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The repressive vision

On the pretext of preserving the power of monetary policy, the International Monetary Fund (IMF) has published detailed recommendations on how central banks can withdraw or make citizens mad. It is at least the third study of its kind in the last two and a half years. Just a few months ago, a senior manager of the European Central Bank (ECB) wrote a similar paper with an IMF adviser.

Christine Lagarde, the IMF chief under whose papers were created, will be sworn in as the new head of the European Central Bank (ECB) in a few months.

I am talking about the need for an effective monetary policy as a pretext, because the renewed push against cash is part of the strategy for tricky cash removal, as described in a 2017 IMF paper. It is worth recapitulating this briefly for classification:

The Macroeconomics of De-Cashing” presupposes the goal of cash elimination, and the monetary policy consequences are just some of many. In it, the IMF recommends governments that want to eliminate cash to start with seemingly harmless steps.

One could, for example, start with the abolition of large banknotes and ceilings on cash payments. It is preferable to send the private sector forward with seemingly harmless changes. Direct government intervention would be more questioned given people’s penchant for cash, and people could make valid counter-arguments.

For this reason, a targeted PR programme is needed to reduce mistrust of cash elimination, in particular the suspicion that governments want to control all aspects of people’s lives through cash elimination, or the distrust that it is about forcing personal savings into the banking sector. The cash disposal process will be better advanced if a cost-benefit assessment is made.

Note that the author does not consider mistrust to be a failure. It includes the possibility to monitor all financial transactions of the people, explicitly among the advantages of cash elimination and also that the savings are pushed into the banks, it lists among the advantages.

The cash disposal process will be better advanced if a cost-benefit assessment is made.

In the 88-page study “Enabling Deep Negative Rates to Fight Recessions: a Guide”, published at the end of April, the cost-benefit consideration is a monetary policy. The aim is to make it possible for central banks to push interest rates deep into the negative range in order to stimulate the economy. It is just by chance that this presupposes to eliminate or make cash unattractive.

So far, the existence of cash prevents banks from passing on low negative interest rates to their deposit clients. In order to avoid negative interest rates, these could withdraw their balances in cash and store them in a safe deposit box at zero interest rates.

It is consistently argued that the directly recognizable changes for people and legal adaptations should be kept as small as possible, so that there is as little public discussion as possible. The proposed Changes are quite dramatic. Trying to stage such a thing past the public and parliaments testifies to a deeply undemocratic attitude of the IMF and the Anti-Cash Crusaders.

The authors do not mention the fact that banknotes issued by the central bank in Europe, as in the USA and most other countries, have the Status of the (only) legal means of payment. There is only one vague indication of possible legal hurdles. In many ways, however, your proposals contradict this legal requirement, and they even want to eliminate it.

The aim is to ensure that, in the case of negative central bank interest, cash against bank money (Giralgeld) consistently devalues. A euro cash would therefore be worth less and less relative to a euro credit at a Bank. Those who pay in cash would (increasingly) have to pay more than those who pay by bank transfer or card.

In order for this to have the intended effect, it is intended to ensure that all essential prices are awarded in digital money. Then Bank money was “the real thing”, the unit of account. If something is awarded with 10 euros, cash payers should pay more, not digital payers less. Old obligations should be reinterpreted in such a way that repayment in digital money (bank money) repays the debt, while a surcharge may be required for cash payments.

Legal tender means, however, that one can settle a monetary debt with this — unless on a voluntary Basis something else has been agreed beforehand. So if you owe someone 10 euros, you can settle this debt with a 10-euro bill. A general surcharge against bank money is incompatible with the status of the legal means of payment.

The clean approach brings with it the slightest change for the money system and does not require new laws.

Nevertheless, the IMF authors conclude that the proposed abolition of the legal means of payment is the least drastic policy measure to preserve the functioning of monetary policy. It brings with it the slightest change for the money system and does not require new laws. This is brazen switching horses. It is neither a small change, if citizens and traders have to cope with a constantly — albeit constantly — changing exchange rate between cash and bank money, nor can one abolish the legal tender without changing the law.

In order to improve the enforcement of digital money as a new unit of account, the IMF’s recommendation is to further reduce the use of cash. A tried-and-tested means for this could also be the issuance of a digital central bank money accessible to all citizens. “Such innovations are likely to further reduce the role of cash,” the IMF commends.

According to the IMF, what is still missing is a central bank, which makes the pioneer and thus frees the way for the devaluation of cash against bank money for others. Three times you can guess which central bank this will be. Of course, as usual, the Swedish Reichsbank. This is already working intensively on the digital central bank money.

The technical implementation

This IMF-preferred “clean approach” would be implemented in the interplay between the central bank and commercial banks. The latter have assets in the form of central bank money at the central bank. These credits are a digital form of legal tender (previously only accessible) to banks. With these balances, the banks balance between themselves in payment transactions. You can also withdraw them at any time in the form of cash to satisfy cash requests from customers. Conversely, they can deposit excess cash into their central bank account, both of which have so far been at the fixed rate of 1 to 1.

