Home > Uncategorized > We may predict the death of physical currency; bills and coins

We may predict the death of physical currency; bills and coins

The technological development process that allows electronic transaction instead of exchanges using physical currency, has the same merciless and irreversible character as the advent of the electronic calculator in the 70s and digital photography in the 90s: it meant the unavoidable death of the slide rule (then) and photographic film (more recently). Based on the nature of technological innovations and the market economy’s exploitation of such, we may predict the death of physical currency; bills and coins. It is probably a question of when, not if, this will take place. This paper will discuss some positive possibilities for reform of the financial and monetary system that emerge as a side effect of the unstoppable advances of technology in this field.

A modern financial system consists of a Central Bank (CB) and an extensive network of private financial units. The role of a CB has up to this day been as an interest-rate setter behind the scenes and – in crisis – “lender of last resort” for the network of private licensed (“commercial”) banks and non-bank financial institutions (NBFIs).

The commercial bank network has historically been quite dense, with branches of competing banks within a reasonable distance from customers. The reasons for this geographical diversity has been twofold:

 

  1. Handling deposit accounts and receiving or furnishing customers with physical currency.
  2. Vetting potential borrowers and extending loans.

With the advent of electronic transactions (PC, debit card and, lately, mobile phone) the need for a dense network of branches has decreased, and commercial banks have started the process of closing down an increasing share of these. If we envisage an expected future without physical currency, the first point above will disappear as a reason for having bank branches. What remains is the second point, the need for offices to handle decisions about loan applications, which to a fair degree will be best handled by personnel having local and/or specialised knowledge. Except for this, most decisions can be taken at a bank’s central office.

So, simply because of no more need for branches to acquire or deposit physical money – for purely technological reasons, not society’s economic policy considerations – it becomes feasible for all “agents” (persons, firms, banks) to only have their checking accounts directly at the CB. Then one may dispense with bank credit money and let all money in circulation be base money (high-powered money; HPM). For the public this means that their deposits are completely safe, and in that sense it matches the 1930ies “Chicago plan” and its “100% money” proposal. But it goes further, because in the 100% money plan, banks would hold people’s deposits (although fully covered by the banks’ deposits at the CB) and furnish them with physical currency, while in the above electronic money scenario liquid deposits only exist directly at the CB. This is the sovereign money alternative (Huber 2014). Technological possibilities today give a new impetus to this alternative, which has until now been promoted based on political economy arguments only.

Trond Andresen, “The Central Bank with an expanded role in a purely electronic monetary system”, real-world economics review, issue no. 68, 21 August 2014, pp. 66-73, http://www.paecon.net/PAEReview/issue68/Andresen68.pdf

  1. September 14, 2014 at 7:55 am

    This is very interesting, and important. The Chicago Plan was devised in aftermath of the Great Depression, because leading economists saw that the bank failure which led to the collapse was caused by fractional reserve system. The main failing of the fractional reserves system is that it places the power of creation of money in the hands of the private banks, and not with the government. The private banks (or the banking system) has the wrong incentives — they have incentive create money in expansions, and to restrict money creating in recessions, even though correct monetary policy should be the opposite of this. The IMF paper by Benes and Kumhoff shows that 100% reserve banking has four advantage over current system: Central Bank has much better control of money supply, There can be no banking crises.Dramatic reduction of public debt, and dramatic reduction of private. All FOUR of these problems currently exist and are source of serious economic problems. If they can be solved by purely technological progress that would be wornderful.

    On the flip side of this optimistic view, we have to consider WHY the Chicago Plan was never implemented? I dont know the history and would be happy if someone could enlighten me on this point. However, it seems to me that banking crises are WONDERFUL things for the rich and powerful. The poor form submissive labor pools, governments reimburse any losses, wealth concentrates among the wealthy and government control of money leads to possibilty of a just inflation tax — it taxes the wealthy more than the poor. For all these reasons, the rich would oppose steps to implement the Chicago Plan, and even step taken to prevent future banking crises (as is currently being done). If the forces of political economy are against it, perhaps technology will not prevail in bringing it about.

