Is the EuroArea marching towards a system of private ‘free’ banking?
It looks as if the Euro Area is, unintendedly, changing into an ‘Austrian’ style ‘free banking’ area where every bank issues its own money, the central bank is no lender of last resort anymore, government money does not exist and exchange rates between bank moneys are variable. A Banco Santander Euro will be another Euro than a Deutsche bank Euro. Yanis Farouvakis gives us a taste of how this works:
“Greece today (and Cyprus before it) offers a case study of how capital controls bifurcate a currency and distort business incentives. The process is straightforward. Once euro deposits are imprisoned within a national banking system, the currency essentially splits in two: bank euros (BE) and paper, or free, euros (FE). Suddenly, an informal exchange rate between the two currencies emerges.”
Why do I think this trend might gain strength?
- A) At this moment there is a lobby to abolish cash. Not just the 500,– Euro note but essentially all cash. Cash is money issued by the government. The government promises that Euros created by whatever money creating bank (the so called MFI’s) has a guaranteed 1:1 exchange rate with cash. This ensures that Euro’s created by Banco Santander have the same nominal value as Euro’s created by Deutsche Bank or RABO. Without cash this promise is empty and there is no guarantee anymore that all bank moneys have equal value.
- B) Bank moneys are of course indistinguishable. Nobody can tell if an electronic deposit Euro in a bank has been issued by RABO or Banco Santander. However, there is a lobby (not the same as the first one), led by mister Schauble, minister of finance of Germany, to roll back the ‘whatever it takes’ promise of Mario Draghi. The ‘whatever it takes’ promise of ensures that all government debt (except Greek debts, which are exempted) is nominally risk free. Which, as banks own quite a bit of these debts, means that all banks can use it as high quality collateral. Schauble wants to end this. This might, when Spain has to impose a haircut on its debt, hamper the possibilities of Banco Santander (a Spanish bank) to issue money to, for instance, provide short term financing for commercial transactions. In extreme cases (which, as the attempts of mister Schauble might trigger bank runs, might become a lot less extreme) this might lead to the situation described by Farouvakis.
- C) There is also a distinct and strong lobby to bail in bank creditors instead of citizens when banks run into trouble: no more ‘Irelands’.
The lobbies mentioned are distinct movements. I, for example, am a very minor part of the last lobby but not of the first two. But the point: if all lobby’s succeed banks are on their own in a cashless world, issuing their own distinct electronic money, which will or will not be accepted (and as is well known, the change from ‘will’ to ‘will not’ is in reality never a gradual one). It will be essentially a system of free banking. And banks will possibly hoard not gold but billions of physical dollars, guaranteeing the USA a whopping seigniorage profit