I offer a macroeconomic perspective on the “Reserves for All” (RFA) proposal to let the general public use electronic central bank money. After distinguishing RFA from cryptocurrencies and relating the proposal to discussions about narrow banking and the abolition of cash I propose an equivalence result according to which a marginal substitution of outside for inside money does not affect macroeconomic outcomes. I identify key conditions on bank and government (central bank) incentives for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate my analysis to common arguments in the discussion about RFA and point to inconsistencies and open questions.
On his blog, John Cochrane argues that banks could, and should be 100% equity financed. His points are:
(1) There are plenty of safe assets—government debt—out there and banks do not need to “create” additional safe assets—deposits.
I share this view partly. First, I don’t know what amount of safe assets are sufficient from a social point of view. Second, I don’t consider government debt to be a safe asset. Third, debt has safety and liquidity properties. The question is not only whether assets/liabilities provide sufficient safety but also whether they serve as means of payment in the same way that base money and deposits do. The key question then is: Do we need inside money? I don’t think that macroeconomics has a convincing answer to this question at this point. But I note that some preeminent macroeconomists (NK) argue that banks can create means of payment better than some governments. If this is true then John’s first argument partly misses the point (although he addresses a related point later).
In spite of these reservations, I share John’s view that in the aggregate, safety cannot be created by means of financial intermediation. Projects and claims to future tax revenue generate returns. The financial system can slice and distribute these returns in different ways (creating safer claims by rendering other claims less safe) but it cannot create safety in the aggregate.
(2) Households and firms no longer need assets (i.e., liabilities of financial institutions) with a fixed nominal value in order to make payments.
I agree. As John writes:
In the past, the only way that a security could be “liquid” is if it promised a fixed payment. You couldn’t walk in to a drugstore in 1935, or 1965, and trade an S&P500 index share for a candy bar. Now you can. (And as soon as it is cleared by blockchain, it will be even faster and cheaper than credit cards.) There is no reason your debit card cannot be linked to an asset whose value floats over time.
(3) If society really needs more “safe” claims such claims can be created on banks rather than in banks. As John writes:
Let the banks issue 100% equity. Then, let most of that equity be held by a mutual fund, ETF, or bank holding company, and let those issue deposits, long term debt, and a small amount of additional equity. Now I have “transformed” risky assets into riskfree debt via leverage. But the leverage is outside the bank.
I agree. In an article (2013) I have described a proposal by BIS economists that relies on equity financed banks and levered bank holding companies to help solve the too-big-to-fail problem.
(4) Why should less “safe” bank liabilities lead to a credit crunch?
I share John’s puzzlement with the often heard claim that fewer bank deposits would go hand in hand with less credit. I believe that this claim mostly reflects confusion about the interplay between national saving and investment on the one hand, and bank balance sheets on the other. There is no mechanical link between the two but of course, there are many indirect links.
All in all, I am as skeptical as John about the view that bank created money obviously is important. I think that bank created money has some useful roles to play but they are more subtle. At the same time, I believe that bank created money is likely to stay with us even if it is not socially useful. Proposals to ban inside money therefore are unlikely to succeed (see my writing on Vollgeld).
In the FT, John Plender reviews Mervyn King’s “The End of Alchemy: Money, Banking and the Future of the Global Economy.” King diagnoses two problems underlying the crisis. First,
Interest rates today, he says, are too high to permit rapid growth of demand in the short run but too low to be consistent with a proper balance between spending and saving in the long run. The disequilibrium persists, as does a misallocation of capital to unproductive investments.
The second problem relates to the financial system and
the alchemy that runs through the financial system, whereby governments pretend that paper money can be turned into gold on demand and banks pretend that the short-term deposits used to finance long-term investments can be returned whenever depositors want their money back. …
King argues that Bagehot’s famous dictum on central bank crisis management — lend freely on good collateral at penalty rates — is out of date because bank balance sheets today are much larger and have fewer liquid assets than in the 19th century. Central banks are thus condemned in a crisis to take bad collateral in the shape of risky, illiquid assets on which they will lend only a proportion of the value, known as a haircut.
