Month: May 2020 Page 1 of 2

CBDC: Currency or Platform?

Abolishing central bank money for the public


Central bank money already has a digital version – bank reserves. Unlike banks, the general public have not been given access to digital money, because central banks have done nothing to modernise banknotes, their main product. Various types of so-called central bank digital currencies (CBDCs) have come under consideration in recent years. Of these, the most brutal solution is provided by the CBDC model as a payment platform on which the private sector could innovate (Bank of England). Another option is the direct model, which offers CBDC for the public without an intermediary. The mixed or hybrid model is a combination of these two. Perhaps the best solution would be cash-like direct CBDC in the form of central bank digital notes (CBDNs), which would share most characteristics of banknotes: being issued by a central bank, safety, accessibility, transferability (person-to-person), finality, privacy, independence, and instantaneity. Of course, these notes would be transferred from one person to another digitally, but outside of the global online network, so preventing cyber-attacks on CBDNs in the possession of their holders. They would be a complement to central bank notes, which would remain the guarantee of our money’s stable nominal value and the nominal anchor of the economy.

Key words: central bank digital currency (CBDC), digital reserves, payment platform model, direct model, hybrid model, cash-like direct CBDC, central bank digital note.

Central bank money for banks and the public

Central bank money is the money put into circulation by an issuing bank. It comes in two forms: deposit non-cash for banks, usually termed the ‘reserve’, and cash for the general public, made up of banknotes and, in some countries, coins as well. Unlike with cash, the general public don’t have access to central bank deposits, although cash is also physically distributed via commercial banks.

Reserves and cash (which we will call ‘banknotes’ in this article) were first separated from one another with the development of fractional reserve banking in the UK. The separation was institutionalised by the Bank Charter Act of 1844, which split the Bank of England into two departments, the Issue and the Banking Department (see Fractional bank money). The Act also put a stop to the proliferation of banks permitted to issue banknotes; existing banks that did so had to meet requirements which made it difficult for this business to earn a profit. These developments reinforced the dominance of the Bank of England, which remained the sole banknote-issuing bank in England and Wales by the 1920s. Over time, this single issuing bank model was adopted by most countries, giving rise to the term ‘central bank’.

Technological puzzles involving central bank money

As commercial banks relied on reserves with the central bank, the modernisation of non-cash payments took place in parallel with that of reserves. In short, banks weren’t able to technically innovate interbank payments without also modernising access to reserves and their clearing and settlement arrangements. The best example of this is electronic bank money, which could not operate without electronic central bank reserves. The information revolution has brought us digital money, but this hasn’t changed the nature of this technical interdependence. Consequently, banks’ payment services available to the public became increasingly technologically advanced and more competitive.

Unlike reserves, or non-cash money, banknotes did not experience much change.[1] New, non-paper materials were introduced, such as cotton and polymer plastics; durability was enhanced; anti-counterfeiting features were improved; but no electronic or digital versions of central bank money for the public were ever developed. The issue was never even raised, as there was consensus amongst central banks that their task was to supply sufficient quantities of banknotes, in other words to meet demand. Forced to compete with increasingly advanced non-cash payment devices (credit and debit cards, ATMs, PoS terminals, e-payments, contactless payments), traditional banknotes inevitably saw their share of the payment market decline. Today, balances in non-cash transaction accounts (also called ‘demand deposits’), which operate as electronic money, exceed the amount of cash in circulation by a factor of between 10 and 20. By way of a reminder, they, taken together, comprise the best-known monetary aggregate – M1.

The belated modernisation of central bank money for the public

For a long time, commercial banks seemed to hold a monopoly on technical advances to non-cash money for the public, whilst central banks stood on the side-lines idly watching their most recognisable product being put out of commission. In recent years, pressure on banknotes has intensified with the entry of non-bank providers into the payment services market. Negative network effects have accelerated the squeeze-out, especially in economically developed countries. Sweden is a textbook example, where almost nobody is willing to take the Riksbank’s krona banknotes anymore, including banks and churches. The Nordic fairy-tale of a cashless society has turned into a grim reality, where the general public are nearly completely dependent on payment intermediators.

Having understood that the unstoppable disappearance of krona banknotes from use would mean the loss of its direct link with the public, the Riksbank was the world’s first central bank to raise the alarm. On one front, it launched a strong initiative in the Swedish Parliament to seek legislative solutions, and, on the other, it commissioned the e-krona research project, now at the pilot stage (Uruguay’s central bank is the only other national bank to have a similar pilot in place). Most other central banks were content to just watch their own banknotes be rejected by a growing number of stakeholders within the country, in spite of formally being legal tender (see How money disappears). In this context, the first attempt at co-ordinated sharing of experiences between central banks, begun in early 2020, looks more like just a box-ticking exercise than a true call to joint action:

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Sveriges Riksbank and the Swiss National Bank, together with the Bank of International Settlements (BIS), have created a group to share experiences as they assess the potential cases for central bank digital currency (CBDC) in their home jurisdictions. The group will assess CBDC use cases; economic, functional and technical design choices, including cross-border interoperability; and the sharing of knowledge on emerging technologies.[2]

You’ll have probably noticed that this group doesn’t include the world’s key central bank, the US Federal Reserve System (the Fed). That said, the Fed’s absence won’t prevent the group from assessing the feasibility of CBDC, nor will it stop the US central bank pursuing its own research. What matters is having final results within a reasonable time.

How researchers think CBDCs will turn out

Many researchers are looking into CBDCs, the hot new topic of the past several years, producing an ever growing and thorough body of literature. It’s inspiring to look at the key results of these studies, especially those promoted by groups of central banks, since these allow us to glimpse possible future consensuses.

The most brutal solution is provided by the model of CBDC as a payment platform. ‘In this model, CBDC would serve as a payment platform on which the private sector could innovate.’[3] In this case, after banknotes, or central bank money for the public, have been squeezed out, the central issuing institution will have lost its fundamental prerogative, direct issuing authority. The remaining power to issue reserves is only indirect, as this deposit-based form of central bank money can be accessed only by banks and authorised payment service providers.

The model doesn’t mean that a central bank will manage the payment platform itself: instead, it would do so in partnership with private financial institutions, sometimes as the minority shareholder with a tiny stake in the new venture, as in the case of the Reserve Bank of Australia and NPP Australia Limited.[4] The Australian example was not a CBDC project from the outset, but a not particularly successful response to problems faced by the old national payments system (RBA, Conclusions Paper, June 2019).

The second approach is the direct model, which provides CDBC to the public with no intermediary. This model is superior to the platform-based one across the board, providing greater safety, resilience, access, and privacy. However, no central bank has yet expressed its preference for this model, primarily due to a desire to safeguard the interests of the banking sector and new payment providers, couched in concerns for the financial system’s stability.

This ‘direct access’ ought to be understood as being conditional, even where this feature is highlighted as a benefit: ‘The direct CBDC is attractive for its simplicity, as it eliminates dependence on intermediaries by doing away with them.’[5] Households and business don’t receive cash directly from the central bank either – they get it through commercial banks. It’s truly naïve to imagine a central bank maintaining tens or hundreds of millions of accounts for private individuals and businesses and contacting each of them directly. The technology now available may permit bulk data processing but still does not allow efficient interactive communication with millions of consumers. So, even direct CBDCs require intermediation by the banking sector and nearly the whole of the payment industry. The key difference is in the off-balance-sheet recognition of direct CBDCs and their independence from payment intermediaries’ liquidity. As a side note, it’s clear that such a model doesn’t need transaction deposit insurance, since these deposits would in effect be claims on the central bank.

There are also two alternative options for the direct model: cash-like CBDC, often confused with token-based digital currency, and account-based CBDC. The latter entails direct public access to central bank reserves, hitherto available only to banks, as already noted, and recently to payment providers as well. The account-based system is less favourable for households and businesses because it permits nominally negative interest rates to be applied with ease.

The mixed or hybrid model is a combination of these two approaches in which the central bank keeps its direct link with the public, rather than only with financial institutions, and where new private companies are able to enter the payment market.

The e-krona envisaged by the Swedish Riksbank bears a resemblance to this mixed model. It’s being advertised as a complement to cash on the one hand, and, on the other, as a private network: ‘An e-krona would offer the general public continued access to central bank money, as cash has done, but in digital form. … The e-krona network is private and only the Riksbank can approve and add new participants to the network.’[6]

Will innovations spell the end of central bank money for the public?

Introducing a CBDC in any of the forms assessed and tested to date would mean cash would lose some of its key features as money. The biggest change would take place with a payment platform model, and the smallest in a cash-like direct model. Not even the latter, however, provides digital cash for households and businesses.

A complete substitution of banknotes by any form of CBDC would imply the disappearance of a non-interest nominal asset, which is authentic central bank money. This scenario would mean the end of money’s genetic code, shaped by several millennia of evolution. The retirement of nominally stable money would jeopardise the fundamental functions of money as a unit of account and a measure of value. The consequent volatility of digital money, coupled with the breaking of the direct link between the central bank and the general public, would lead to turbulence in goods and asset prices and general insecurity. It’s only to be assumed that no government would like to see this as the outcome of any modernisation of means of payment.

This is why it’s crucial to preserve central bank notes as the nominal anchor of the economy and the primary means for keeping its issuer – and the entire banking sector – in check. There’s no reason to expect that abolishing cash would remove the danger of a run on the banks, because digital money available 24/7 would maximise clients’ ability to withdraw deposits. The inability of digital money to leave the banking sector, meaning to transform from bank money into banknotes, will not prevent systemic risk from erupting in an unimaginably short period of time. We’d no longer see savers queuing outside a latter-day Northern Rock Bank to withdraw their deposits: instead, the online interbank network would collapse so quickly that the central bank wouldn’t even have time to pump in sufficient reserves.

