I argue that taken to its most extreme conclusion, CBcoin issuance could have far-reaching consequences for commercial and central banking – divorcing payments from private bank deposits and even putting an end to banks’ ability to create money. By redefining the architecture of payment systems, CBcoin could thus challenge fractional reserve banking and reshape the conduct of monetary policy.
.. Because banknotes and coins circulate in the economy, they are also referred to as ‘currency’. Yet currency is only a very small part of money (see McLeay et al (2014)). Money mostly consists of electronic deposits: broad money consists of (currency and) households’ and firms’ deposits with commercial banks, while base or CB money consists of (currency and) commercial banks’ deposits with the CB (‘CB reserves’).
.. Another scenario would see a large-scale shift of customer deposits into CBcoin, forcing banks to sell off their loan books. Bank deposits could still exist but as saving instruments, no longer used to make payments. Banks could still originate loans, provided they lent money actually invested by customers, say, in non-insured investment accounts that couldn’t be used as a medium of exchange. Banks would operate like mutual funds, losing their power to create money and becoming pure intermediaries of loanable funds, as described in economic textbooks.
.. Under this scenario, the contraction of broad money (bank deposits), and the attendant emergence of ‘private-sector base money’ made of CBcoin would mark the demise of fractional reserve banking (see Sams (2015)). The conversion of bank deposits into CBcoin deposits at the CB would amount to 100% reserve backing for deposits. This could usher in a system similar to the Chicago Plan, a set of monetary reforms proposed by Irving Fisher during the Great Depression and recently revisited by Benes and Kumhof (2012).
The Plan’s call for the separation of the credit and money-creating functions of private banks would be addressed – with 100% reserve backing, banks could no longer create their own funding – deposits – by lending.
Central Banks Worry About Engaging World Markets After ‘Brexit’
But, as the world’s leading central bankers finished a weekend of brainstorming in Basel, Switzerland, as to what their next move might be, some feared that this time around they might do more harm than good.
.. Global central bankers had already planned to convene at the annual meeting of the Bank for International Settlements, a clearinghouse and research shop that provides a private forum for central bankers to gather and exchange views.
But the British referendum results and the sharp fall in the markets that followed brought an extra urgency to the two-day meeting.
.. Playing a central role were exchange-traded funds, which at one point on Friday accounted for close to 50 percent of overall trading volume in stocks. That is an extraordinary statistic, given that the funds were largely unknown a decade ago as an investment option for investors.
The ability for investors to quickly and successfully buy and sell stocks and bonds, the crucial advantage that exchange-traded funds have over mutual funds, is seen by regulators as critical in times of acute financial stress.
.. Mr. Jen, the hedge fund manager, scoffed at the notion that the extraordinary central bank interventions of recent years were designed to stamp out deflationary threats and spark an increase in prices and economic activity in stagnant economies in Europe and Japan.
“We have plenty of inflation, it’s just asset price inflation,” he argued, referring to elevated equity, bond and housing markets that have been one consequence of these policies. “People can’t live in cities anymore, and they are grumpy about their jobs.”
.. Persistent central bank interventions have not only created dangerous distortions, they have added to a sense of worldwide cynicism that these measures have not accomplished their central aims: lifting economic growth and increasing wages.