Currently, there is a shadow over the monetary and financial systems regarding changing of the current money system to one that is created by private entities for money that is (presumably) safer.
There is a possibility being discussed that wouldÂ let all the citizens and companies of a country deposit their money in the central bank of their country where they would be more secure. Currently, only private entities can deposit their money in the central bank. To be fair, I am not the first to advocate for this idea.
At central banks our money would be safer
The possibility of being able to deposit our money in the central banks means that we have the advantage of having our money more secure, therefore, there would be no budgetary costs, unemployment, losses in the national GDP and destruction of companies that have caused the last financial crisis.
In addition, there would be another positive effect that would allow us to deregulate and liberalize the credit activity that is currently heavily protected and intervened by the government.
For this reason, other sources of financing such as cryptocurrencies attract large and small investors, but they are not adequate substitutes for the money of private entities.
However, deposits with central banks can substitute for deposits in private entities. This would be a revolution in the financial sector.
In the 19th century, paper money was issued by private financial entities and it was decided that it would be issued exclusively by the national central banks.
The current money in private financial institutions is fragile and insecure
The successor private banking entities of the current banking entities may continue to provide their services to companies and families, but they will no longer be able to use the money from their deposits without our consent – they will have to request it in order to lend them to others.
This change provides a significant advantage, since the current money is fragile and insecure, since it depends on the success or failure of the investments of financial institutions. We will have a safe and independent loan market because the central bank will not lend deposited money.
Financial crises will not disappear, because the moment a risk is assumed, there is the possibility of failure. But the losses of these crises, as it happens now, would not be paid by the taxpayers.
Every day, the losses that occur in the Stock Exchange, in the Hedge Funds, the investment funds … are assumed by those who risk their money. However, now the losses of the crises of the banking entities are paid by all.
This system of depositing money in central banks would not have to suffer the consequences of the private financial entities not being able to return the deposits, because the deposits in the central bank would be deposits, while the deposits in the private financial entities would not be consdiered deposits per se.Â The money is not deposited, but rather, it is being used for these financial entities to make their investments.
Moving from a highly regularized sector to a deregulation of credit activity
The fragility of deposits in private financial institutions is the one that governments maintain, today, regulations that make the banking system the most protected and intervened sector of all economic sectors.
On one hand, there are protective norms by which the deposits of the clients are secured, they are guaranteed liquidity and, if necessary, they are injected with public funds to prevent these entities from breaking down.
On the other, there are interventionist rules, which impose restrictions on the banking entities that limit their freedom as a company in almost all their courses of action that hinder innovation and competition.
In addition to this numerous volume of regulations, the Government has to maintain some supervisors to prevent them from violating these imposed requirements. The advantage of having a safe money issued by central banks is that these rules and their supervision could be reduced.
That is, the credit and payment activity could be deregulated, generating efficiency benefits that occur when liberalizing any sector.
There are important benefits but high costs for the economy
This new system through the central banks would have other advantages:
- Monetary policy will be more effective because the creation of money will not have to increase the indebtedness of families and companies, as is happening at the moment.
- This could lead to lower taxes, return debt, increase public investment or improve other policies.
- Disappearance of fragile money and liberalization of the financial system.
These benefits are important but must be obtained through a revolution, through a sudden change. A transition must be designed to allow financial institutions to transform and adapt to the possible new situation. Wishful thinking? You be the judge.