Digitalisation of the means of payment is not a threat to cash in and of itself: recall that coins and banknotes themselves arose as exceptional technical innovations that incorporated all the features of money. No CBDC substitute possesses all of these hallmarks, and so the only right approach is the one recently announced by the Riksbank, which aims to produce ‘an e-krona that can work as complement to cash’ (The Riksbank’s e-krona pilot, February 2020).

Central Bank Digital Note (CBDN) 

One question begs an answer right away: aren’t cash-like direct CBDCs real substitutes to cash? A central bank expert in money digitalisation explains: ‘How do we give the general public access to a non-cash financial instrument that is as safe and liquid as cash and which provides a similar degree of privacy, finality and instantaneity? That is the key question of CBDC. No one has the solution yet.’[7]

The Bank of Canada, at the forefront of CDBC research, holds a similar view of what the attributes of cash-like CBDCs may be: ‘The technology would need to enable person-to-person transfers with immediate settlement, offer a great deal of privacy (not anonymity), have very high resilience in the event of infrastructure failure and be universally accessible.’[8]

Nevertheless, exception could be taken with the Canadian central bank’s approach in which a CBDC would be issued only in response to possible threats posed by private digital currencies to the Canadian dollar and Canada’s monetary sovereignty. ‘The Bank of Canada will consider issuing a CBDC if private digital currencies appear as if they will begin to materially erode the public good benefits of the Canadian dollar.’ (Contingency Planning, 2020, p. 9). A CBDC should not be a back-up weapon in a future monetary war, but an option that the general public itself would vote on by either accepting or rejecting it in payment transactions. Of course, only as a complement to the Canadian dollar.

The closest version of a cash-like direct CBDC could be provided by central bank digital notes (CBDNs), which would have most of the characteristics of banknotes – being issued by a central bank, safety, accessibility, transferability (person-to-person), finality, privacy, independence, and instantaneity. Of course, these notes would be transferred from one person to another digitally, but outside of the global online network, so preventing cyber-attacks on CBDNs in the possession of their holders. They would be a complement to central bank notes, which would remain the guarantee of our money’s stable nominal value and the nominal anchor of the economy.



[1] Banknotes are often referred to as paper money, a name first attested in the 16th century. Yet this term is insufficiently precise, both formally and materially. It is formally so because the original name, paper credit, referred to all credit instruments in paper form (promissory notes, bills of exchange, bills and notes, etc., including bank notes, or Notes payable to the Bearer on Demand, whether issued by a public bank or by a private banker – Henry Thornton, Paper Credit of Great Britain (1802), Chap. III). The name is materially imprecise because paper has long since been marginalised in banknote production.

[2] BIS (2020), Central bank group to assess potential cases for central bank digital currencies, Press release, Bank for international settlements, 21 January 2020.

[3] Bank of England (2020), Central Bank Digital Currency: Opportunities, challenges and design, Discussion Paper, March 2020.

[4] ‘The New Payments Platform (NPP), launched in February2018, is a fast retail payment system developed by a consortium of 13 financial institutions, including the Reserve Bank. … Currently there are 4 high-band shareholders (the major banks), 7 medium-band shareholders (including the RBA), and 2 low-band shareholders.’ RBA (2019), NPP Functionality and Access Consultation: Conclusions Paper, Reserve Bank of Australia, June 2019, p. 1, 25.

[5] Raphael Auer and Rainer Bohme (2020), The technology of retail central bank digital currency, BIS Quarterly Review, March 2020, p. 90.

[6] Sveriges Riksbank (2020), The Riksbank’s e-krona pilot, February 2020.

[7] Aleksi Grym, Head of Digitalization at Bank of Finland (2020), Getting Real about CBDC, Cash Essentials, February 23, 2020.

[8] Bank of Canada (2020), Contingency Planning for a Central Bank Digital Currency, February 25, 2020.

Negative Nominal Interest Rates


Negative interest rates are but the latest monetary virus, sown by central banks in the early 2010s. Commercial banks were the first to be hit by the bug, and have remained the primary carriers of this contagion ever since. The virus’s gradual spread has meant it has been slow to reveal its full destructive potential. That said, its transmission accelerated in 2019, and the disorder has been impacting an ever-growing number of savers. Negative nominal interest rates make no economic sense – why would anyone consent in advance to losing some of their own money? Cash, unaffected by negative interest rates, is the final line of defence against this scourge. This is why it is crucial to keep as many people as possible immune by keeping our own cash in our own hands. This does not, however, mean we should promote only banknotes and roll back the recent advances made by the banking system. On the contrary: there’s no reason not to use the whole range of innovative payment technologies. The underlying issue, though, is that no alternative asset can come close to cash for liquidity and security. Not even central banks’ digital currencies (CBDCs) offer a substitute. Put simply, digital assets do not guarantee nominal stability as not even the central banks themselves are certain that CBDCs are a complement to physical banknotes. If banknotes are not used by a majority of people, they will inevitably disappear due to the negative network effect. Their departure would eliminate the final bulwark against central bankers’ unrestrained technocratic absolutism and destructive negative interest rates, which deprive our money, incomes, and assets of their nominal value.

Key words: negative nominal interest rates, monetary policy without constraint, cashless society.

Why negative rates

Negative interest rates are the latest monetary virus sown by the central banks of Switzerland and Sweden, and the European Central Bank (ECB), in the first half of the 2010s. The bug first hit commercial banks and they have remained its primary carriers to date. The virus’s gradual spread has meant it is yet to reveal its full destructive potential. That said, transmission accelerated in 2019, and the disorder is now impacting an ever-growing number of savers, people with money in banks. Their deposits have been dwindling in proportion to the negative rates, which now mainly range from 0.5 to 1 percent, meaning that, for instance, 10,000 euros in someone’s bank account will fall to 9,900 euros one year later. On top of that, the banks also already charge account management fees. Cash, unaffected by negative interest rates, is the final line of defence against this scourge. This is why it is crucial to keep as many people as possible immune by keeping one’s own cash in one’s own hands.

Monetary experts defend exposing the general population to this interest rate virus by claiming that banks can no longer hold your money ‘for free’. There should, obviously, be no doubt as to how serious these experts are, nor how ready banks may be to act purely out of the goodness of their own hearts. Doing away with ‘free’ deposits means that the future may hold something hitherto unimaginable – negative interest rates on YOUR OWN money in the bank: in other words, you may catch the bug as well. These penalty interest rates are already paid by many deposit holders in Switzerland, Germany, Denmark, and elsewhere in the EU. Fewer than one-half of all banks have introduced such negative rates, but the number is growing. The first to be affected were the largest, multi-million deposits in some Swiss banks, followed by accounts with more than 100,000 euros in other European countries. In 2019, the contagion spread to all deposits, even the tiniest ones, including those in co-operative banks.

This unconventional idea is currently applied only to current accounts or demand deposits, meaning accounts we use for day-to-day transactions, and not to time deposits, savings, or other bank accounts. To better understand the effects of negative interest rates, we ought to first look at how these accounts work.

How current accounts work

Banks keep our money ‘for free’ in ‘current accounts’ or as ‘demand deposits’. It is universally acknowledged this is our non-cash money that we use for day-to-day payments, which is why these accounts are often termed ‘transaction accounts’. Don’t be confused: all of these names, including ‘sight deposits’ and ‘overnight deposits’, mean the same type of account. These are the accounts our salaries and other income – such as interest, rents, dividends, and the like – get paid into. For practical reasons we keep much more money in these accounts than in our wallets: it’s easy to use them to pay by card or mobile phone, without having to write cheques (even though we’re still able to).

Maintaining a current account was never completely free, with most banks charging fees, usually as fixed monthly sums. Fees for individual transactions are based on banks’ policies, and can be fixed, percentage-based, or a combination of both; these payments can also be free of charge. If you thought banks didn’t make much money from these charges, you’d be wrong: payment services are the greatest non-interest source of revenue for most banks.

Just as we have our current accounts in banks, so banks have their own transactional accounts with the central bank. These are called ‘reserve deposits’, or just reserves, and banks use them to settle our transactions with clients of other banks and to make all other payments. There is, evidently, a logical connection between our and banks’ current accounts, or reserves. This link is the key for explaining why negative interest rates are charged on our money.

Negative or penalty interest rates

The interest rate is every central bank’s primary monetary policy instrument. Central banks set these interest rates independently and apply them in their day-to-day operations intended to supply money to the economy by either lending to banks or buying securities in the open market. This is how central banks influence the market price of money, which also extends to the cost of our own borrowing. Specific interest rates also apply to banks’ reserves, and these have slid to below zero (‘into negative territory’, in economic parlance) in a number of developed countries. Since these are nominal rates, we can assume they constitute some sort of penalty or disincentivising interest.

Monetary history up until the 2010s has never known negative nominal interest rates, because these make no economic sense – why would anyone consent in advance to losing some of their own money? That being said, negative real interest rates have appeared in times of inflation, when all prices have risen. This was not caused by nominally negative interest rates but, rather, by the fact that contractual nominal interest rates were lower than the rate of inflation. Put simply, if your contract with the bank stipulated, for instance, a 2% annual rate on your deposit, and the inflation rate reached 4% in that year, you’d have incurred a real loss of some 2% (2% – 4% = -2%). This phenomenon has been known since the late 1890s, when it was explained by the brilliant American economist Irving Fisher, who termed the lack of differentiation between nominal and real interest rates the ‘money illusion’.

You’re probably going to ask why commercial banks would even keep money with a central bank at negative interest. This is due to central banks’ monopoly on bank reserves, so banks have no choice. The one thing they can do, though, is reduce their reserves, but doing so exposes them to liquidity risk (meaning they may be unable to meet their financial demands). Banks, however, have no way to avoid negative interest rate losses outright, because they cannot operate without reserves, or money. A look at what motivates central banks will help shed light on this ‘illusionist’ interest rate policy.

