How Money Disappears
Summary
Money is part of our everyday lives. Low inflation and constant technological innovations make it look like the stability of money is a given. Even the very existence of money seems incontestable. But facts show money is rapidly being squeezed out of the economy and society. De-cashing on the way to the cashless society of the future will leave the general public without safe money and a risk-free means of payment issued by the central bank. This will mean the loss of non–interest safe assets that preserve the nominal value stability of central bank money. Stable prices of goods, services, and real and financial assets are unthinkable without nominally stable money. More…
Key words: de-cashing, cashless society, legal tender myth, non–interest safe assets, stable prices, risk-free means of payment, nominally stable money, government money.
Money in the Time of Coronavirus
Summary
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 has admonished us that we’re not superior but weak and vulnerable, in spite of all of our knowledge, technology, and resources. 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. More…
Key words: coronavirus disease 19, Covid-19 recession, economic recovery, ‘helicopter money’, spreads via banknotes, supply of cash, macroeconomic lesson.
Abolition of Cash or Loss of Anchor
Summary
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. More…
Key words: cash, banknotes, government money, private money, the curse of cash, war on cash, legal tender status, payment tigers.
Fractional Bank Money
Summary
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. More…
Key words: fractional bank money, money illusion, deposit insurance, full reserve banking, electronic money institutions, fractional digital money.
Negative Nominal Interest Rates
Summary
Negative interest rates are but the latest monetary virus, sown by central banks in the early 2010s. 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 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. But, digital assets do not guarantee nominal stability. 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. More…
Key words: nominal stable money, negative nominal interest rates, monetary policy without constraint, cashless society.
CBDC: Currency or Platform?
Abolishing central bank money for the public
Summary
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. More…
Key words: central bank digital currency (CBDC), digital reserves, payment platform model, direct model, hybrid model, cash-like direct CBDC, central bank digital note.
Disclosure of Anonymity in Modern Payments
Summary
Anonymity of payments and privacy of the transactors had not been mentioned before the end of the 20th century, nor the anonymity was pointed out as a characteristics of money. The turnabout starts in the 1990s with the appearance of electronic money, then Bitcoin in 2008 and numerous cryptocurrencies in 2010s. Nowadays, monetary analysis place the anonymity into the most important characteristics of money, as the most decisive condition of payments’ privacy. However, the research about anonymity of payments in history perspective shows that most transactions, cash or non-cash, had been documented, respectively not anonymous, Therefore, today’s modern electronic payment systems in the world still rely on Hammurabi’s principle of documented money and not on Nakamoto’s idea about cryptographic proof.[2]
The question arises how have all science authorities overlooked such an important characteristic of money and payments like anonymity over the centuries? How was the privacy of transactors kept despite the domination of non-anonymous documented payments? Why had anonymity always been underestimated and was linked only with everyday low value retail payments? General answer is that the anonymity of payments is not essential since the privacy of transactors was implied until 1940s. This is also the answer to the first question. Whether to trust Smith, Thornton, Jevons, Menger, Wicksell, Friedman and other researchers of money or the anonymous Satoshi Nakamoto and the promoters of data sharing and Open Banking. More…
Key words: anonymity of payment, documented money, proof of payments, means of payment, cash, transaction accounts, cryptocurrencies, retail payments, data sharing, open banking.
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[1] ‘If the agent is careless, and does not take a receipt for the money which he gave the merchant, he cannot consider the undocumented money as his own’. The Law Code of Hammurabi (c. 1755-1750 BC), rule 105, the L.W. King’s translation (1915).
[2] ‘What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party’. Satoshi Nakamoto (2008), Bitcoin: A Peer-to-Peer Electronic Cash System.
The perception of people about their money and digital euro
Summary
In the early 2020s, central bankers started to realize that people do not distinguish public and private money, or central bank and commercial bank money. The widest general public obviously has a perception of money and money issuers that is significantly different from the settings of monetary theory and policy, which has been confirmed by several recent studies and surveys conducted for the needs of central banks. The perception of people about their money will have a decisive influence on the adoption of central bank digital currency (CBDC). Evidence of the true power of this influence is presented in the final part of this paper – Case study: Digital euro adoption. The fate of the new digital currency as a European alternative will be decided by the answer to the question of the general public: why the digital euro? More…
Key words: perception of money, people attitudes, monetary theory and policy, monetary legislation, central bank money, commercial bank money, CBDC, ECB, digital euro
Two primary forms of money
Summary
Money has two primary forms – immediate money and mediated money. Decisive distinction is that the former circulates off-line, while the latter in-network, via intermediaries. Immediate money accomplishes its functions without intermediaries, circulating hand-to-hand (ingots, bars, coins, banknotes) or device-to-device (in the future). Mediated money exclusively circulates account-to-account in books of payment institutions. It implies that money stays in-network, i.e. in banking system. Due to clearing and settlement technology it amy appear that payments in-banks are performed without money or with little money. All other functions of mediated money are also realized in-network only. These two forms of money have circulated in parallel, intertwined and mutually conditioned during their multimillennial evolution. Three basic channels of creation and circulation of money have been built in this process– factor incomes channel, asset channel and credit channel. The analysis of clearing and settlement process is the key, because it reveals concealed nature of mediated money and differences to immediate money. More…
Key words: money evolution, immediate money, metal money, intrinsic problems, mediated money, book money, payments, clearing, settlement, banknotes, liquidity, banks, central banks, reserves, payment intermediaries (PSPs), electronic/digital/quantum money, central bank money