Central bankers as well as monetary reformers are discussing the introduction of
central-bank issued digital currency in coexistence and competition with bank deposits
(bankmoney). Among the reasons for this are the gradual disappearance of cash and
a far-reaching loss of monetary control. However, a general shift to digital currency
(DC) cannot be taken for granted. The paper discusses the conditions and design
principles that are tipping the scales in the competition between bankmoney and DC.
Relevant issues include access to and available quantities of DC, mutual convertibility
of bankmoney and DC, parity of bankmoney with DC, how to deal with bank run
situations, central-bank support and government warranties

Download Huber’s paper

Download slides


Recommended Articles

1 Comment

  1. 15 Joseph Huber

    Any solution needs to follow from an accurate analysis of the problem it is meant to solve. To quote the professor, “The reason for the structural non-safety of bankmoney is its just fractional base of cash and reserves.”  By “non-safety” I assume he means subject to periodic default crises as experienced in 2008 and repeatedly throughout recent centuries. Depositors lose their deposits and banks go bankrupt. 

    Professor Huber provides a chart that shows the proportion of central bank money (cash) to bankmoney (bank credit) since 1905 suggesting that the increasing share of commercial bank credit over the past century till now is the root cause of the system’s “inherent instability”. Therefore, reversing the trend should increase stability. 

    Correlation isn’t causation
    At https://en.wikipedia.org/wiki/List_of_banking_crises there is a long list of bank failure crises in several different countries since 1763. No doubt the proportion of bank credit to cash money (in whatever form) varied widely in all of these situations. Without proving causation for each of these banking crises, there would seem to be no compelling reason to assume they arose due to an excessive proportion of commercial bank credit.

    Defaults are caused by the borrowers’ inability to pay back their principal debts with either bank credit or cash. Therefore, it is far more logical that these banking crises were caused by total principal debt far exceeding the total bank credit and cash money available to pay it, what I call “impossible principal debt”. Impossible principal debt is caused by concurrent re-lending of the same money. Impossible principal debt in the aggregate can be serviced by velocity as long as money repaid is promptly re-lent in full, but the amount of it can never be eliminated, nor even shrink without causing mathematically inevitable defaults.

    In the bank credit system, the bank has to eliminate the unpaid amount of a defaulted upon loan from its own earnings. A default occurs when a borrower can’t pay back and eliminate the principal the borrower created. Bankruptcy occurs when the total of defaults overwhelms a bank’s capital reserves which are defined as: “common stock and retained earnings”. A banking crisis occurs when too many borrowers default at the same time. Does it matter to the bank whether they fail to pay back their bank credit debt in cash or bank credit? I think not.

    It’s the Lending Itself
    Lending of any form of money is inherently “unsafe” because its continued success (stability) depends entirely on the ability of the great majority of borrowers to repay their principal debt to the lender. What would cause a great mass of borrowers to default at the same time and bankrupt the lender?

    For one thing, the banks themselves encourage long term savings. Savings are generally misconceived as a “foundation” of the system, a store of value, when in fact, they are someone else’s principal debt to a bank that the borrowers that created it cannot earn.

    Savings make the money the borrowers need to pay off their principal debts indefinitely unavailable to them. By the simplest of logic, an increase in the ratio of savings as a proportion of the money supply, plainly evident from central bank money supply statistics, is proof that even more debt-created money has been made unavailable to the borrowers that need it. At some point, velocity can no longer sustain this ever-climbing ratio of impossible principal debt to available money and the cascade of defaults begins and continues until velocity can once again sustain the impossible principal debt.

    Thus, by its own design, the banking system, regardless of whether all money is bank credit, gold coins, fiat cash, CBDC or Bitcoin, deliberately creates the impossible principal debt that makes the “bank money regime” “unsafe”.

    Created as debt and then re-lent as “loanable funds”
    In addition, the non-bank lending sector, which is usually at least as large as bank money-creation and ultimately unmeasurable, lends existing money, which, by definition, is someone else’s principal debt to a bank. This process is then repeated, creating a theoretically unlimited number of concurrent principal debts of the same money. The real world limit is how many times the same money can be re-lent concurrently before a mass default event occurs.

    Most money is lent as mortgages, often for 30 years. Because most of the interest is paid in the first 20 years of the repayment schedule, about half of the outstanding principal (bank credit) is still in circulation after 20 years.

    This begs the question: How many times can the same dollar or euro be acquired by a non-bank lender, whether institution or individual, and be re-lent over a period of 20 to 30 years?

    Economists never ask this question. Professor Huber clearly has not. A “solution” to eliminate the “inherent instability” of the money system must take into account how the whole money system actually works, not just how money is created. In a money system that, as Huber later comments during the final discussion, must run on debt by necessity, how can multiple concurrent principal debts of the same money be so universally ignored?

    It should be obvious that it is impossible to eliminate or even reduce multiple concurrent principal debts of the same money without default. Yet, no one in economics that I have ever read, and not one of the presenters at this conference has shown even the slightest indication that they have ever thought about it.

    It should also be obvious that, as these non-bank principal debts multiply over time, the inevitable result is the “grow-or-collapse imperative” that causes periodic debt crises and blew up the world economy in 2008.

    It is simple logic that sovereign money would tend to increase the lending of already lent money, as creating new money would be restricted by a misguided debt-reducing policy. Therefore, it follows that the impossible principal debt I have described in detail would be created even faster than in the current system. Acceleration of the debt crisis cycle would be the result.

    If mass default resulted in austerity policies that further attempted to reduce “too much debt” without distinguishing between money creation debt and the re-lending of it, the entire system would collapse in a death spiral – simply because an unexamined ideological belief had triumphed over the facts, logic and grade school arithmetic that I have presented.

    See also
    For further explanation see my comments on Michael Kumhoff’s and Steve Keen’s presentations from Part 1. 


    See also my challenge to the authors of Money Creation in the Modern Economy.  It consists of 3 very simple arithmetic questions the Bank of England’s Monetary Analysis Directorate refused to answer.

    Digging Deeper into Debt-Money
    The Bank of England’s confessional isn’t the whole story

    “… just consider what might happen if mortgage holders realized the money the bank lent them is part of
    an invisible trap, a game of musical chairs designed by the bankers in which losers are mathematically predetermined to default whenever the creation of new debt to banks slows down, for any reason. The only way to keep the music playing is for all of us as a whole to go further and further into debt to banks forever.”

    I explain the basics in Economists and a Pile of Nuts a cartoon just over 2 minutes long.

    The animated calculus explanation takes longer.

    My detailed critiques of sovereign money proposals are at:

Lämna ett svar

E-postadressen publiceras inte. Obligatoriska fält är märkta *