King suggests this lender of last resort role should be replaced by … a pawnbroker for all seasons. In effect, he offers an elegant refinement of the concept of “narrow banking”, which seeks to ensure that all deposits are covered by safe, liquid assets. In his system, banks would decide how much of their asset base to lodge in advance at the central bank to be available for use as collateral. For each asset, the central bank would calculate a haircut to decide how much to lend against it. Together with banks’ cash reserves at the central bank, this collateral would be required to exceed total deposits and short-term borrowings.
This central bankerly pawnbroking would facilitate the supply of liquidity, or emergency money, within a framework that eliminates the incentive for bank runs. It amounts to a form of insurance whereby the central bank can lend in a crisis on terms already agreed and paid for upfront …
The system would displace what King regards as a flawed risk-weighted capital regime ill-suited to addressing radical uncertainty. Today’s liquidity regulation would also become redundant. But banks would still need an equity buffer, with King seeing an equity base of 10 per cent of total assets as “a good start”, against the 3-5 per cent common today.
The current shortfall of fully liquid assets against deposits — the alchemical gap — could be eliminated progressively over 20 years, during which time the expectation would grow that banks would no longer be bailed out. The system would apply to all financial intermediaries …
Update: The Economist‘s reviewer writes:
… Lord King wants banks to buy “liquidity insurance”. In normal times banks would pledge collateral to the central bank, which would agree to lend a certain amount against it, if necessary. Banks would thus know in advance precisely how much help they could get in the event of a meltdown, making them behave responsibly when times were good.
In a recent Vox blog post, Zoltan Jakab and Michael Kumhof argue that macroeconomic models where banks intermediate loanable funds get it seriously wrong.
In the intermediation of loanable funds model, bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers … [but in reality] [t]he key function of banks is the provision of financing, meaning the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor.
This difference has important implications. Compared to intermediation of loanable funds models, money creation models predict larger and faster changes in bank lending and real activity; pro- or acyclical rather than countercyclical bank leverage; and quantity rationing of credit after contractionary shocks. New loans in loanable funds model are accompanied by additional savings and thus, higher production or lower consumption. In money creation models, in contrast, they simply reflect an expansion of banks’ balance sheets that is only checked by profitability and solvency consideration. Moreover, “the availability of central bank reserves does not constitute a limit to lending and deposit creation. This … has been repeatedly stated in publications of the world’s leading central banks.”
A large part of [money creation banks’] response [to a contractionary shock], consistent with the data for many economies, is … in the form of quantity rationing rather than changes in spreads. … In the intermediation of loanable funds model leverage increases on impact because immediate net worth losses dominate the gradual decrease in loans. In the money creation model leverage remains constant (and for smaller shocks it drops significantly), because the rapid decrease in lending matches (and for smaller shocks more than matches) the change in net worth. … As for the effects on the real economy, the contraction in GDP in the money creation model is more than twice as large as in the intermediation of loanable funds model, as investment drops more strongly than in the intermediation of loanable funds model, and consumption decreases, while it increases in the intermediation of loanable funds model.
Iceland is considering fundamental monetary reform. A report (PDF) by Frosti Sigurjónsson, Member of Parliament, discusses problems under the current fractional reserve system as well as possible alternatives. The report was commissioned by the prime minister (website of the Prime Minister’s office).
The report argues that the Central Bank of Iceland lost control over the money supply. Commercial banks lent pro-cyclically; they effectively forced the Central Bank to provide base money when needed; the Central Bank’s interest rate policy didn’t suffice to keep the growth of broad monetary aggregates in check; money creation by commercial banks shifted seignorage revenue from the Central Bank to commercial banks; and the deposit insurance accompanying the fractional reserve system encouraged risky lending, distorted competition and gave way to taxpayer funded bailouts when systemic banks collapsed.