Central banks’ motives

Commercial banks use reserve deposits, their current accounts with the central bank, to keep money for day-to-day payments, including our own transactions. In addition to using our own money, we can also pay in money we’ve borrowed from the bank. Lending to individuals and firms is the most extensive banking operation and provides key support to every nation’s economy. History teaches us that economic prosperity is generally connected with credit growth, whereas contractions (recessions) are associated with downturns in lending. Hence, central banks tend to discourage bank lending when the economy overheats, and, conversely, stimulate it when the economy is cooling down.

Following the 2007 global financial crisis and the attendant recession, the most severe economic downturn since the Great Depression of the 1930s, central banks endeavoured to use monetary policies to restart economic recovery. It quickly became apparent that traditional economic policy was not going to do the trick, so central bankers resorted to so-called unconventional measures. Two of these were key: a drastic cut in interest rates, and the provision of unlimited liquidity to banks in the form of an extreme money supply. However, the explosion of money, which multiplied in aggregate relative to pre-crisis levels, failed to jump-start credit growth, which meant there was no expected positive impact of lending on economic activity and employment. The extended economic contraction was then renamed as the Great Recession.

Unhappy with this turn of events, central banks concluded that commercial bankers were not as quick in approving loans as they could be, and that they were holding too much money in their reserves. The final expedient remaining to the central banks was to make interest rates negative and so force commercial banks to lend more. Not even this irrational idea, however, yielded the expected results, as the banks responded only by buying more government bonds and similar safe securities. In the face of a lack of bankable borrowers, even at low nominal rates, the desired credit growth never took off.

What ensued was a true illusionist sleight of hand with our current accounts. Commercial banks were encouraged to do to their clients what central banks, the ‘banks of banks’, had done to them. This is where we return to the warning cited at the top of this article, that banks can no longer hold your money ‘for free’. A separate article on fractional banking on this web site has more information about how banks hold our money and to what extent they do so. Promoters of the non-free bank account theory are mainly drawn from academia, with fewer coming from central banks and the fewest from the commercial banking sector. They seem to believe the notion of stable money must be sacrificed on the altar of economic recovery. Of course, nobody expects private banks to ever lend at negative interest rates, yet this would be an intriguing concept: borrow 100,000 euros and, in a year’s time, repay, say, 98,500, at an interest rate of negative 1.5%. And how about a multi-year loan at cumulative compound interest – just imagine the debt disappearing as if by alchemical transmutation.[1] No, the proponents of this idea only expect that negative interest rates on current accounts will force us to spend more of our hard-earned cash on goods and services, which is the textbook formula of economic recovery. They seem to believe banks’ clients are not sufficiently sophisticated or knowledgeable to invest in other assets and so safeguard the nominal value of their money.

If commercial banks continue to hold off from using negative interest rates – and they have not shown much enthusiasm to date – we can expect to see the invention of even less conventional measures. These policies would aim at ‘incentivising’ most commercial banks to charge negative rates on their clients’ accounts.

Commercial banks’ reactions

Commercial bankers are not as naïve in their expectations, as it is abundantly clear that their clients have two immediate options: either to change banks or physically take cash out of their accounts, with ruinous effects. Visualise the slogan: ‘put your money in our bank because our negative interest rates are the most attractive’. Bankers are aware that this policy would be tantamount to commercial suicide and will avoid it for as long as they’re able to, in other words until pressure from the central bank and other government agencies becomes too much to bear.

If banks are compelled by some means to apply negative rates, one other readily available option for their clients is to hoard banknotes. The nominal value of banknotes cannot change, which is why they’re critical for maintaining money stability. Inventive academic economists have a solution for this obstacle, too: phase out cash or abolish banknotes. Books have already been written declaring a ‘war on cash’, which has grown from an academic conflict into a hot war after it was taken up by central banks and other government bodies. The scrapping of large-denomination banknotes is in fact their first victory, but the final outcome is highly uncertain. It seems obvious that central bankers, these unelected technocratic rulers, are attempting to gradually change the monetary landscape enshrined in the Constitution. Due to its monumental importance, the issue of doing away with banknotes is discussed in a separate article on this web site.

The alternatives

In an Orwellian world without banknotes, the only way money can exist is as a non-cash means of payment, available only via commercial banks and non-bank money providers. In such a world, negative interest rates would continuously erode the general measure of value, in accordance with central bankers’ technocratic decisions. Nevertheless, there remain a number of other options open to money holders wishing to preserve the nominal value of their money, at least to some extent. These alternatives are showcased on a wide variety of investment recommendation sites.

The primary problem is that no alternative comes close to cash for liquidity, security, or protection from negative interest rates. Not even central banks’ digital currencies (CBDCs) offer a substitute. Put simply, digital assets do not guarantee nominal stability. In a recent paper on these innovative instruments, part of its Future of Money series, the Bank of England takes pains to assure its readers that ‘£10 of CBDC would always be worth the same as a £10 banknote’.[2] However, the only guarantee of nominal value always remaining the same are banknotes, the same as personal identity papers are proof of ‘nominal’ identity for each one of us. Without banknotes, negative interest rates could easily turn £10 into £9.99.

It becomes apparent that any attempt to preserve your wealth requires preserving your money, or, rather, its nominal value. An absence of this stable measure of value jeopardises not only your wealth, but also your salary and all other income, which, in turn, creates uncertainty for your prospects for the future, such as your savings and retirement income.

The solution

The only possible solution to deflect the threat posed by negative interest rates would be to retain banknotes as the guarantee of nominal value of our money. This does not, however, mean we should promote only banknotes and roll back the recent advances made by the banking system. Quite the contrary: there’s no reason not to use the whole range of innovative payment technologies. For instance, the most advanced payment method – contactless smartphone payments – is the most widely spread in several developing countries, Kenya in particular. Even Sweden, the leader in cashless payments, lags behind these nations.

If you feel the danger of negative interest rates has been blown out of proportion, I invite you to look at what one of their greatest proponents, Willem Buiter, recently wrote in his article, ‘The New Normal Should be Cashless’: ‘Negative nominal interest rates will become the new normal, and that the “inflation illusion” or “nominal interest rate illusion” will become a thing of the past. There is no reason to assume that such cognitive distortions will last forever. … The rest of us could prepare to welcome -5% policy rates during the next deep recession.“[3] Don’t doubt Mr Buiter’s competence and influence,[4] nor those of the other advocates of negative interest rates. And, by all means, do consider your own cognitive distortions and a rate of -5% on your money, incomes and assets.

A true solution can be glimpsed in the Bank of England’s paper cited above, where CBDC is referred to as a complement to physical banknotes?’. Yet the question mark at the end of this sentence in the paper’s foreword comes from the Bank’s outgoing governor Mark Carney, whose last legacy at the Bank was a platform model of CBDC. ‘In this model, CBDC would serve as a payment platform on which the private sector could innovate.’ There is no need to explain that such a model would provide no safeguards against negative interest rates.

The central banks’ inherent inertia in creating their own electronic money, an area where they have only recently begun to do research (only Sweden’s Riksbank and the Central Bank of Uruguay have moved to the pilot stage), and their divergent views of its features, from the method of issuing it to channels for distributing it to the general public, gives us little reason to be optimistic. The fate and ultimate design of CBDCs are highly uncertain, as borne out by the view promoted by Professor Buiter, he of the cognitive distortions: ‘But I would prefer the third option: abolish the currency and replace it with a central-bank digital currency.’

This arrangement would remove the sole monetary policy constraint – ‘the practical inability of central banks, such as the Fed, to implement negative interest rates’.[5] The idea of those who promote monetary policy without constraint is to use negative rates to fight recession in the cashless society of the future. The futility of such designs is amply borne out by the on-going recession due to the Covid-19 pandemic.

The above discussion shows how important it is for the majority of the world’s population to directly support the preservation of physical banknotes by holding at least smaller denominations and using them occasionally for retail purchases. In addition, we should oppose any further reduction in banknote denominations to only the lowest amounts (the 5 and 20 monetary units), as this is in effect a covert way to push cash out of the payment system. Billions of dollars, euros, pounds, and other currencies did not arrive in tax havens in the form of banknotes: they got there by wire transfers between banks. Banknotes in the Virgin Islands and other island nations are out of global use, which may prevent petty crime and small-time tax evasion, but promotes large-scale criminal activity and helps major tax evaders.

Unless most people support banknotes, they will inevitably disappear due to the negative network effect. This trend is at its most visible in Sweden but can also be seen in many other developed and developing economies. Perhaps this is why the Riksbank gave up on its negative interest rate policy earlier this year, after five years of failure.

Keeping banknotes means more than just giving them a stay of execution as a means to guarantee access to cash until vulnerable groups and retail businesses have adjusted. No: this issue is about preserving the nominal stability of our money: so that £10 is always worth £10, $10 stays $10, €10 remains €10… Banknotes are the last bulwark against monetary policy without constraint and destructive negative interest rates. Ultimately, paper money is the sole remaining ballot paper we can use to rein in the central bankers and other policymakers. This is why your vote is decisive.



[1] Actual preparations for this arrangement were reported in November 2019, but so far only for refinancing a loan with a government bank. The Financial Times covered the story on 18 November 2019 in an article titled ‘Most German banks are imposing negative rates on corporate clients’, noting that ‘State-owned German development bank KfW is preparing to pass on negative interest rate to its borrowers – paying them to borrow money. KfW is legally obliged to pass on its own funding terms to clients and it can already refinance itself at negative rates.’

[2] Bank of England (2020), Central Bank Digital Currency: Opportunities, challenges and design, Discussion Paper, March 2020.

[3] Project Syndicate, 25 February 2020.

[4] In the course of his respectable career, Willem Buiter has taught at prestigious universities (Cambridge, London, Princeton, Columbia) and occupied senior positions at the EBRD (Chief Economist), Bank of England (External Member of the MPC), Goldman Sachs (International Advisor), Citigroup (Chief Economist), and elsewhere.