    It should be noted that the future envisioned in the post goes beyond the Chicago Plan to the complete elimination of the banking system.
    .

  2. Macrocompassion
    September 14, 2014 at 2:42 pm

    1. Surely there will always remain a few “simple people” who will not accept the electronic ways and will still need to visit the bank teller and shop cashier on a regular basis. So ordinary currency is not completely dead.

    2. With a fully developed electronic system, some people will find themselves in debt and not manage their affairs sufficiently well to escape from it. In fact their debts will steadiloy rise as will their interest payments. If as you write, this new system is sufficiently harsh as to replace the older fashioned debtor’s bankruptcy, what will this replacement be? Abject slavery?

  3. September 14, 2014 at 4:38 pm

    Physical or digital, money will accumulate in the possession of the rich which is the fundamental problem with money conceived of as a “single uniform commodity in limited supply the value of which is inversely proportional to its scarcity”.

  4. September 14, 2014 at 6:30 pm

    Dear Assad,
    An excellent, thoughtful post. Yes the Chicago Plan was defeated politically; not seriously considered by the Roosevelt Administration, when it was introduced into Congress in 1935. You asked for information about that and so I refer you to an article written exactly ten years ago, which we did for a major American Reformer (probably the first name that will come to your mind), which has much of this information. See http://www.monetary.org/wp-content/uploads/2014/04/Chicago-Plan-and-American-Monetary-Act.pdf

    The IMF’s Kumhof and Benes revisited The Chicago Plan in their outstanding IMF Working Paper, see: http://www.monetary.org/wp-content/uploads/2012/08/ChicagoPlanRevisited.pdf, which is the first time modern economists have taken a close look at the plan. As you point out, they concluded it had major benefits over the present bank debt based system. Subsequently Dr. Kumhoff was invited to speak at the Bank of England a couple of times and then that bank’s 2014 1st Quarter Bulletin had the descriptive subheading: “This article explains how the majority of money in the modern economy is created by commercial banks making loans.” So the economics textbooks must be re-written regarding money and banking!
    Back in 2004, the American Monetary Institute based its developing American Monetary Act on The Chicago Plan, adopting its first two elements: nationalization of the Federal Reserve; and complete abolishing of whats called the fractional reserve accounting system. Our third element is the encouragement of Congress to use its constitutional power to create and spend, not loan, new money (if/when necessary) into circulation, for infrastructure, health care and education. That would be “real money” not loans requiring reserves.

    This plan became the basis of Congressman Dennis Kucinich’s National Emergency Employment Defense Act (N.E.E.D. Act, HR 2990) which he introduced into the 112th Congress in September 2011. See a summary and all 12 pages of it at:
    http://www.monetary.org/wp-content/uploads/2013/01/HR-2990.pdf
    It is also presented in the middle of the Institutes 32 page descriptive brochure which is prominently available at our website at http://www.monetary.org
    The Act is “on the shelf” ready to be re-introduced by a thoughtful Congressperson.
    I apologize for this blatant “advertising” and self promotion of the American Monetary Institute, but its probably the only way you will hear about it, considering the media control we all live under, and the fact that nearly all that media is in serious debt to the banks! The AMI does not eliminate the banking system, but does end the present mis structured, crisis prone system,
    Peace, Love, and Progress Assad…

  5. September 15, 2014 at 1:14 am

    Dear Steve

    You have been very modest — no self-promotion. In fact, I am in process of reading your book, “The Lost Science of Money.” I am deeply impressed with the depth of your knowledge and the central importance of your analysis to any process of economic reform currently being contemplated. In order to convey your message to monetary theorists, I started by an analysis of Krugman’s Baby Sitting Coooperative, which he refers to in many books and papers as his favorite story, and his basis for a paradigm for monetary policy. However, I found that his analysis of this story is entirely wrong; see my paper “Sunsport equilibria of Baby Sitting Cooperative” at: http://ssrn.com/abstract=2482928
    I am also working on a paper for Islamic scholars to explain the issues under discussion. It seems entirely likely that the current production of money by private banks is prohibited by Islamic law — There is consensus that government only has the right to produce money. Also, I am trying to explain why gold dinar/ silver dirham is not the answer, though this is actively being promoted by some currently — these insights are due to your book, which I am recommending to all.