The report discusses the Sovereign Money proposal (Fischer 1930s; Huber and Robertson 2000; Dyson and Jackson 2013) according to which all physical and electronic money is created by the Central Bank; commercial banks administer transaction payments and serve as intermediaries; new money is brought into circulation by way of transfers from the Central Bank to the Treasury; and the Central Bank may also lend funds to commercial banks which in turn lend these funds to businesses.
The report recommends that either the Central Bank proactively enforces credit controls or, preferably, that money power is secured with the state owned Central Bank (p. 17). The report recommends to commission a feasibility study of the implementation of the Sovereign Money proposal in Iceland.
Concerning the Sovereign Money proposal, I remain favorable as far as the analysis of the problem is concerned but rather skeptical regarding the proposed solution. In particular, I remain very skeptical as to whether a Sovereign Money regime could be enforced at all. I have previously described and evaluated the Swiss version of the Sovereign Money proposal—the “Vollgeldinitiative.” And I have made an alternative proposal for monetary reform (see also here).
George Pennacchi discusses narrow banking in an article in the Annual Review of Financial Economics. He concludes as follows:
During the nineteenth century, US banks were more narrow than they are today, and the narrowest (e.g., those under the Louisiana Banking Act of 1842) appeared resistant to panics. Common modern-banking practices, such as maturity transformation and explicit loan commitments, arose only after the creation of the Federal Reserve and the FDIC.
… There appears to be little or no benefits available from traditional banks that could not be obtained in a carefully designed narrow bank financial system. Most importantly, a narrow-banking system could have huge advantages in containing moral hazard and reducing the overall risk and required regulation of the financial system.
In contrast, the reaction by US regulators to the recent financial crisis was to expand the government’s safety net by raising deposit insurance limits and by giving more financial firms access to insured deposits. Expanding, rather than narrowing, the activities that are funded with insured deposits is justified if one believes that regulation can contain moral hazard when firms have many, complex risk-taking opportunities. Unfortunately, this belief appears dubious if one recognizes that regulators face political and information constraints.
In my view, there is a need for research that considers the optimal design of a financial system when a government regulator is limited in its ability to assess risk. … Research needs to better identify those financial services where government support would produce a net social benefit. Services such as maturity transformation and liquidity insurance may not deserve costly government guarantees. Finally, should further research support the general concept of narrow banking, there are still open questions regarding the specific features of these banks. In particular, how narrow should be these banks’ assets and should their liabilities should be deposits or equity shares (at fixed or floating NAVs) are questions that need better answers.
- reform of the tax system: www.thepurpletaxplan.org;
- reform of the health care system: www.thepurplehealthplan.org;
- reform of the social security system: www.thepurplesocialsecurityplan.org;
- an overhaul of banking: www.thepurplefinancialplan.org;
- intergenerational fairness: www.thepurplegenerationalbalanceplan.org;
- an energy tax: www.thepurpleenergyplan.org;
- a reform of the education system: www.thepurpleeducationplan.org.
Narrow banking proposals are fashionable. Here is a selective list of contributions to the debate:
- Cantillon (1755) and Mises (1912) argue that money creation leads to distortions.
- The 100% reserve proposal by Irving Fisher and his colleagues in the 1930s is reviewed by William Allen in the article “Irving Fisher and the 100 Percent Reserve Proposal” (Journal of Law and Economics, 1993). The article covers precursors to the 1930s debate; the March 1933 memorandum by University of Chicago economists; the March 1939 “Program for Monetary Reform;” and Friedman’s “Program for Monetary Stability.” See also Wikipedia on the “Chicago Plan”.
- In 1990, Tyler Cowen and Randal Kroszner wrote an article entitled “Mutual Fund Banking: A Market Approach” in the Cato Journal.
- In the early 2000s, Joseph Huber and James Robertson proposed a “plain money” reform (website with links to various documents). Grass root movements pushing for monetary reform in several countries reference their work.