[5] ‘Another benefit (from a macroeconomic perspective) of a cashless society cited by economists would be the potential elimination of the practical inability of central banks, such as the Fed, to implement negative interest rates.’ David Perkins (2019), Long Live Cash: The Potential Decline of Cash Usage and Related Implications, CRS Report R45716, Congressional Research Service, Washington, May 10, 2019.

Fractional Bank Money


Fractional reserve banking is based on the illusion that our money in our transaction account in the bank is always intact and available. With fractional banking, demand deposits are fractional money, as demonstrated terrifyingly by the Great Depression. Fractional reserve banking has been kept on artificial life support by deposit insurance schemes. What electronic money institutions offer is not safe money, but just another version of debit cards. Digital money issued by new payment providers shares the traits of bank money, meaning it is fractional digital money. As transaction accounts make up a relatively small proportion of all deposits, and an even smaller part of broad money (M4 in the UK, or M3 in the ECB system), their de-fractionalisation would not pose a monetary problem, but is not possible without political support.

Key words: fractional bank money, money illusion, deposit insurance, full reserve banking, electronic money institutions, fractional digital money.

A double illusion

Fractional-reserve banking is based on the illusion that our money in our transaction account in the bank is always intact and available. This may make us think that the sum of balances in all transaction accounts is equal to the bank’s reserve. But it isn’t. The bank knows that owners of transaction accounts or demand deposits will never ask to draw their money all at the same time, which allows it to execute our payment orders using reserves smaller by a factor of ten or 15. The ratio between the bank’s reserves and our deposits is called the reserve-deposit ratio, and commercial banks’ deposit-taking business is termed fractional reserve banking.

If we ever doubt the ability of our bank to repay us our money – say, because it looks like it’s having issues with liquidity, such as Northern Rock did – we can either rush to join the queue to take the money out, or else rely on the government’s deposit insurance. Because of cash withdrawal limits, one urgent action is to transfer the money to another bank that we believe is safer. Technology again comes to the rescue – in this age of e-banking, there’s no need to queue outside banks. All you require is one online payment order, provided you’ve got an account with a different bank; also, obviously, your old bank has to be able to honour it. The time of the old-fashioned run on the bank has passed, with physical panic now replaced by e-panic.

Consequently, our non-cash money, which we can dispose of only using the bank as an intermediary, is best termed fractional bank money. The extent of the illusion is revealed by just how fractional this money is, as measured by the reserve-deposit ratio. With negative interest rates recently extended to demand deposits (transaction accounts), especially those with balances exceeding a minimum threshold (see Negative Nominal Interest Rates), we’re in thrall to a double illusion: the banks are charging us for ‘safekeeping’ money they’ve already mainly invested elsewhere. This is a veritable alchemical process, but no court has yet weighed in with a decision.

Fractionality, the ultimate banking illusion, has endured for centuries in spite of countless banks going bankrupt and their clients losing their deposits. Admittedly, it has benefited from lender of last resort arrangements and governments’ deposit insurance schemes. Many see fractional banking as the foundation of modern banking, and with good reason. Some historical background to this illusion will help us understand what makes our money in the bank safe, and how this mechanism is connected with the latest trends in the modernisation of payments and money issuance.

The origin of fractionality

Deposits were a natural extension of money changing operations in Mediaeval Europe, which banking evolved from and where banks got their name (banco is Old Italian for ‘bench’, as these early currency dealers traded on benches improvised as desks; ‘bankrupt’ comes from banco rotta, literally ‘broken bench’). Early deposit banks were universal banks, which provided a wide range of services but also went bankrupt frequently, a common occurrence in fractional banking. Venice was among the first nations to face deposit failure: ‘The basic problem with the Venetian payment system based on private banks was the possibility of failure. … Deposit banking and commercial banking were not separate, and bankers extended loans or invested directly’.[1] With nearly 100 banks having failed by the 1550s, Venice set up the public Banco di Rialto, which was ‘essentially a government intervention to correct a market failure: the institution created was intended to supply a payment service hitherto provided by the private sector, but in a manner found to be wanting.’[2] The Banco di Rialto was soon replaced by the Banco del Giro, which would serve as the model for many public banks throughout Europe. It’s now obvious that fractional banking has been causing the same problems for hundreds of years, but 16th century Venice was yet to discover the principles of lender of last resort and deposit insurance scheme.

Public banks proliferated during the 17th century as cities and countries sought to safeguard deposits and provide secure payments systems, so that ‘the idea of public banks was virtually synonymous with the idea of a giro bank operating in a republic (Genoa, Venice, Amsterdam, and Hamburg).’[3] The development of these banks in Continental European practice reflected an aversion to private depositaries, due to a wealth of adverse experiences.

The most famous public bank, based on deposit security, or full reserve banking, was established in 1609 as the Amsterdamse Wisselbank, better known as the Bank of Amsterdam (BoA). By pioneering non-cash payments via a giro system of net clearing, in an environment flooded by poor-quality coin produced by innumerable mints, the BoA revolutionised money. ‘Merchants from all over Europe were then content to leave their specie and precious metals in the vaults of the bank. (Even John Law, the great financier for France from 1715 to 1720, kept his personal account open, if inactive, and with a minimum deposit, after he left Amsterdam)’.[4] Six decades later, it was another Scotsman, Adam Smith, who called the money issued by the BoA bank money, emphasising its intrinsic superiority to currency, security, simplicity and risk-free transfer.[5]

The absolute monarchies of the day evidently did not favour public banks, probably fearing they would jeopardise the sovereign’s monopoly on minting money. Deposits were particularly under threat in England in the 17th century, a time when the erratic rule of the first Stuarts was followed by the Civil War, then the Restoration, and, finally, the Glorious Revolution. This, the most turbulent time in English history, saw the emergence of a new set of deposit-takers: the goldsmiths of London. To them we owe some exceptional monetary innovations, such as ‘goldsmiths’ notes’ (which later evolved into banknotes), and fractional reserve deposits transferrable by cheque. These new devices blazed a trail for modern banking, with all its strengths, weaknesses, and risks.

Confused about deposits

These new practices created a fundamental problem that hasn’t been resolved to this day: the lack of a distinction between money on account or demand deposits and time deposits, i.e. non-cash money vs financial investment. These were clearly differentiated only in the early 1900s, but even as late as after World War I some British and American banks still allowed clients to draw cheques on savings deposits. To this day, most economists use the collective noun ‘deposits’, although most central banks have long since given up trying to clearly define deposits that constitute money. ‘Just which kinds of deposit obligations count as “money” depends on definitions, of which there are several, all somewhat arbitrary.’[6] The combination of fractional reserve banking and confusion about deposits has caused numberless runs on banks, bankruptcies, and banking crises.

The fractionality of bank reserves therefore became the main hallmark and driver of English banking from the time of the first industrial revolution. The key word here is promise: banks promise to pay a sum to the bearer on demand, using fractional reserves they hold as assets. The use of cheques completely transformed the non-cash business previously developed by public banks. ‘The increased use of cheques is a striking feature of London private banking in the latter half of the eighteenth century’.[7] All evidence suggests that deposit banking based on fractional reserves was flourishing as early as the 18th century, with payments made through the system far outstripping those in actual cash. Yet it failed to attract much attention, since non-cash payment instruments ‘circulat[ed] chiefly among the trading world [and came] little under the observation of the public.’ (Henry Thornton, Paper Credit).

The different treatment of cash and non-cash money, or banknotes as a regulated business and bank deposits as a free market activity, was first legislated in the UK’s Bank Charter Act 1844. The intention was to split the Bank of England’s note issuing operations from its general banking business by creating distinct Issue and Banking Departments. The Act therefore separated central bank money for the public (Issue Department) from central bank deposit money, available only to banks (Banking Department). So, the general public, forever denied access to risk-free central bank deposits for transactions, was forced to use fractional bank deposits for non-cash payments, although before the Act was passed the Bank used to accept individual deposits. ‘Other banks, although stripped of the right of issue, were virtually unmolested in the creation of deposit currency.’[8]

The fact that banknotes earned no interest, whereas demand deposits were interest-bearing, helped assuage deposit-holders’ aversion to risk. The convenience of account-to-account payments by cheque made demand deposits doubly attractive, in spite of their fractional nature. This quality made economists start calling them bank money, neglecting their promissory character. Adam Smith was among the first to use this term, although he employed it to refer to the full reserve deposits the Bank of Amsterdam utilised for non-cash risk-free transfers. In fractional banking, demand deposits are fractional money, as demonstrated terrifyingly by the Great Depression.

The destruction of our demand deposits

‘The most outstanding fact of the last depression is the destruction of eight billion dollars – over a third – of our “check-book money” – demand deposits.’[9] The author of this quote, Irving Fisher, was a renowned economist who lived through this cataclysm and employed mathematics to expose the real interest rate. His sketch of the destruction of the dollar illustrated the scale of the money illusion, or just how fractional transaction accounts in banks in really were. It wasn’t eight billion dollars in non-cash money that were destroyed, it was eight billion dollars in claims on banks. Depositors’ money had already been invested, either in securities or as bank loans, which the economic crisis made uncollectable. Nine thousand US banks failed during the Great Depression, a third of the entire banking sector; 4,000 banks went bankrupt in 1933 alone. The greatest series of bank failures in history is slowly being forgotten, just like the terrible Spanish Flu of not-so-distant 1918. The Covid-19 pandemic has been a forceful reminder that not all contagious diseases have been eradicated – including a possible new banking contagion.

As Irving Fisher succinctly put it, the dollar grows scarcer ‘by reason of the destruction of the check-book money of the nation through the liquidation of bank loans; and finally, the fundamental reason why such liquidation destroys our check-book money lies in our partial reserve system.[10] This is why he and a group of colleagues proposed ‘the 100% money plan’, which would require 100% reserve for deposits, so making them perfectly safe.[11] This suggestion, also known as the Chicago Plan, continues to attract the attention of many economists.[12]

Unsurprisingly, Fisher didn’t invoke London banking practice, but the Bank of Amsterdam. The powers that be rejected his plan on the pretext that it would destroy banks’ deposit business (even though it would have applied to only a small portion of these affairs, demand deposits or transaction accounts). So failed the last attempt to separate monetary and credit operations, tried for the first time in 14th century Venice.