    • September 15, 2014 at 5:04 am

      Thanks much Asad. I did a limited amount of research into Islamic monetary developments and was encouraged to find that the leaders in that field were coming to the same conclusions as the advanced persons from other religious backgrounds – whether Catholic, Anglican, Jewish or Secular. You may have seen “Islamic Monetary Developments” in Chapter 22 of my book (pages 623 to 628). Anyone who does not have the book can get an autographed copy at a discount at our website, and help keep the American Monetary Institute going! I’ll read your paper.

  6. davetaylor1
    September 15, 2014 at 12:43 pm

    Hi, folks. Please accept my contribution to this important discussion, as from the pretty graph on life expectancy I’ll be doing better than most if I survive another four years! Let me first say I am delighted to see Trond, Asad and Stephen getting so close to true monetary solutions, while as a father I can remind Macrocompassion that we are all simple when we are kids, and debt tokens issued in advance of use help kids learn how to live within their budgets.

    What I want to see discussed is a sort of mirror-image of our present understanding of money: as in the need for a Copernican revolution to reinterpret the observed movement of the stars, or to print a photographic negative for the information it carries to become sensible for us. The change required is very simple: seeing money as debt (i.e. of negative value) even though we see a positive number of countable tokens. We don’t need to change much of what we physically do now. It could mean starting our personal accounts not at zero but at a minus number representing how much we are already in debt to others, and writing off our ever-increasing debt by earning our keep. The IOU’s given us by our employers would be added to THEIR account. One of the beauties of this is that no-one would wish to steal, overspend or accumulate money which merely indebted him.

    As no-one has reacted to my somewhat garbled response to “Smith without Marx” (so I’ve no idea whether anyone read it), I’ve tidied it up and repeated it here for consideration in light of this IOU understanding of money. It’s about the modern equivalent of Smith’s “invisible hand”: the automated part of a control system.

    Here then are my answers to Neva Goodwin’s questions:

    Q. How is the total wealth generated by a society divided between those who own the means of production and those who work for them?
    A. By means of the capitalist PID control system. [NB. “How” is ambiguous]!
    Q. Is the existing division optimal?
    A. Of course not: that is not what is being controlled.
    Q. What are the forces that determine how society’s wealth will be divided?
    A. Not forces but constraints in the form of monetary information feedbacks about the past, present and future, i.e. capital accumulation, costs and returns on monetary investments.
    Q. What are the goals of the economy?
    A. The goals of AN economy are to produce and distribute wealth, but what we have is chrematism (masquerading under the name of economics), the achieved goal of which is money-making to finance debt (and thereby control the power of the indebted).

    And here’s my answer to what really is the critical question: What to do about it?

    • Tell the truth and control one’s own power, allowing for our differences and need to grow up.
    • Accept that money (now masquerading as having positive value like gold) is actually of negative value (an IOU). “The bearer [not the bank] promises to repay (on request) the community [not the receiver] with proportionate work or goods”.
    • Accept that laws are primarily educational (commendations) and have already failed (misled) since in 1694 a puppet king bought with financier’s IOU’s accepted a notional “National Debt” and normalised enforcement of dishonest monetary contracts via armies, police and bailliffs.
    • Accept continued use of IOU’s (implying that those who possess more than they need owe more), but “divide and rule” by separation of the variables of need, motivation, reward and reproduction. Allow a Citizen’s Income level of IOU’s (e.g. credit card usage rate limit) and joint enterprise development costs to meet present need; modest upgrading of this for reliable past repayment in work and achievement of competence; in lieu of profits from mass production, the prospect of honorary prizes (in kind) for outstanding contributions, developments or achievement in communal enterprises of all kinds; reproduction of goods at rates marginally replacing actual purchases, at affordable prices weighted by taxation of non-renewable resources.

    Having said most of this before, here’s the question I haven’t an answer for. Why has no-one so far seemed willing even to discuss it?

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