The IMF wants to break this 1-to-1 ratio. In order for banks to be less likely to withdraw their balances in cash, to avoid negative interest rates and to recoup them later, you would be less credited when you re-deposit than you would be deducted from the account balance when withdrawing Was. For example, if the ECB’s key interest rate were minus 4 percent, the ECB would announce that banks will receive four percent less after a year for cash deposited than they have to pay for it today. After a quarter, it would be one percent less. Whether the bank leaves the money in the account, or withdraws cash and deposits it, it would cost them four percent per year in both cases.

This ongoing devaluation of cash should also take place in general business. Banks are supposed to pass on the cost of cash to their cash-using customers out of self-interest. They would make cash cheaper at the vending machine or at the counter (calculated in bank money). Conversely, those who deposit cash, especially traders, would receive less and less bank balances for the cash deposited. Traders would then either charge cash payers higher prices or stop accepting cash.

When cash is no longer readily available or devalued on an ongoing scale, cash withdrawal is no longer an option to escape negative interest rates, and banks can unabashedly pass on negative interest rates to their depositories.

Cold expropriation

The shameful note in the section on digital central bank money for anyone, which can carry a positive but also negative interest rate, is treacherous:

“In order to reassure people that their digital central bank money will not be confiscated, it would be good to give an explicit guarantee that the interest rate on this digital money will never be more than x percentage points below, for example, the interest rate short-term government bonds.”

Here it is implicitly acknowledged that with sufficiently low negative interest rates people can also be expropriated. At minus 5 percent, a phrase often mentioned in these circles, you have lost just under a quarter of your balance after five years.

For bank deposits and cash, the IMF does not propose such a guarantee, indeed it does not even explicitly mention the problem. Ultimately, low-negative credit interest rates mean that depositors are split to rehabilitate banks that have gambled. Of course, the IMF does not write this, but says that the profitability of banks is important for the economy. Depositors are therefore expropriated for the benefit of the economy, pardon, not expropriated, but confronted with appropriate incentives.

Confidential alternatives

But if it is supposed ly that one could only preserve cash if one let the whole economy jump over the blade for it, then even the most stubborn cash friend must have an insight. If cash makes it impossible for the central bank to do its charitable work of stabilizing the economy in the future low interest rate world, then a nefarious egotist is who opposes it out of concern for his savings. That is the IMF’s message.

To convey this message, the authors pretend that interest-rate policy, by detour through private commercial banks, is not only an effective tool, but also the only available means of monetary policy. In view of the very moderate results of the last ten years, it is already possible to argue as to whether traditional interest rate policy is particularly effective. In no case, however, is this policy without alternatives, which can easily be as clear from the fact that it is only a few decades old.

In the chapter “Alternatives to negative interest rate policy”, however, the authors only think of doing nothing or other strategies that have been tried out about commercial banks in recent years, such as bond purchases, or rather minor changes in interest rate policy, such as so-called GDP level targeting. What the authors, on the other hand, forget to mention, are ways of monetary policy to stabilize the economy directly without fattening commercial banks on the side.

There is, for example, the proposal for helicopter money, which has already been brought into the discussion by Nobel laureate Milton Friedman and former US Federal Reserve Chairman Ben Bernanke — the latter explicitly as an alternative, if interest rate policy is to be sent to the zero interest rate limit. Helicopter money means that the central bank does not give the newly created money to the banks, but distributes it directly to the citizens for the stimulation of demand. For this policy, the zero interest rate limit is not an issue. It is also quite uncontroversially effective for stabilising the economy.

The main argument of the opponents is that then people would understand how the money system works, and then they would lose their confidence in that system.

The only counter-argument I can imagine is that the public might fear a future head tax of the same amount as the transfer of money, which would cause them to keep the extra money rather than spend it. But the government has no reason to do that, and that’s why the public has no reason to expect it.

More recently, Adair Turner, former head of the UK’s financial regulator, Thomas Mayer, the former chief economist of Deutsche Bank, Mark Blyth of Brown University and hedge fund manager Eric Lonergan, Daniel Stelter and (with smears) have recently joined. Willem Buiter, chief economist at Citigroup, said he was in favour of helicopter money. You don’t have to think of the proposal as a good one, but not mentioning it when it comes to presenting possible alternatives to zero interest rate policy is frivolous. I have listed further alternatives to the business bank-promoting, interest-rate-oriented monetary policy and counter-arguments here.

The price of gold would naturally soar at a significant negative interest rate, which also includes cash. Because gold is a prominent measure of confidence in book currencies, that would be very unpleasant. It would therefore be necessary to ensure that the negative interest rate is somehow also applied to gold, which is difficult, or that private gold farming should be limited or banned. This is the fitting of a report by the FAZ dated 10 July that the Federal Government plans to reduce the ceiling for gold purchases without identity verification from EUR 10,000 to EUR 2000.