Fractional reserve banking has been kept on artificial life support by deposit insurance schemes, formalised with the creation of the world’s first institution of this type, the US Federal Deposit Insurance Corporation (FDIC). The FDIC’s crest reads ‘1933’ as a symbol of victory over the Great Depression, even though the Corporation began operating only a year later.

Additional support to the faltering bank sector was to be provided by the Federal Reserve System, or the Fed, as the lender of last resort, a function it did not perform in the Great Depression.

Milton Friedman, the founder of monetarism, fiercest critic of the Fed, and champion of the free market, distrusted these solutions to problems of fractional reserve deposits and promissory money. As early as 1959, in his famous A Program for Monetary Stability, Friedman set out a list of the ‘good reasons’ why ‘monetary arrangements have seldom been left to the market’, which he kept the same until the latter half of the 1980s. A major ‘good reason’ is ‘the peculiar difficulty of enforcing contracts involving promises to pay that serve as a medium of exchange and of preventing fraud in respect of them. … However, the character of the difficulty has changed. … Moreover, it is now taken for granted that governments (i.e., taxpayers) will completely shield holders of deposit liabilities from loss’.[13] The lines of deposit-holders queuing outside Northern Rock branches in 2008 were tangible proof of Friedman’s visionary thoughts about deposit liabilities.

James Tobin put it slightly differently: ‘It is, after all, historical accident that supplies of transactions media in modern economies came to be byproducts of banking business and vulnerable to its risks.’ (Financial intermediaries, p. 26).

Contemporary bank deposit money

Confusion about bank deposits persists, especially in the UK, as confirmed beyond doubt by the standard reference handbook published in 2000 by the Bank of England: ‘Money intended primarily for use in transactions … has been hard to define satisfactorily in the UK. This is because there is no administrative distinction, or any clear commercial distinction, between deposits held for transactions and those held as wealth.’[14]

By contrast, the Fed draws a clear regulatory distinction in Regulation D between reservable “transaction accounts” and non reservable “savings deposits”’, as highlighted in the very terminology used, accounts vs deposits. Urgent temporary measures in response to the ‘novel coronavirus situation’ do not alter this distinction in any meaningful way but do reveal how far the Fed is ready to go to address the Covid-19 recession.[15]

Nevertheless, reservable ‘transaction accounts’ remain fractional bank money, inferior to central bank money, which is comprised of ‘safe forms of money, with no chance of default.’[16] This is why our money in banks will continue to remain the only security that is only fractionally safe. All other securities, both debt and equity, are protected by custody banking. Why is it, then, that there’s no custody banking for our money as well?

Wrong exit

Electronic money for the public offered a possible solution to the fractionality issue. According to the definition used by the European Central Bank (ECB), electronic money (or ‘e-money’) is ‘an electronic store of monetary value on a technical device’, where ‘the device acts as a prepaid bearer instrument which does not necessarily involve bank accounts in transactions.

Central bankers, however, were afraid that direct access to electronic central bank money by the public (obviously, banks had access to it from the very beginning) would cause flight of demand deposits from commercial banks. A way out was found in the EU Directive 2009/110/EC on the supervision of the business of electronic money institutions, which are legal persons ‘granted authorisation to issue e-money’ (ECB). Article 2(1) of the Directive broadens the definition of electronic money to mean ‘electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions.[17] So our money is now a claim not only on banks, but also on these new payment service institutions. Clearly, what we’ve got here is not safe money, it’s just another form of debit card.


Given that transaction accounts make up a relatively small proportion of all deposits, and an even smaller part of broad money (M4 in the UK, or M3 in the ECB system), their de-fractionalisation would not pose a monetary problem, but is not possible without political support. Banks are an inevitable payment intermediary, so that safe transaction accounts would have a positive effect on the stability of their business and improve their less than stellar perception in public. Incidentally, the extreme protection commercial banks get from governments and their agencies, especially central banks, has made the banking sector vulnerable and sluggish to modernise its business models. It may be paradoxical, but it’s quite likely that banknotes will outlive traditional commercial banks, battered as they are mercilessly by their technologically hyper-innovative competitors. Instead of fractional bank money, what we’d get is fractional digital money.

Until this happens, all we can do is try to keep our transaction accounts safe in banks with fractional reserves. Government deposit insurance has its limits, not just in the amounts it covers, but also in terms of their aggregate volume. This is why it’s good, from time to time, to check up on our money the old-fashioned way: by converting into banknotes some of the non-cash money in our bank accounts.



[1] William Roberds and Francois Velde (2014), Early Public Banks, Working Paper 2014-03, FRB of Chicago, July 2014 (Revised), p. 15-16.

[2] Ibid.

[3] Ibid, p. 4.

[4] Larry Neal (2000), How it all began: the monetary and financial architecture of Europe during the first global capital markets, 1648-1815, Financial History Review, No. 7, p. 121.

[5] ‘Bank money, over and above both its intrinsic superiority to currency, and the additional value which this demand necessarily gives it, has likewise some other advantages. It is secure from fire, robbery, and other accidents; the city of Amsterdam is bound for it; it can be paid away by a simple transfer, without the trouble of counting, or the risk of transporting it from one place to another.’ Adam Smith (1776), An Inquiry into the Nature and Causes of the Wealth of Nations, New York: The Modern Library, 1937.

[6] James Tobin (1987), Financial intermediaries, Cowles Foundation Discussion Paper No. 817, p. 5.

[7] R.D. Richards (1958), The Early History of Banking in England, Routledge, 2012, p. 192.

[8] Frank Whitson Fetter (1965), Development of British Monetary Orthodoxy, 1797-1875, Harvard University Press, p. VII.

[9] Irving Fisher (1936), 100 % Money and the Public Debt, Economic Forum, Spring Number, p. 420.

[10] Ibid, p. 421.

[11] ‘One hundred percent reserve deposits would, of course, be perfectly safe – that is, as safe as the national currency – and would not have to be insured. Those deposits would in effect be currency, but in a secure and conveniently checkable form. One can imagine a system in which banks and other financial intermediaries offered such accounts, with the reserves behind them segregated from those related to the other business of the institutions. That other business would include receiving deposits which required fractional or zero reserves and were insured only partially, if at all.’ Tobin (1987), p. 25.

[12] Jaromir Benes and Michael Kumhof (2012), The Chicago Plan Revisited, IMF WP 12/202.

[13] Milton Friedman and Anna Schwartz (1987), Has Government Any Role in Money?, In: Anna Schwartz (ed.) (1987), Money in Historical Perspective, University of Chicago Press, p. 291-2, 310.

[14] John Thorp & Philip Turnbull (2000), Banking & Monetary Statistics, Centre for Central Banking Studies, Bank of England, December 2000, p. 6.

[15] Federal Reserve Board – Regulation D – Savings Deposits, FAQ, Last Update: April 24, 2020.

[16] Wataru Takahashi (ed.) (2012), Functions and Operations of the Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, p. 3.

[17] Directive 2009/110/EC of the European Parliament and Council of 16 September 2009.

Abolition of Cash or Loss of Anchor


The squeezing-out of cash means, in essence, the elimination of government money for the public. We know that this process has been going on since the 18th century and could not be reversed even by the gold standard, which applied only to central bank notes. It was not the ‘War on Cash’ that dealt cash the final blow: it was merchants’ refusal to accept national currencies in banknotes and coins. In a cashless society, only private money exists. The fundamental problem is that the disappearance of central bank notes means the end of risk-free money for the public, the only money with a stable nominal value. Without banknotes, £10 will not always be £10, 10 will not always remain 10, nor will $10 always stay $10. The end of cash will remove the final line of defence against monetary policy without constraint and corporate money issuers.

Key words: cash, banknotes, government money, private money, the course of cash, war on cash, legal tender status, payment tigers.

The gradual expulsion of government money

Coins are government money and so is, ultimately, central bank money. Since non-cash central bank money is not available to the general public, government money for the public is comprised of coins and central bank notes, in other words, of cash. So the expulsion of cash is, essentially, the abolition of government money.[1]

We know that this process has been going on since the 1750s, when the bankers of London concluded that issuing banknotes was not as profitable as doing business with non-cash money on account. This initial squeeze-out of cash was not halted by the introduction of large-denomination banknotes (the minimum being £10), which were readily used by businesspeople and the wealthy. Simply, non-cash money on account proved superior for wholesale payments. The lowering of banknote denominations throughout the 19th century did not slow the process down but merely meant increasingly fewer coins were used for daily retail payments.

In a seeming paradox, the ousting of cash could not be stopped even by the gold standard, which applied to central bank notes of most countries in Europe and further afield but not to households’ and firms’ deposits with commercial banks. Moreover, before the 1930s, the convertibility of bank deposits into banknotes was not assured by the government, but depended on the liquidity and solvency of the saver’s bank. The explanation for this lies in the efficiency of account-to-account wholesale payments and interest returns on deposits.

The final exodus

The final exodus of cash from retail payments, its last stronghold, began with the introduction of payment (credit and debit) cards, followed by ATMs and PoS terminals. Understandably, the innovations were broadly accepted by most money holders: they facilitated payment services, and money in banks was convertible into banknotes at face value.

Over the past decade, contactless payments by card and smartphone have meant cash has increasingly been ‘out’, with its legal tender status reduced to nothing but a myth. The cashless economy ignores central bank notes, or government money. ‘When people come across a cashless café, restaurant or pub for the first time they can be surprised that they don’t have a right to use cash in the UK, and that cash acceptance is determined by the party offering the service.’[2] It would be interesting to see whether the UK Government and the Bank of England would react if the party offering the service in London posted a note announcing it only accepted euros, bitcoins, or libras. New York and many other cities throughout the world are facing the same issue. Stockholm has taken this absurdity to new heights: there, krona notes are not accepted by nearly anyone, except the Riksbank, and, perforce, hospitals (see How Money Disappears).

