The Future of Money and Banking
Central Bank Digital Currency and Beyond
This presentation begins with Miguel’s stated assumption that the problems have been identified. The retail banking system is “unsafe”. To my mind, the cause of this condition wasn’t convincingly established by any of the presenters in the first part of this conference. As Ulf said “ “we still don’t know what creates these financial crises”. No one mentioned the fundamental structural problem I have identified.
This talk is by a senior banker making the case that the solution is a central bank digital currency (CBDC) being available to everyone. This is no surprise as the stated goal of this conference is to justify the introduction of CBDC.
My first impression is confusion. Miguel claims that commercial banks get the “seignorage” on the creation of money. But seignorage is defined as the profit made by a government by issuing currency, especially the difference between the face value of coins and their production costs. Commercial banks don’t collect seignorage. Is Miguel saying that “seignorage” is the interest on the money commercial banks create as loans?
Miguel also refers to commercial banks using depositors’ money to make investments for the bank. But a deposit is a liability of a bank to a depositor. Only the depositor can lend or invest it. Both Michael Kumhoff and Steve Keen commented that even at the top levels, bankers have misconceptions about their own business. Is this an example?
Next, Miguel talks about central bank money being “safe money” without telling us how it is created.
Currently, in all the banking systems I have studied, central bank reserves (potential legal tender physical cash) are created to buy, in normal times, national government debt. Interest is paid on this debt by the taxpayers which is used in part to fund the operations of the central bank, with the remainder returned to the national government.
To maintain the quantity of reserves and cash, the principal is almost never paid off and thus the “safe money” a central bank creates is, in practice, an interest-only loan to the national taxpayers. The taxpayers of the country are essentially renting the supply of legal tender cash and central bank reserves from the central bank.
Since quantitative easing began, central banks have been creating reserves to buy private debt as well. This means that the consumer or shareholder at the end of the line is paying the rent for this money because the cost of servicing these private bonds is passed on to the consumer in prices, or reduces the return to the shareholders.
How would this “safe money” enter circulation? I assume that ”safe money” means “legal tender” and one way usually proposed by sovereign money advocates is that the government gets to spend “debt-free sovereign money” into the economy. This sovereign money promotional slogan ignores the fact that currently, legal tender is created as national taxpayer debt on which interest is paid. It also ignores the fact that in a no-growth situation, which is the real test for system stability, every money unit spent would have to be taxed back at the same rate to maintain a stable money supply. Thus, such sovereign money is just another form of money in circulation as debt.
If it enters circulation by being borrowed from the central bank directly, as mortgages for instance, it has to be paid back on time just like retail bank credit, and is therefore money as debt. By simple logic, any form of money, once lent, is money as debt. A gold coin lent into circulation is money as debt. It is an inescapable fact.
If lent long term, central bank money will be subject to being acquired and re-lent multiple times concurrently just as commercial bank credit is today. As a result, the same grow-or-collapse math will be created.
See my comment on Steve Keen’s presentation for the analysis:
I found it most interesting the language Miguel used that gave no hint of the true nature of money, either central or retail bank credit. Central banks “register” money? What does that mean? According to my studies, the legality of today’s money as third party debt, the foundational concept of our modern money system, was created by a series of legal decisions in the late 17th century, starting in England.
According to laws written shortly before the Bank of England was founded (1694), any third party debt, once accepted in trade for something of value (consideration), would, in future, be enforceable by the court. Previously, only the original parties to the debt could bring a claim before the court – because only the original parties knew the circumstances of the creation of the debt contract and could argue its validity before a judge.
In order to facilitate commerce, the law needed to be changed so that debt contracts could be used as money, a huge convenience. To accomplish this goal, the new laws assumed debt contracts to be valid if accepted for value by the holder, and therefore, enforceable by the holder against the debtor. Thus third party debt became functional as “money”, and the Bank of England, now creating third party debt money legally, became the “mother bank” to the global system we have now.
The same principle still holds today. That is why mortgage originators sell their mortgages to another legal party, often just a sibling company. It isn’t “money” until accepted for “valuable consideration” by someone other than the original two parties that agreed to the debt.
Before the central bank gets into the retail loan business, perhaps it is appropriate and prudent to take a critical look at how the money creation process works at retail banks.
First, the bank gets the borrower to pledge to surrender as collateral, the property the borrower wishes to purchase but does not yet own. The bank then writes the purchase price of the property into the bank’s asset column as if the borrower already had title to the property. This act is a violation of the natural law principle that one cannot give better title to something than one has.
Logically, the value of the “asset” should be zero because neither the bank nor the borrower have title to the property. The bank and the borrower have “hypothecated” the asset. This word comes from the word “hypothesis” which means a conjecture, not a fact, as in: IF I owned the house I could promise it to the bank.