- On May 14, 2009, Laurence Kotlikoff and John Goodman proposed a system of “Limited Purpose Banking” in New Republic, and in 2010 Kotlikoff published the book “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.” According to the proposal, “all financial corporations engaged in financial intermediation, including all banks and insurance companies, would function exclusively as middlemen who sell safe as well as risky collections of securities (mutual funds) to the public. They would never, themselves, own financial assets. Thus, they would never be in a position to fail because of ill-advised financial bets.” On July 17, 2010, Tyler Cowen criticised the proposal in a blog post; Kotlikoff responded on August, 3 and Cowen responded in turn on August, 4.
- In August 2012, Jaromir Benes and Michael Kumhof published an IMF Working Paper entitled “The Chicago Plan Revisited” (revised paper, slides [pages 18–29 display the balance sheet changes]). Benes and Kumhof write in the abstract: “We study [Irving Fisher’s (1936)] claims [about the advantages of the Chicago Plan] by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher’s claims. Furthermore, output gains approach 10 percent …” Benes and Kumhof also argue that the plan eliminates the zero-lower-bound problem (see my post on other proposals to eliminate the zero-lower-bound problem).
- On April 16, 2014, John Cochrane advertised his paper “Toward a Run-Free Financial System” in a blog post. Key points in the paper are: The recent financial crisis involved a systemic run. Accordingly, one should eliminate run-prone securities rather than guaranteeing them and regulating bank assets. Banks should have to back demand deposits, fixed-value money-market funds or overnight debt by short-term treasuries; they would have to finance risky investments from equity or long-term debt. Fully equity-financed banks (that are difficult to resolve) could still be held by downstream institutions that issue debt (and are easy to resolve). Leverage should be regulated by means of Pigouvian taxes rather than quotas and ratios. Modern technology and large public debt stocks render narrow banking feasible: Treasury-backed or floating-value money-market fund shares can be used for payments; risky assets are highly liquid and can easily be sold and bought for transaction purposes.
- On June 3, 2014, the Swiss group “Monetäre Modernisierung” started to collect signatures with the aim to force a national referendum on changes to the Swiss constitution. In the tradition of Joseph Huber’s work, the group aims at abolishing all money except for base money. See my post on the initiative.
- On June 5, 2014, the Economist’s Free Exchange blog covered the narrow banking idea, somewhat sceptically. John Cochrane argued that the post suffered from misconceptions.
- On July 27, 2014, John Cochrane discussed Sheila Bair’s opposition against letting the broader public hold reserves. On August 21 and September 22, 2014, he approvingly discussed (here and here) the Fed’s balance sheet policy from a financial stability perspective. He published another related post on September 17. On November 21, 2014, he interpreted minutes of an FMOC meeting as suggestive evidence of plans to establish segregated cash accounts. These deposit accounts would be backed by central bank reserves. They would be safe and run proof, and the link to (interest paying) reserves would facilitate a rate rise by the Fed.
- In August 2014, Ralph Musgrave published a paper that defends the full reserve banking model against various criticisms.
- In December 2014, Romain Baeriswyl published a paper that discusses narrow banking proposals in light of Cantillon (1755), Mises (1912) and Fisher (1936).
I have discussed pros and cons of narrow banking against the background of the Swiss “Vollgeldinitiative.” The issue of segregated cash accounts connects the narrow banking debate to the debate on government provided electronic money that I discuss in another post.
This post has been updated and extended after the initial publication.
In the tenth chapter of “Across the Great Divide: New Perspectives on the Financial Crisis,” John Cochrane argues that at its core, the financial crisis was a run and thus, policy responses should focus on mitigating the risk of runs (blog posts by Cochrane on the same topic can be found here and here). Some excerpts:
… demand deposits, fixed-value money-market funds, or overnight debt … [should be] backed entirely by short-term Treasuries. Investors who want higher returns must bear price risk. …
Banks can still mediate transactions, of course. For example, a bank-owned ATM machine can deliver cash by selling your shares in a Treasury-backed money market fund … Banks can still be broker-dealers, custodians, derivative and swap counterparties and market makers, and providers of a wide range of financial services, credit cards, and so forth. They simply may not fund themselves by issuing large amounts of run-prone debt.
