Article by Guest Author Thomas Meyer (Former Chief Economist of Deutsche Bank)
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, jewellery and the precious metals generally, and so forth” (p.326). 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 EUR5,000 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. At first glance, this looks bad. But the policy of debasing the official currency could open the door to a competition for better money.
On the website of the German Bundesbank one can find the following definition of legal tender: “The term legal tender is used for a means of payment that cannot be rejected for the settlement of a monetary debt without suffering legal disadvantages. In the euro area, euro bank notes are legal tender. Only the central banks of the Eurosystem are allowed to bring these bank notes into circulation. In Germany, euro denominated bank notes are the only unrestricted legal means of payment. Euro coins are restricted means of payment, because nobody is obliged to accept more than 50 coins or coins in the value of more than 200 euros.”
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. During the financial crisis and more recently in Greece banks’ promissory notes were out of favour. Cash was king. If cash were now reduced to a “restricted means of payment”, it would be doubtful, if monetary claims could always be settled with the available money “without suffering legal disadvantages”. Money would no longer be fully functionary.
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 ECB 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 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? Is the euro indeed “without alternative”, as Chancellor Merkel likes to say? In a free market economy private suppliers could meet the demand for an alternative with “active money”. There would be no limit to payment volumes and security, or a systematic debasement of the purchasing power. “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 crypto currencies (like Bitcoin). No supplier of active money would be interested in restricting its use, impose an artificial user fee or debase its value, because this would deter people from using it. Light deflation would even be positive as the user would receive moderate real interest simply from money hoarding. “Seigniorage” from money issuance would be shared between the issuer and the users. Since active money would be issued only to satisfy the needs of users, “monetary policy” would no longer be possible. 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.
We live in a market economy managed by government. For the government managers the idea of competition among several means of exchange and the store of value is pure utopia. They do not believe in utopias. But sometimes utopias come true when there is a widening gap between claim and reality. In the case of our monetary system this gap is widening fast.
* The author is Founding Director of the Flossbach von Storch Research Institute and professor at the University of Witten/Herdecke.