmly under the watchful eye of less than benevolent governments. As credit cards, PayPal, wire transfers and other digital means of moving money become more ubiquitous, it is not so far-fetched to imagine a dystopian future where governments consider completely eliminating cash.
Maybe the demise of physical paper assets was inevitable. Maybe a fancily embossed sheet of paper that unequivocally states you own an asset is an unnecessary anachronism in a computer driven, digitally-connected world. But I have had too many experiences in my life where the unsympathetic voice on the other end of the phone flatly declares, “I’m sorry sir, but we have no record of that in our systems.” Without physical certificates to prove ownership, such a situation could quickly escalate from an annoyance to a disaster.
The rise of digital wealth in modern society may be inescapable at this point, but that does not necessarily mean it is a wholly positive development. I believe the slow, irreversible death of physical paper asset is both a warning and an opportunity for the average person. It underscores the importance of those tangible assets that remain available to us – fine art, antiques, gemstones and bullion – while prompting us to ask ourselves how much of our personal financial information we want to expose to monopolistic corporations and power-hungry governments.
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