- Private banks obtain banking licenses.
- Private banks have deposit insurance, but bank runs are a risk.
- Private banks create money by lending to people and businesses.
- Those same institutions assess the credit risk themselves.
- The rate of money creation is indirectly nudged by central bank base rates.
- Inflation occurs when the central or private banks create money alongside accelerating money velocity: more money chasing the same or fewer goods and services.
- Bubbles - in tulips, houses or stocks - occur due to fads or other policies. Raising rates is at best a hammer to crack a nut.
- When bubbles burst central banks fund inefficient government bailouts of favored large firms, such as car-manufacturers and banks.
- Interbank transfer is complicated and costly.
- There are no banking licenses.
- There is no deposit insurance. Everyone has an e-money account with the central bank that is (de facto) 100% guaranteed.
- Lending does not create new money. All lending is 100% collateralized: the act of extending a loan doesn’t create new money, but transfers ownership of eMoney.
- Private companies, many formerly banks, assess credit risk for a fee. Those companies may also organise peer-to-peer lending (and loan recovery, bailiffs etc.) and offer pooled fund management services.
- Money creation is tied to money velocity. The rate of money creation is algorithmically and automatically tied to the rate of turnover of the money stock (which is known in realtime via the blockchain). When velocity falls*, new money is created and deposited to all accounts equally. This allows automatic NGDP targeting and is a net transfer from above-mean-cash-holders to below-mean-cash-holders, trending to equalisation in the very, very, very long-term. It’s punishment for ‘hoarding’, which is saving ‘too much’ (above the mean) without lending it or investing it.
- Without private (bank) money-creation via lending, general price inflation is a practical impossibility, except at the NGDP targeted rate.
- Bubbles - in single assets such as tulips, houses or stocks - occur due to fads or other policies. They should be tackled by non-monetary policies, such as removing mortgage interest deductions or taxing land.
- When bubbles burst, if the failure in loans due to falling asset prices (e.g. bad mortgages) is severe and generalised enough to dampen total economy money velocity, this is met with automatic money creation by the velocity-matching NGDP targeting algorithm. Every citizen is ‘bailed out’ in part, so that the economy as a whole may recover.
- Micropayments and all the other benefits of eMoney are present.
Economists: please explain to me why I’m wrong about point 6.
I think this proposal has the benefits of gold on the inflation-capping side, and the benefits of fiat on the deflation-control side. State eMoney ends the need for banks as deposit-holders and as a monetary policy transmission mechanism.
* Getting the settings right on the money-creation algorithm is obviously important: I’d love to see economists do modelling around this. With the zero lower bound gone, do you even need a positive inflation target? I believe there’s no risk of a liquidity trap in this future world. The US money stock seems to turn over about 1.75x every three months (7x a year: so total transaction value in a year is 700% of money supply; daily average about 2%). So the algorithm says: If about 2% of all money got spent yesterday, you’re on track, do nothing. If more than 2% gets spent (consistently) that’s a red flag to government to implement some austerity measures to cool things off: raise a tax, cut a subsidy. If you’re undershooting - because a significant asset bubble is popping or money’s being hoarded - the algorithm can trickle out some new money to everyone. I imagine that trickle increasing the longer we’re below target. And all of this data and the algorithm is public and real-time, like the blockchain and the bitcoin protocol. Remember that the natural state of technological progress is deflation, so a very gradual trickle increasing the money supply will be the normal state of affairs.
A possible transition:
Central bank offers an eMoney account (eWallet) which pays 0% interest but is 100% safe, 100% collateralised and 100% real state money. You can move your bank deposits there today (at some capped rate to avoid runs) and it will be magically laundered from bank-created paper money into true state eMoney.
A date is announced after which taxes will have to be paid in true state money, from these eWallets. Bank money will not be accepted.
Deposit insurance is reduced to zero ($250,000 today in the US; £50,000 in the UK) in stages over a couple of years, but with great fanfare: banks’ reserve ratios are made very, very public and banks are cast in all public rhetoric as risk businesses.
In response, banks limit withdrawal rates to avoid runs, and raise shareholder equity to collateralise their outstanding loans (while also cleaning up and shrink their loan books). Over time, the public moves their current/checking account money into the central bank account, and lends or invests any substantial savings via their bank, a fund manager, a p2p website etc. Companies update their systems to pay wages into eWallets. Retailers update their systems to accept electronic payment (cost: approximately the price of buying an iPad).
If money velocity falls during this transition - which is likely, as loan repayments to banks destroys bank money - the central bank does ‘QE-direct’ to all the eWallets. Although (intentionally) inflationary (or rather counter-deflationary) this looks like a free bonus to the man in the street, and further encourages moving money out of banks into the eWallet. (This QE-direct would be much more heavy-handed than the algorithm proposed for eventual adoption, because paper-money data aren’t easily visible in a public ledger. It’s done manually, and maybe weekly or quarterly depending on data availability.)
Ultimately, retail banking is pretty dead or becomes fee-for-service. Banks revise their business models to become fund managers, P2P lending intermediaries, credit rating agencies.
Government workers are among the first to be paid in eMoney, and after some pre-announced date, taxes *must* be paid in it.
(The black market economy - including the middle cash paying tradesmen - can use foreign cash.)
Because all transactions are now captured, state revenue is huge and collection costs have fallen. Taxes may be cut dramatically (or revenue redeployed).
Although I’m trying to keep it general, I have Scotland in mind as I’m writing this. Some bits of rhetoric that might come in handy: Scotland’s history of financial innovation (this is the latest example of leading, etc.); and the fact that so-called Scottish banks are really Sterling banks, and so governed by the Bank of England. Expertise in pensions, investment management, credit assessment, M&A etc. need not go anywhere (and they were here for quality of life and tax breaks anyway). And the tech sector can be attracted by a digitized populus.