To balance this as yet hypothetical “asset”, the bank simultaneously creates a matching liability by typing the purchase price into the so-called borrower’s chequing account. The real value of this chequing account should also be zero, but the seller, knowing that bank credit will be accepted by others as “money”, accepts the borrower’s cheque for these newly created numbers, and transfers title to the property to the buyer.
Legally, it is only the acceptance by the first seller that makes the borrower’s debt to the bank enforceable by the bank and any other holder against the debtor. This is the origin of the “money” that comprises almost all of our so-called “money supply” (actually total principal debt to banks).
Imagine a beggar promises to pay another beggar a million dollars. Is the second beggar now a millionaire?
How is money creation by retail banks any less fraudulent, as both the bank and the borrower came to the transaction with empty pockets? The only physical “valuable consideration” involved was supplied by the seller. What was the “valuable consideration” supplied by the bank? The seller has received brand new purchasing power to be spent in the real world.
The total money supply has increased by the price of the property without producing anything new, thus diluting the purchasing power of everyone using the same currency units. Therefore, by simple deduction, we see that the “valuable consideration” the bank put up was supplied, without our knowledge or permission, by the general public of the nation.
The bank calls this money creation process, “making a loan”, leading the borrower to believe that he or she is receiving a loan of existing money entrusted to the bank by savers. But the truth is that the borrower has created brand new money by promising to pay it back to the bank in a process that is clearly fraudulent and misrepresented, but legal nonetheless.
So how different would it be to borrow money from a central bank? Miguel’s presentation gives no details. Just an assurance that it is “safe” money. I would assume that it is “legal tender” itself rather than a promise of legal tender like retail bank credit. Whether it is physical cash or central bank cryptocurrency that comes out of it, it would be like a central bank ATM, drawing legal tender from a legal tender account, bypassing the retail banks.
One certainty is that if the structure of banking and savings remains the same, as seems to be what is being proposed, the overlooked problem of multiple concurrent principal debts of the same money, and all its inevitable effects, will arise just as surely as in the current system.
As we reach real world limits to growth, the inevitable result of a grow-or-collapse house of cards money system can only be financial and ecological collapse.
Our Money System is an Ecocidal Ponzi Scheme 55 minute animation.
Lastly, Miguel complains that the government enforces fiscal rules on banks it doesn’t enforce on any other industry, as if that were exceptional and unfair.
It is not exceptional since governments enforce standards to ensure the safety of products in many industries. Given that the product of banks is money as principal debt to a bank, it is entirely appropriate and necessary to regulate the safety of the product, which requires fiscal regulation of banks.
@ Paul Currently,
Thanks for a very interesting comment – a lot of information. For instance – I didn’t know that the word hypotek (in Swedish) was derived from the word hypothesis.
I totally agree that the problem is that debt are mistaken for being money. The fact that we use debt (credit) as a mean of payment is a oxymoron. Money should kill debt – the fact that banks give birth to debts from nothing so the society has a mean of payment so it can pay off the debts the banks invented is by it self a self-contradiction.
So I think you and I are on the same page – but some remarks though:
“in all the banking systems I have studied, central bank reserves (potential legal tender physical cash) are created to buy, in normal times, national government debt. Interest is paid on this debt by the taxpayers which is used in part to fund the operations of the central bank, with the remainder returned to the national government.
To maintain the quantity of reserves and cash, the principal is almost never paid off and thus the “safe money” a central bank creates is, in practice, an interest-only loan to the national taxpayers. The taxpayers of the country are essentially renting the supply of legal tender cash and central bank reserves from the central bank.”
The Maastricht treaty strictly forbid the central banks in from directly finance a member state in EU (or its municipalities. So states and municipalities has to “borrow” from the commercial banks. So it’s he commercial banks that buys government obligations. The central banks in Europe then buys the government bonds on the secondary market in order to fill up the banks reserve (QE). So the central bank is prohibited by law from creating money (central bank money) in the the way you describe (it’s a another matter in USA – you may recall Krugmans 1 trillion coin proposed to pay of US national debt).
“This sovereign money promotional slogan ignores the fact that currently, legal tender is created as national taxpayer debt on which interest is paid.”
No, as pointed out above – the central banks in EU buys states bonds on the secondary market.
Central bank money (the banks reserves on their account at the central bank and physical cash) are since the gold standard was abolished pure fiat. Central bank money in the form of for instance a 100 kr bill is not a claim the owner has on the central bank – the only thing the owner might get from the Riksbank is a new 100 kr bill in exchange. The fact that the 100 kr bill is written as a liability on the Riksbanks balance sheet is only a left over from the time when you could claim gold from the Riksbank in exchange for the bill. So In reality physical cash is pure fiat – an E-krona should also be pure fiat.
I’m not a member of the “Positive Money” organization.
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