Central banks will continue to supply cash until the last café, restaurant or pub stop accepting it. Faced with the threat of the Covid-19 pandemic, most countries’ national banks re-affirmed this position, with the Bank of England being one of the first to do so: ‘The provision of secure physical cash is a core part of our mission. The Bank has made clear its commitment to continuing to produce cash for as long as people want to use it. … Acceptability requires not just that banks distribute and “bank” cash. It also requires that merchants accept it.[3] Only days earlier, on 19 February 2020, BBC News reported that the UK’s cash system ‘will collapse without new laws’.

So, it turns out, acceptance of a nation’s currency in banknotes and coins depends not on their legal tender status, the government, or the central bank, but on merchants and their payment policies. The US has nearly identical rules in place: ‘Private businesses are free to develop their own policies on whether or not to accept cash unless there is a state law which says otherwise.’[4]

With the global exodus of cash from payment systems and economies in full force, cash was put on two symbolic trials, one in 2015 in Zurich and another in 2019 in Frankfurt. The principal organiser was SUERF, the European Money and Finance Forum, seemingly guided by the honourable intention of provocatively presenting and thoroughly discussing issues that are set to determine the fate of cash. Given the arguments for and against, as advanced by witnesses for the prosecution and witnesses for the defence, and the turbulent events that took place between 2015 and 2019, it will be useful to look at the conclusions of these two events.



Cash on trial

The first conference, held in November 2015, saw simultaneous presentation of both indictments against and evidence in favour of cash. ‘Cash has been accused of three sins: First, cash is inefficient and costly to use and society would be better off without it. Second, it promotes crime, and facilitates money laundering and tax evasion. Third, it makes negative nominal interest rates infeasible.’[5]

One of the main arguments in defence of cash was that it was fast and easy to use. Also highlighted were its privacy, anonymity, role in preventing central banks’ extreme interest rates, the fact that the state earns income from seigneurage, and so on. The defence focused on rebutting specific accusations, but other benefits of cash were advanced as well. ‘Cash provides an insurance against very bad outcomes, such as economic crises, hyperinflation, or the failure of computer or electricity networks. The costs of cash can therefore be viewed as an insurance premium.’[6]

The Cash on Trial conference, which took place in May 2019, recorded fewer accusations against cash, with its inefficiency in payment being the most serious one. The principal indictments are condensed in the title of a speech made by one of the witnesses for the prosecution: ‘Cash – an inefficient and outdated means of payment’.[7] The evidence and arguments in favour of cash once again prevailed over the accusations, even when it came to crime and terrorism.[8] It was especially emphasised that the tangible nature of cash contributes to the liberty and autonomy of members of society, allowing them to live off the grid.[9]

Between the two conferences, Kenneth Rogoff published his The Curse of Cash, with the gruesome title matched by equally gruesome content. The weight of the accusations laid at the feet of banknotes (the author is a supporter of coins, provided they are made of gold) requires a detailed look, before we move on to the war on cash, of which Rogoff is an enthusiastic supporter and proponent.

The Curse of Cash

The author contradicts himself from the very outset. He admits to having devoted an entire book to a ‘sideshow’: ‘Indeed, most academic and policy academics tend to think of physical paper currency as an irrelevant sideshow in today’s world of high-tech banking and finance.’ (Preface) The titles of the three sections reveal his preferences and intentions: Part 1, The Dark Side of Paper Currency; Part II, Negative Interest Rates; and Part III, International Dimensions and Digital Currencies.

On the first page of The Dark Side, having referenced Goethe’s Faust, Rogoff rolls out an outrageous charge: ‘Goethe, writing early in the nineteenth century, was nothing if not prescient. Without paper money, there might have been no German hyperinflation, and perhaps no World War II’.[10] Goethe indeed knew of the collapse of John Law’s bubble, and read Adam Smith and even Henry Thornton (he even revised the German edition of Thornton’s Paper Credit),[11] but could not have been so far-sighted as to envisage a global conflict caused by the hyperinflation of banknotes, which Rogoff disparagingly calls paper money. On the contrary, it was banknotes that allowed Germany to burn off the greatest part of its World War I reparations in the fire of hyperinflation while its citizens rejected the Reichsbank’s worthless paper. Goethe was ultimately unable to convince his fellow Germans that cash was cursed, and they continue to rank amongst the world’s greatest adherents of banknotes. Finally, associating World War II with banknotes is mockery of this most tragic event in human history.

Rogoff illustrates the unreliability of coins, the oldest form of cash, by citing their debasement during the decline of the Roman Empire. ‘In Rome, coin debasement produced cumulative inflation of 19,900% over the period 151-301 AD, a period that saw major revolts and plague’ (p. 19). Over these 150 years, this seemingly terrifying rate of inflation works out at no more than 3.6% annually, an unattainable goal from the 1960s to the 1990s for many developed countries, the UK and US included. The effects of plague are now plainly visible from our own perspective, tinged as it is by Covid-19. Rogoff has thus slandered ancient Rome’s monetary policy unprovoked. The table showing Selected peak debasement years for European coinage, 1300-1812 (p. 20) is similarly erroneous, as the peaks indicate cumulative debasement over the course of decades. Reducing the values to average annual growth rates would have revealed the true pace of coinage debasement.

Even though he considers it cursed, Rogoff does not dispute the importance of ‘paper money’ for his own nation’s independence: ‘Paper currency also played a major role in the American War of Independence from 1775 to 1783, financing the vast majority of the colonists’ expenditures.’ (p. 27). It is questionable whether the colonists saw the ‘paper’ as money or as war bonds, but the author would have to admit that no other means of issuing money would have given as much help to his ancestors in gaining liberty.

After thoroughly enlarging on all the evils and disasters caused by ‘paper money’, Rogoff proposes a most cunning Plan for Phasing Out Most Paper Currency. His proposal is based on three guiding principles: first, make it more difficult to engage in anonymous untraceable transactions; second, the speed of transition needs to be slow; and, third, that poor and unbanked individuals have access to free basic debit-accounts and possibly also basic smartphones.[12] The key oversight of his concept of a total banked regime is the likely disobedience of these poor and unbanked individuals, who may refuse to take up the free basic debit-accounts and basic smartphones. Perhaps this promoter of social engineering worthy of any totalitarian regime ought to think about obligatory basic microchip implants for the poor and unbanked individuals.

To date, the proposals Rogoff suggests for phasing out most paper currency have not helped bring about his desired banishment of cash, unlike the fluidity of legal tender status banknotes, which the author fails to recognise as an option for swift de-cashing.

The rapid phasing out of cash from most of the world in the latter half of the 2010s nevertheless proved too slow for the interests of the banking sector and many non-bank companies and institutions. Financial inclusion for all (see G-20 – High-level Principles of Digital Financial Inclusion, September 2016) and a cashless society were the rallying cries for both governments and the payment industry. Analysts at Germany’s largest bank concur: ‘Governments, banks and card providers share at least a goal: the elimination of cash’.[13] This is why a global war on cash had to be declared.

War on cash

A relatively comprehensive definition of this conflict and its objectives was given by Lawrence White: ‘[t]he “war on cash” refers to a set of policies, in the United States and around the world, deploying the power of government agencies to suppress the use of paper currency. The principal aim is to shift transactions to credit card and bank account media that leave an electronic data trail for law enforcement and tax authorities. A secondary aim is to raise the cost of cash storage so as to allow the central bank to push nominal interest rates further below zero’.[14]

Government agencies include the Fed, the Treasury Department, FDIC, and other public authorities whose decisions directly or indirectly affect the use of cash, here US dollar notes and coins. Similar government agencies are also employed in most other countries to eliminate cash. Yet the government is not the only stakeholder mobilised to combat cash. The ‘war effort’ receives robust support from banks and other financial institutions, as well as consulting firms, universities, research institutes, social media networks, non-profit foundations, and a host of other related entities.

Ensuring a means of payment that leaves an electronic data trail for law enforcement and tax authorities is a key focus of the conflict, yet not its primary goal. The primary and ultimate outcome is to abolish government money and transfer money issuing power from the public to the private sector. This makes banknotes only a tactical target, with central bank reserves remaining the strategic objective. The public have never fully understood the nature of these reserves, making them much easier to take over under the veil of a public-private partnership. Obviously, before this can happen, banknotes and coins must be abolished as evidence of erstwhile issuing power. Cash is here only collateral damage, and the private sector may reissue it at some point in the future in the guise of digital notes and coins.

Many central banks are in favour of the abolition of their own products, citing their technological obsolescence – an issue they hardly gave any thought to until recently. This is probably the only recorded case in economic history of a monopolist advocating the removal of its monopoly to the benefit of a technologically more advanced competitor. Perhaps absurdly, cash is being defended from central bankers by supporters of free banking, currency competition and new private monies. One of the most courageous of these cash defenders is Kevin Dowd:

‘One of the most significant developments in economic policy in recent years has been a gradually escalating government war against cash. … The abolition of cash threatens to destroy what is left of our privacy and our freedom … Quite simply, the government’s war against cash is the state’s war against us. Andy Haldane, the chief economist of the Bank of England – announced that he too was in favour of abolishing cash.’[15]

Policy tactics involve various restrictions and monitoring requirements that hinder the holding of cash, suppress cash transactions, and generally make cash more expensive to use.[16] However, none of these tactics is as effective at squeezing cash out as the ephemeral nature of cash’s legal tender status. Merchants’ freedom to set their own payment policies, as described above, has been accelerating the disappearance of banknotes and coins.

