Abolish Cash or Abolish Fractional Reserve Banking?

Opposition to fractional reserve banking can help to make money more sound, but a more concentrated central bank might still hinder things with the abolition of physical cash.

September 12, 2016

By: Bobby Casey, Managing Director GWP

fractional reserve banking cashGoing cashless isn’t just some cocktail conversation heard in some random circles anymore. This is a very real idea that is starting to take root in the minds of very influential and powerful people. In fact, several countries are already putting a level cash restriction or limitation into place.

It’s not that I’m totally adverse to virtual money. I’m not. I think cryptocurrencies are fantastic. What makes them fantastic is that their supply is controlled by an apolitical algorithm, not the corrupt political trade winds of power hungry panderers.

Kenneth Rogoff, the Thomas D. Cabot Professor of Public Policy at Harvard University and the former chief economist of the International Monetary Fund is calling for the abolition of bills $20 and over in the United States. He doesn’t advocate doing away with physical cash altogether, since smaller denominations serve some purpose in smaller transactions.

He lays the blame of every evil thing at the threshold of physical cash: from money laundering and tax evasion, to terrorism and illegal immigration. Basically money is portable and untraceable, which was the reason for its creation. But it does its job too well because it also gums up the works for negative interest rates. People can still SAVE without penalty (jerks!) rather than stimulate the economy like good little citizens.

Several countries and jurisdictions are implementing some level of cashless activity. I don’t oppose debit cards or credit cards wholesale. Not at all. In fact, I’m an advocate for a plurality of choices. Everything from cash to credit cards to barter: I’m for it. What I oppose is the abolition of choices. And that is what is happening here. Telling people how they must pay for goods and services is no different than telling people how they should defend themselves. Cash isn’t for everyone, but it is for some; just like guns aren’t for everyone, but they are for some.

As we’ve said before, going cashless has more to do with control and currency manipulations than it does with safety or convenience. Switzerland seems to be one of the few countries left that is fighting for some form of sound money practices.

Leading up to the Brexit, Switzerland was collecting signatures for its own referendum.

The goal of the referendum is to ban the creation of money by private commercial banks and force a return to the use of actual, tangible money.”

While physical money might provide cover for many criminal elements, digital money provides cover for government criminality such as “Quantitative Easing” policies, Negative Interest Rate Policies (NIRP), and even welfare.

In the case of Switzerland, they don’t want money being created out of thin air through fractional reserve banking. They want to go back to full reserve banking. This is 100% correct for 50% of the problem. It certainly does address the issue of creating money out of thin air that is entirely unbacked. But it centralizes the power of money creation to only the government run central bank.

So the assumption is, the central bank will only expand and contract in the best interest of the country, not based on the whims of their legislating bodies. While Switzerland has certainly demonstrated more responsibility than the United States when it comes to their monetary policies, the Federal Reserve has been in the business of cashing populist checks for the US congress for over 100 years. While I would certainly like to see more backed currency, I haven’t decided if this is merely a stepping stone to abolishing central banks or just a greater concentration of power in the hands of one bank.

I don’t entirely disagree with the referendum in Switzerland, but I do wonder what would’ve happened if it was allowed to go the other way? By that, I mean, what if the central bank gave up its role in the country’s monetary policy and banks were left to compete on their own? If banks were each responsible for the value of their reserve notes, would they still engage in reckless lending and fractional reserve banking practices?

For that matter, if banks were truly allowed to fail would they do this?

My guess: unlikely.

In any case, it looks like this might’ve been put on hold for a bit while the dust settles on the whole Brexit thing.

The Swiss central bank introduced a negative deposit rate early last year after it abruptly abandoned its three-year effort to hold down the franc’s exchange rate against the euro to protect exports.” (Source: The Local)

They have been working tirelessly to keep their franc stable, and to that end, there might be some delays in any major monetary reforms. The franc is very incredibly strong and overvalued, so it didn’t help when the Brexit referendum passed and so many fled to the Swiss franc for sanctuary.

Switzerland can be a friend to the UK. Switzerland is totally independent from the EU, therefore they have a series of about 100 bilateral trade agreements that allow them to trade with that bloc.

However, after a 2014 Swiss referendum that put a quota cap on EU immigration, Switzerland and the EU’s relationship has gotten a little dicey. Those 100 or so bilateral trade agreements are all interconnected under one “kill switch”. That is to say, if they misstep on just one agreement, the whole kit and caboodle can be pulled out from under them. That’s what makes this migration issue so sticky.

The UK is now in a similar situation. Not identical because the Swiss GDP per capita is higher and their currency is stronger, however, as countries independent from the EU they share some common ground. The UK will need to walk that immigration tight rope carefully, too. But they also have a built in trade partner in Switzerland who is desperate to maintain if not grow their exports.

Right now, all those who opposed the Brexit are pointing at the UK as being “isolationist”. But the UK has been very clear about their desire to continue trading with the EU bloc. The EU, on the other hand, keeps threatening to cut off trade agreements with everyone who doesn’t bow down to their immigration demands… which might in the end prove the EU to be more isolationist than the UK.

Is immigration the big deal breaker? What will become of Switzerland’s monetary policy moving forward? Would a full reserve banking system help or hurt? These are just things to keep your eyes on as the dust continues to settle in Europe. I have no predictions, but I’m not a big fan of knee jerk decisions either. Diversify your holdings and pay attention. That’s all anyone can do at this point.

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