The End of Currency |
28 April 2023
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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 central banks don't keep reserves of central bank currencies either.
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.
It seems there are no serious issues with this arrangement that make it unworkable, but it is difficult to oversee the consequences. 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. Governments or central banks might still hold reserves of government currencies to facilitate trade by stabilising exchange rates.