If a demand for separate bank debt really exists, the equity of 100 percent equity-financed banks can be held by a downstream institution or pass-through vehicle that issues equity and debt tranches. That vehicle can fail and be resolved in an hour …
Rather than outlawing short-term debt, Cochrane suggests to levy corrective taxes on run-prone liabilities. Moreover:
… technology allows us to overcome the long-standing objections to narrow banking. Most deeply, “liquidity” no longer requires that people hold a large inventory of fixed-value, pay-on-demand, and hence run-prone securities.
… electronic transactions can easily be made with Treasury-backed or floating-value money-market fund shares, in which the vast majority of transactions are simply netted by the intermediary. … On the supply end, $18 trillion of government debt is enough to back any conceivable remaining need for fixed-value default-free assets.
Cochrane rejects the claim that the need for money-like assets can only be met by banks that “transform” maturity or liquidity. He argues that current regulation reflects a history of piecemeal responses that triggered the need for additional measures; and he points out that the shadow banking system creates run risks because a “broker-dealer may have used your securities as collateral for borrowing” to fund proprietary trading.
Cochrane debunks crisis lingo and clarifies links between aggregate variables:
The only way to consume less and invest less is to pile up government debt. So a “flight to quality” and a “decline in aggregate demand” are the same thing.
He questions the need for fixed value securities other than short-term government debt as means of payment or savings vehicle; offers a short history of financial regulation; and deplores regulatory discretion.
Joint with CEPR, the Study Center Gerzensee organised a conference on law and economics. The program can be viewed here and papers can be downloaded from CEPR’s website. The focus session on bank resolution featured contributions by
- Patrick Bolton and Jeffrey Gordon (paper)
- Martin Hellwig (paper, slides)
- Mathias Dewatripont (slides)
- Gerard Hertig
- Wolf-Georg Ringe (paper)
- Paul Tucker (paper)
In his talk, Jeff Gordon explained how Dodd-Frank extends the FDIC’s resolution technology from the 1930s to “non-banks” that engage in banking business. Dodd-Frank establishes an “Orderly Liquidation Authority” and in title II a “Single Point of Entry” by putting a holding company (topco) into receivership. The objective is to minimise disruption costs for large institutions, to preserve the going-concern value of the company and to avoid collateral damage. Single point of entry also helps resolve cross-border issues. No comparable institutional framework is available in the EU. In the crisis, US authorities implemented ad-hoc alternatives to bankruptcy: Mergers (which require the approval of shareholders and therefore make it hard to wipe out the target’s shareholders) worked for Bear Stearns (JPMorgan Chase, Maiden Lane, Fed) but not for Lehman Brothers (Barclays, Fed) because the UK authorities refused to waive Barclays shareholder approval, fearing fiscal implications. Recapitalisation with third party funds (Fed) in the case of AIG also required shareholder approval and protected creditors and counter-party claims.
Patrick Bolton cautioned that the rules for the topco are still not clear and discussed alternatives to Dodd-Frank in the bankruptcy code. He emphasised the role of qualified financial contracts and debtor-in-possession interventions.
Martin Hellwig argued that the government rescue of Hypo Real Estate reflected the political will to help influential creditors rather than systemic importance. He questioned the viability of single-point-of-entry arrangements in cross-border resolution, pointing to lack of trust among national regulators. He questioned whether internationally active banks can ever be resolved in an efficient manner and asked whether, in that light, they are socially valuable.
Mathias Dewatripont warned that excessive emphasis on bail-in arrangements can undermine financial stability, for example by having the expectation of a small haircut applied to senior debt tranches trigger a run on all senior debt. To avoid such an outcome, he favoured a clearly identified seniority structure with a significant balance-sheet share of “bail-inable” liabilities. He questioned the usefulness of higher capital requirements, arguing that “prompt corrective action” is politically infeasible unless the equity ratio has fallen below a very low value, 2 percent say.
