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The End of Currency


28 April 2023 (latest revision: 25 September 2023)


 
Permanent Liquidity Or End Of Currency
 

The blog post Permanent Liquidity dwells on the consequences of a holding fee on central bank currency. A holding fee of 10% to 12% annually makes it unattractive to hold it. When capital requirements replace reserve requirements for banks, and cash becomes a loan to the government, no one keeps central bank currency, and it becomes an accounting unit only. And commercial banks do not keep reserves of central bank currencies either.

There must be liquidity requirements for banks so reserve requirements continue to exist. Short-term government debt can perform the role if reserve instead of central bank currency. With Natural Money, cash is a separate currency backed by government debt, so cash can also provide liquidity.

Nations and regions can have central bank currencies, but they are accounting units. What we see as money and the money unit is the government currency backed by short-term loans to the government. The blog post Cash for negative interest rates clarifies how that might work out. The reserves a country or a bank might hold could be government currencies and bonds from foreign countries, precious metals, and stocks, but not central bank currencies.

There appear no serious issues with this arrangement, but overseeing the consequences is impossible. At least it is clear that the role of the central bank is minimal. Currencies might not require management as the holding fee provides liquidity, and the maximum interest rate provides financial discipline.