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Economy

Thomas Mayer: We need better money

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In his "General Theory of Employment, Interest and Money" John Maynard Keynes took a dim view of political efforts to reduce the attractiveness of cash: "...if currency notes were to be deprived of their liquidity-premium..., a long series of substitutes would step into their shoes -- bank-money, debts at call, foreign money,  jewelry and the precious metals generally, and so forth". But depriving currency notes of their liquidity is exactly what the German and French finance ministers want to do. They talk about a limit of 5,000 euros ($5,479) for lawful cash transactions. Their intention is to fight the black economy and the funding of terrorism. But as Keynes argued, the unintended consequence of the ministers' crack down on euro cash may be the substitution of the euro by other means of payments.

     Only notes issued by central banks are legal tender. Bank deposits are no legal tender. They are created by commercial banks through credit extension as private debt money. Thus, they are promissory notes issued by the banks. There is no legal requirement to accept these promissory notes as settlement for a monetary debt. When banks are in financial difficulties, it is doubtful, whether the settlement of a debt through transfer to a bank account satisfies the creditor. If the use of cash were now restricted, money would no longer be fully functional.

     Moreover, not only is there no legal obligation to accept private debt money in the form of bank deposits, these deposits are also safely exchangeable in legal tender only up to a certain limit. Since the beginning of "banking union" this year, euro area states guarantee the exchange of private debt money into legal tender only up to 100,000 euro. Amounts above this level can be used to cover losses of insolvent banks. Thus, if cash payments were restricted, official money would consist of restricted legal tender and private debt money of limited security. In addition, the time will come when banks have to pass on the negative interest on deposits they have to pay to the European Central Bank to their customers. The latter would then even have to pay a fee to use the private debt money of the banks. Finally, the ECB, like other central banks, is desperate to generate inflation. This will lower the purchasing power of the money it issues. Adding it all up, the euro is on its way to become a highly unattractive means for payments and store of value.

     Politicians want to better surveil monetary transactions of people and at the same time spoil their taste for money hoarding. They want them to trade money against goods in order to raise aggregate demand. But what if people do not want more goods but an alternative to the money of restricted usability and limited security that is subject to a user fee and comes with a built-in loss of purchasing power? In a free market economy private suppliers could offer "active money" as an alternative. "Active money" would not be issued as promissory notes denominated in legal tender like bank money at present, but generated as material or immaterial means of exchange. Material active money could be gold coins or bank notes or deposits completely backed by gold. Immaterial active money could be centrally or decentrally generated cryptocurrencies (like bitcoin). No supplier of active money would be interested in restricting its use, imposing an artificial user fee or debasing its value, because this would reduce demand. Light deflation would even be positive as the user would receive moderate real interest simply from money hoarding. Economists and central bankers would deeply regret this as they see in money primarily an instrument to reach political objectives. But people would be pleased with money whose purpose is not to manipulate them but simply to be an effective means of exchange and store of value for them.

Thomas Mayer is founding director of the Flossbach von Storch Research Institute in Cologne, Germany.

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