Wolf-Georg Ringe favoured holding-company structures with sufficient “bail-inable” debt.
Paul Tucker discussed potential problems with the holding-company/single-point-of-entry strategy, related to centralised operations (IT). He raised the issue of accountability and the potential lack thereof if companies are resolved by regulators rather than judges, and he wondered whether national regulators can commit to collaborate across borders if need be. He favoured “bail-inable” debt over equity because the former gives incentives to monitor without the incentive to speculate on the upside.
Gerard Hertig warned that regulatory incentives lead to bank mergers rather than resolution, in particular because authorities tend to be more lenient in crisis times. He argued that because of deposit insurance, resolution worked well in Japan until recently.
Patrick Bolton argued that cocos are badly designed as their triggers are too low and they refer to accounting equity. Instead, he favoured reverse convertible bonds that can be converted by the issuer.
Oliver Hart argued that resolution has the advantage over cocos that the management gets replaced.
Many panelists voiced scepticism towards narrow banking proposals. They feared that control over the money supply might turn into control over credit, referring to the discussion in the US during the 1930s.
On June 3, 2014 the Swiss group “Monetäre Modernisierung” (monetary modernisation) started to collect signatures with the aim to force a national referendum on changes to the Swiss constitution. (The group needs to collect 100,000 signatures within an 18 month period in order to succeed.) The referendum would put the “Vollgeldinitiative” (sovereign money initiative) to vote, an initiative that seeks to fundamentally change Switzerland’s monetary system. The group “Monetäre Modernisierung” is part of a broader international movement with partner groups in the UK, the European Union and the US.
According to the proposal, deposit claims vis-a-vis commercial banks would be transformed into claims vis-a-vis the central bank and deposit liabilities of commercial banks would be transformed into liabilities of those banks vis-a-vis the central bank. Within a certain time span, commercial banks would have to repay those liabilities. Moreover, they would be prohibited from ever creating deposits again—that is, all money should be base money. The proposal envisions the Swiss National Bank to bring new base money into circulation by transferring reserves to the treasury, allowing the government to partly finance its expenditures by means of “original seignorage,” or to citizens. The Swiss National Bank could also lend reserves to banks, against interest, to accommodate fluctuations in money demand. (The resulting interest seignorage would add to government revenues as well.) The initiative aims at a complete separation between money and debt; accordingly, base money would be booked as equity in the central bank’s balance sheet rather than debt.
The proposal goes further than Irving Fisher’s 100% money plan and other proposals for full-reserve banking (and narrow banking) where banks are required to keep the full amount of deposited funds in cash/reserves (or very liquid, safe assets). Under the “Vollgeldinitiative,” the amount of deposited funds does not only have to be kept in cash/reserves but deposits are abolished altogether.
Some background information (in German):
- The text of the proposed constitutional amendment, with explanations.
- Background paper by one of the intellectual father’s of the initiative, Joseph Huber. He explains that the name “Vollgeld” is the short form of “voll gültiges gesetzliches Zahlungsmittel,” or legally speaking, “unbeschränktes gesetzliches Zahlungsmittel.”