How the war can end

At the war’s end, the merchants will lead us into a cashless society. The Swedish central bank has an answer as to what that society will look like: ‘In a cashless society, a restricted group of financial corporations has access to risk-free central bank money. The general public, in contrast, does not.’[17] By being denied to the public, central bank money would lose its risk-free status, whereas reserves would remain private bank money. Soon after, a public-private venture would take over the issue of reserves, which would then comprise all of base money (without cash). Global payment corporations, encouraged by the full control they already exercise over payment systems, have no reason to refrain from reaching after the power to issue money. Monetary sovereignty, lost in the intricate interpretations of legal tender status, would be replaced by the sovereignty of the corporate issuers of reserves, i.e. of money.

Public-private issue of reserves will serve as an overture to the abolition of central banks and the fully private issuance of base money. The government would retain its deposit insurance function that employs taxpayer (our) money, whereas regulation and oversight would be the remit of independent agencies created from remnants of the former central bank. ‘In a cashless society, a financial crisis could arise in a situation where only private money exists’ (Riksbank, Petition, p. 8). The function of lender of last resort would have to be assumed by the new money issue masters, as it is inseparable from issuing authority, but is nonetheless difficult to reconcile with their private interests.

The incompatibility between the power of issue and private interests of corporate money issuers ultimately limits the feasibility of this new monetary order sketched out in the preceding paragraphs. The pretenders to the sovereign right to issue money are the same private banks whose business policies have caused so many financial and economic crises. The transformation of banks and payment providers from payment intermediators to money issuers will not do away with their genetic vulnerability. By definition, a money issuer cannot be illiquid, but it may still devalue its own product. No formal definition of a unit of account by the government will allay this danger, and corporate money issuance will inevitably lead to monetary chaos.

The new monetary order of the cashless economy hides a built-in construction error: the abolition of cash, which guarantees the stable nominal value of money. The absence of stable nominal value removes two of money’s fundamental functions, unit of account and measure of value. This structural weakness will bring the planned monetary system crashing down soon after central bank money for the public is scrapped. The abolition of cash will ultimately prove to be a Pyrrhic victory for the cashless armada.

Loss of anchor

Banknotes are the nominal anchor of the economy due to their stability of denomination, meaning that their denominated face value does not change. They anchor the nominal prices of goods and assets and relative price ratios, which is a precondition for the operation of product and financial markets. The nominal certainty of factor incomes (salaries, profits, rents, interest payments, dividends) underlies all our decisions to produce, sell, consume, save, lend, borrow, and invest. Without banknotes to serve as their anchor, the certainty of nominal values in the economy will inevitably be lost.

Their unchanging nominal value and transferability lend banknotes another unique characteristic: they discipline banks and other financial intermediaries, including the very central banks that issue them. Of all the forms of money, banknotes are the easiest to withdraw and dispose of, which sends a clear signal to their issuers and depositaries about how much we trust them. In a cashless economy, we would not be able to take out our money from the bank – all we could do is move to a different bank.

Immediate settlement is another characteristic of banknotes that sets them apart from other means of payment, which cannot function without payment providers. ‘A banknote is the payment instrument by which the highest settlement finality can be achieved’.[18] This highest settlement finality is clearly the reason why, according to Milton Friedman and Anna Schwartz, ‘there is no pressure by banks or other groups to gain that privilege’.[19]

Apart from all the advantages cited above, which are derived from the intrinsic nature of banknotes and the credibility of their central bank issuers, other prerequisites exist that have long been completely ignored. Conclusions of the Swedish Committee of Inquiry of 1881 can serve as a reminder: ‘The inquiry’s three main reasons for a banknote monopoly were: 1) banknotes should be entirely free of risk, 2) banknotes must be issued without a short-term profit motive, and 3) revenues from the issue of banknotes are necessary to fund a central bank’s function in society so that it does not have to act according to a profit motive.’ (Riksbank, Petition, p. 9). These past findings clearly indicate that what makes banknotes unique is their absence of a short-term profit motive and private profit from their issue, or seigniorage.

The re-introduction of the gold standard, which not even Kenneth Rogoff believes to be far-fetched, is also impossible without banknotes. Banknotes were the only form of money that allowed the gold standard to operate. Gold coins and gold certificates are not viable in practice as means of payment.

There is no reason to invoke the costs of payment in the retail sector as an argument against cash, as data indicate it is competitive in comparison with other means of payment. [20] Of course, if it continues to be squeezed out of everyday transactions, cash will lose its cost competitiveness.

In spite of all their exceptional qualities, banknotes are disappearing, and their passing marks the end not only of physical central bank money, but also of risk-free government money for the public. Its technological development neglected by its issuers, no longer accepted as legal tender, lacking an heir in the form of central bank digital notes, this authentic money has no chance of survival in the payment market. And so the precious heritage of Sir Robert Peel will be irrevocably lost in today’s world in which the banishment of cash has become a sign of progress, and where those the furthest advanced on that road are held up as paragons. ‘An emerging group of “payment tigers” have also made especially rapid progress – Poland, Ghana, Malawi, and Rwanda. Rwanda aims to become a cashless economy by 2024.’[21]

Technologically superior payment methods will obviously replace traditional banknotes permanently. Most consumers and merchants now rightly want to use these vastly more efficient means of payment. The fundamental problem here is that the disappearance of banknotes means the end of risk-free money for the public, the only money that has stable nominal value. Without banknotes, £10 will not always be £10, €10 will not always stay €10, nor will $10 always remain $10. This will remove the final line of defence against monetary policy without constraint and corporate money issuers.



[1] The term government money is more precise and modern than sovereign money, but not exclusive.

[2] Access to Cash Review, Final Report, London, March 2019, p. 86.

[3] John Cunliffe, Deputy Governor (2020), It’s time to talk about money, Speech, 28 February 2020, p.6, 7.

[4] U.S. Department of the Treasury – Legal Tender Status (Resource Center).

[5] Aleksander Berentsen and Fabian Schar (2016), The fallacy of a cashless society, In: Cash on Trial, SUERF Conference Proceedings 2016/1, February 2016, p. 14.

[6] Christian Beer et al (2015), Cash on Trial, Findings from a conference, SUERF.

[7] McKinsey&Company (2019), Cash – an inefficient and outdated means of payment, Witnesses for the Prosecution, Cash on Trial Mk II, SUERF Conference, 20 May 2019.

[8] Frederich Schneider (2019), Restricting or abolishing cash: An effective instrument for eliminating the shadow economy, corruption and terrorism? In: Urs Birchler et al (eds.), Cash on Trial Mk II, Conference Proceedings 2019/1, SUERF, p. 53-66.

[9] Morten Bech and Amber Wadsworth (2019), What is money? Comparing cash and central bank digital currencies, In: Urs Birchler et al (eds.), Cash on Trial Mk II, Conference Proceedings 2019/1, SUERF, p. 24-31.

[10] Kenneth Rogoff (2016), The Curse of Cash, Princeton University Press, p. 15.

[11] Hans Binswanger (1994), Money and magic: a critique of the modern economy in the light of Goethe’s “Faust”, The University of Chicago Press.

[12] ‘The proposal here is driven by three guiding principles. First, the ultimate goal is to make it more difficult to engage in anonymous untraceable transactions repeatedly and on a large scale. … Second, the speed of transition needs to be slow, stretching changes out over at least 10-15 years. Gradualism helps avoid excessive disruption and gives institutions and individuals time to adapt. (p. 92) Third, it is essential that poor and unbanked individuals have access to free basic debit accounts (or the future equivalent), and possibly also basic smartphones, as several countries have already done or are contemplating.’ (p. 93). (Kenneth Rogoff (2016), The Curse of Cash).

[13] Marion Laboure (2019), Cryptocurrencies: the 21st century cash, Imagine 2030, Konzept # 17, Deutsche Bank Research, December 2019, p. 58.

[14] Lawrence White (2018), The Course of the War on Cash, Cato Journal, Vol. 38, No. 2, p. 477.

[15] Kevin Dowd (2017), Killing the cash cow: Why Andy Haldane is wrong about demonetisation, Briefing Paper, Adam Smith Institute, London, April 2017, p. 1.

[16] ‘The main policy tactics in the war on cash are currently four: 1. Abolishing high-denomination banknotes. 2. Place a maximum legal value on cash payments. 3. Require declarations from any party carrying a cash amount above a specified value across the national border. 4. Require banks to report to authorities any cash deposits or withdrawals in amounts above (or suspiciously near) a specified value.’ Lawrence White (2018), The Course of the War on Cash, p. 478-9.

[17] Sveriges Riksbank (2019), Petition to the Riksdag – The state’s role on the payment market, Summary, p. 9.

[18] Wataru Takahashi (ed.) (2012), Functions and Operations of the Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, p. 55.

[19] ‘While we therefore see no reason currently to prohibit banks from issuing hand-to-hand currency, there is no pressure by banks or other groups to gain that privilege.’ Milton Friedman and Anna Schwartz (1987), Has Government Any Role in Money, In: Anna Schwartz (ed.), Money in Historical Perspective, NBER & University of Chicago Press.

[20] ‘As a result of the low fixed costs, cash payments up to an average payment amount of just under €20 are the most cost-efficiency for the retail sector.’ Deutsche Bundesbank (2019), The costs of payment methods in the retail sector, Monthly Report, June 2019, p. 107.

[21] Markus Massi et al. (2019), How Cashless Payments Help Economies Grow, BCG: Boston Consulting Group, May 28, 2019.

Money in the Time of Coronavirus

Coronavirus disease 19

An infinitesimally tiny bit of protein – a virus from the coronavirus family, the cause of the disease now known as Covid-19 – has altered the life of every human being on this small planet. It’s forced us to watch from our windows as spring awakens, confined to quarantine at home; to keep physical distance from others; and to wear face masks and gloves on the rare occasions when we do venture out. Coronavirus has shown us all how interconnected we are and laid bare the truth that there’s no room for Robinson Crusoe’s Island in our modern world. It has admonished us that we’re not superior but weak and vulnerable, in spite of all of our knowledge, technology, and resources. Coronavirus has made all people equal in this tribal world, where investment into tools that destroy life are thousands of times greater than in those that help it survive.

The scale of the Covid-19 scourge is revealed by the frightening daily statistics of infections and deaths by country, region, city, village, and, inevitably, for the world as a whole. It’s accompanied by the grim figures showing the extent of the Covid Economic Crisis,[1] the economic pandemic: the dizzying growth in unemployment, plunging production levels, and curtailment of domestic and foreign trade to just the bare necessities. Any decline in aggregate demand is, by definition, a prelude to economic recession. In terms of its depth and duration, the Covid-19 recession is already showing all the hallmarks of a depression. The medical and economic emergencies have elicited preventive action from all of the world’s governments and their departments.

The Covid-19 recession: Money for survival

In responding to the Covid-19 recession, the policymakers’ first instinct was to reach for money. Obviously, not their own, but ours – taxpayer money, money printed in profusion by central banks. Without a doubt, at this time of economic pandemic, every member of society must be entitled to the bare minimum required for life, regardless of their country’s budget deficit. Also without a doubt, the real sector must receive at least some of the assistance given to the financial sector during the 2007-2009 global financial downturn and lasting to this day. And yet, in doing so, the relative stability of goods and services prices must be maintained – a difficult but not impossible task, because there’s no reason to expect aggregate demand to grow during the pandemic. Curing the respiratory distress of the economy surely requires mechanical monetary ventilation, but for a limited time only, to reduce hardship faced by populations and prevent markets from collapsing.

Most governments have already temporarily relaxed their tax rules and provided fiscal support to small and medium-sized firms. Having learnt their lesson in the Great Depression of the 1930s, central banks ensured the financial system remained liquid and extended vast amounts in loans at zero or negligibly low interest rates. Central banks have also scaled up their purchases of safe securities issued by both banks and non-bank financial institutions and companies operating in the real sector.

At the same time, economists have lost no time in proposing various incentives, with some going as far as insisting that these remain in place permanently.[2] Although all of these stimuli are directly or indirectly linked to money, discussing them would take us too far from our topic – money in the time of coronavirus.

Support for recovery – NOT ‘helicopter money’

The pressing need for economic recovery has brought to the fore an old term, ‘helicopter money’, first used in a completely different context by Milton Friedman, the founder of modern monetarism. An erroneous interpretation of Friedman’s example,[3] which gained currency during the global financial downturn, became dominant in the Covid-19 crisis.

Proponents of the helicopter approach are growing ever more numerous. ‘There is an alternative … direct unrepayable funding by the central bank of the additional fiscal transfers deemed necessary, an intervention commonly known as “helicopter money”’.[4] This strategy, seemingly simple and effective, is one of the greatest threats to the real value of our money. Decades of low and stable inflation don’t mean that hyperinflation has been stamped out – just like with dangerous viruses.

These proposals have prompted central bankers to respond. In early April, Jerome Powell, Chair of the Fed, stressed that ‘these are lending powers, not spending powers. The Fed is not authorized to grant money to particular beneficiaries. The Fed can only make secured loans to solvent entities with the expectation that the loans will be fully repaid.’[5]

This is why it’s particularly important to distinguish between the functions, tools, and scope of fiscal policy, on the one hand, and those of monetary policy, on the other. In brief, this means setting the responsibilities of the Ministry of Finance and the Treasury apart from the role of the central bank.

The discussion about money-financed fiscal interventions has overshadowed a vignette in which our cash – or, more precisely, our banknotes – played the bad guy. Let’s take a quick look at the directors and stars of this one-act show, and see how things turned out.

Covid-19 dislikes cash

It took just one offhand remark made at a press briefing of the World Health Organisation to set off an avalanche of questions about whether cash could carry the virus. Use contactless payments, the world’s public health body said. And so, we learnt that cash was not just responsible for crime, terrorism, tax evasion, drug trafficking, and all other illicit activities, for monetary policy constraints and world wars (see Abolishing of Cash or Losing of Anchor), but for the coronavirus pandemic as well.

Nevertheless, the joy of global money providers, card network corporations, and private issuers of cryptocurrencies was short-lived. Soon afterwards, the MIT Technology Review retorted: No, Coronavirus is not a good argument for quitting cash, adding ‘[i]n fact, we don’t have any evidence that money in any form has ever been source of any kind of infection… You’re more likely to pick up COVID-19 from people exposure than from the type of payment.’[6]

One of the first central banks to wade into the fray was the German Bundesbank, which released a statement titled Cash poses no particular risk of infection for public: ‘… the risk of picking up coronavirus via cash is extremely minimal.’[7] Shortly thereafter, the Riksbank, the national bank of cashless Sweden, declared there was no evidence that the coronavirus spreads via banknotes.[8]

As may well have been expected, the most colourful answer came from Scotland: ‘The risk of banknotes spreading the coronavirus is small “unless someone is using a banknote to sneeze”, says Christine Tait-Burkard, an expert on infection and immunity at the Roslin Institute at the University of Edinburgh.’[9]

And so, thanks to the world’s immunologists and microbiologists, banknotes received a last-minute reprieve from the death sentence pronounced on them long ago by proponents of the cashless society. What’s more, they have proven to be a key means of preventing pandemic panic. No country may have had sufficient supplies of gloves, face masks, or ventilators, but all had ample stocks of banknotes, and all made this fact known in good time – like the Bundesbank, which reassured the public that ‘[t]he supply of cash is secure’ (18 March 2020).

Money after the coronavirus pandemic

Covid-19 will not exterminate the human race and neither will it eliminate money, for millennia the companion of humans and the omnipresent means of payment in each economy. Having said that, once the Covid-19 pandemic is over, money will be shaped by two key factors, the course of the outbreak and emergency economic policies, both fiscal and monetary. The macroeconomic lesson of the pandemic is clear: contraction of aggregate output and unemployment growth are proportional to the contagiousness and pathogenicity of any new virus or bacterium. Economic recovery will also be determined by the speed with which the pandemic is brought under control. Medical precautions can greatly dampen these consequences, but not prevent them outright.

Perhaps controversially, the Covid-19 pandemic may help keep the real value of money relatively stable by contracting aggregate demand. After all, inflation is hardly to be expected when most people have limited access to supermarkets and other retail outlets. Aggregate supply has also adjusted to the present circumstances and is not likely to put pressure on general price growth either.

Cash should see the same levels of use for several years to come, until people have forgotten about this pandemic, as they have forgotten the much more destructive Spanish Flu outbreak of 1918. The attention devoted to antibacterial and hygienic features of banknotes, already high, is set to increase further. In case you weren’t aware, ‘€5 and €10 banknotes, which change hands particularly often as change, additionally have a protective coating against soiling.’ (Deutsche Bundesbank, 18 March 2020).

With emphasis placed on resistance to germs, the introduction of polymer plastic banknotes is certain to pick up pace. The latest example of these is the new polymer £20 note, issued on 20 February 2020, and claimed by the Bank of England to be its most secure ever banknote. The retirement of the old £20 note will remove from circulation the image of Adam Smith, ‘the first economist and the first Scotsman to appear on a Bank of England note.’[10] Ironically, Adam Smith first appeared on a banknote in the spring of 2007, on the eve of the global financial crisis, and began to depart in February 2020, at the start of the Covid-19 pandemic in Europe. The replacement of old notes bearing his likeness will probably continue until the pandemic has died down, so his image will have linked two extraordinary episodes of economic history, the Great Recession and the Covid Recession (hopefully not Depression). If banknotes with the face of one of the fathers of economics are associated with such events, then no economist should ever be put on the money of any country anywhere in the world. What is certain, however, is that no economist will peek out at you from your wallet after the Covid-19 pandemic.



[1] Baldwin, R., Weder di Mauro, B. (eds.) (2020), Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, CEPR Press VoxEU, March 2020.

[2] Paul Krugman (2020), The case for permanent stimulus, In: Mitigation the COVID Economic Crisis, p. 213-219.

[3] ‘“Wise” also means avoiding the deceptive lure of variants of so-called “helicopter money” or, in less colorful language, debt monetization. Given the considerable confusion surrounding this topic, it is worth dwelling on it for a moment. Helicopter money conjures up a powerful image money falling from the sky directly into people’s pockets. Choreography aside, though, it amounts to two rather mundane steps. The first is simply crediting individual accounts, just like the government does when paying out unemployment benefits or tax rebates. The second, less well understood, step is allowing the additional money to swell banks’ deposits with the central bank (technically, boost “excess reserves”) – that is where the money ends up. We have a pretty good idea of what their respective impact is; neither step is new. Transfers are the largest component of government spending. And the main central banks have operated with excess reserves for quite some time now. There is a consensus that simply adding to the reserves has little effect of its own on economic activity. It pushes on a string.’ Claudio Borio (2019), Wise fiscal policy is not about helicopter money, Speech, Bank for International Settlements, 08 November 2019.

[4] Jordi Gali (2020), Helicopter money: The time is now, In: Mitigation the COVID Economic Crisis, p. 57-61.

[5] Jerome Powel (2020), COVID-19 and the Economy, Remarks, Federal Reserve System, April 9, 2020.

[6] Mike Ocurt (2020), No, coronavirus is not a good argument for quitting cash, MIT Technology Review, March 12, 2020.

[7] Deutsche Bundesbank (2020), Cash poses no particular risk of infection for public, 18.03.2020.

[8] Sveriges Riksbank (2020), No evidence that the coronavirus spreads via banknotes, News, 26.03.2020.

[9] Rachael King and Alice Shen (2020), Will cash survive Covid-19? Central Banking, 20 March, 2020.

[10] Bank of England (2006), Governor’s Adam Smith Lecture 2006, News Release, 29 October 2006.

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