Some quotes from the Q&A section on the technical implementation of the proposed reform (in German):
Die Girokonten der Kunden werden aus der Bankenbilanz herausgelöst und separat als Vollgeldkonten geführt. Die Guthaben auf den Girokonten bleiben eins zu eins bestehen, werden Vollgeld und somit zu gesetzlichen Zahlungsmitteln gleich Münzen und Banknoten. Ab dann ist nur noch die Nationalbank autorisiert Zahlungsmittel zu schöpfen. Dadurch geschieht mit dem unbaren Giralgeld heute das gleiche wie vor hundert Jahren mit den Banknoten. …
Das bisherige Banken-Giralgeld wird von Gesetzes wegen zu Vollgeld umdeklariert. Liesse man es dabei bewenden, kämen die Banken mit einem Schlag in den Besitz von Vollgeld, obwohl sie nicht das (neue) Vollgeld, sondern nur das (alte) Giralgeld geschaffen haben. Deshalb übernimmt die Nationalbank im Moment der Umstellung alle bisherigen Giralgeld-Verbindlichkeiten der Banken und verpflichtet sich damit, den Bankkunden anstelle von Bankengiralgeld Vollgeld auszuzahlen. Diese Auszahlung erfolgt sofort, damit die umlaufende Geldmenge nicht vermindert wird, und sie erfolgt auf Geldkonten ausserhalb der Bankbilanz, also auf Konten, auf die die Bank keinen Zugriff mehr hat. Für die Bankkunden ist diese Umstellung äusserst relevant: Sie sind jetzt im persönlichen Besitz von gesetzlichem Zahlungsmittel in der Höhe der bisherigen Sichtkonten, die vor der Umstellung blosse Geldversprechen auf Konten der Bank, aber kein Geld waren. …
Nach der Vollgeld-Umstellung gibt es nur noch Nationalbank-Geld. Das elektronische Geld ist genauso vollwertiges Geld wie heute Münzen und Banknoten. Das heisst, die Vollgeld-Zahlungsverkehrskonten der Kunden befinden sich dann nicht mehr in der Bilanz der Banken, sondern diese werden von Banken wie heute Wertpapierdepots verwaltet. Das Geld auf dem Konto gehört nur dem Kunden, wie das Bargeld im Tresor, und ist nicht mehr wie heute, eine Forderung an die Bank. So hat auch der Zahlungsverkehr nichts mehr mit Forderungen und Verpflichtungen zwischen den Banken zu tun, weshalb das heute übliche Banken-Clearing unnötig wird. Wenn ein Kunde eine Überweisung an einen Kunden tätigt, wird einfach Vollgeld von einem Konto auf das andere transferiert. Es passiert dann das, was fast alle Menschen heute meinen, was bei einer Überweisung geschieht.
Diese direkte digitale Übertragung von Vollgeld vereinfacht den Zahlungsverkehr, da die bisherige komplizierte Verrechnung von Forderungen und Verbindlichkeiten zwischen den Banken und eventueller Ausgleich mit Nationalbank-Guthaben entfällt. Statt dessen können Überweisungen sofort ausgeführt und gebucht werden, genauso wie heute der Kauf von Aktien und Wertpapieren. Die bisherige Wartezeit von mehreren Tagen, bis das Geld ankommt, entfällt. Nach wenigen Minuten wird man den Geldeingang auf dem Konto sehen können.
I discuss the initiative here.
- A 100% money regime reduces the risk of credit bubbles, but requires more and better fine-tuning by the central bank.
- Central banks can already implement higher reserve requirements. If the fact that they don’t reflects policy failure, then the 100% money proposal risks handing more power to one source of the problem.
- A 100% money regime increases financial stability, at least temporarily, but it forces banks to find new sources of funding and lowers the interest rate for depositors, which is fine.
- If lender of last resort support by the central bank occurs at too low interest rates then seignorage revenues are privatised and costs socialised under the current regime. Moving to a 100% money regime would help but so would simple Pigouvian taxation.
- How can a 100% money regime be enforced if market participants end up coordinating to use other securities than deposits as means of payment?
- More stable deposits in a 100% money regime do not imply a more stable banking system unless other regulation is imposed that completely prevents “maturity transformation.”
- Aggregate liquidity cannot be created out of nothing, with or without deposit insurance.
- Societies have to take a stand on whether they want to guarantee broader monetary aggregates than base money. If so, the cost of the guarantee should be privatised. Problems arise if societies pretend not to provide such guarantees but central banks nevertheless feel obliged to step in ex post and market participants are aware of that fact ex ante; bad, self-fulfilling equilibria are the consequence.
- Commitment on the part of policy makers is key; it requires independent central bankers and regulators.