Jump to content
Objectivism Online Forum

Cashless economies and Duration Manipulation Monetary Policy

Rate this topic


Brendon Farrell-Agius

Recommended Posts

A cashless society, seems to be a coming eventuality, for all nations in the future; but to reserve banks they pose a problem.

As I was unable to find anything describing this problem on the web, I’ve simply called it the No Reserve Needed Problem.This problem concerns the ability to conduct monetary policy in a cashless society, when at least one bank within an economy, will have spare money to lend.

Imagine a hypothetical 2 bank economy, where cashless account to account transactions are all that exist. As the two banks wish to lend as much as possible, wishing not to be limited by liquid reserves, they form an agreement whereby if one has liquidity issues, the other will lend it money, at a rate slightly higher than the base rate. If Bank 1 runs into a liquidity problem, it knows that Bank 2 must have funds, for when loans are made, the money lent can only be spent into its own accounts or Bank 2’s accounts. As bank 2 is obliged by standing agreement, it lends to bank 1 ending the liquidity problem. This agreement allows both banks to function without the need for a fractional reserve.

The base rate exists due to the balancing of the money supply and demand for credit. When money is limited, the base rate alters itself to ensure that demand matches supply. When money is unlimited, there is always more money to lend and hence demand for that money, does not need to be reduced by a base rate. Money is unlimited in the cashless hypothetical economy above as one of the two banks will always have money to lend.

This is a problem for a reserve bank, as it uses a base rate to maintain an even keel economy.

The simplest solution is to place restrictions on interbank lending, that force banks to maintain reserves; but doing so is a restriction upon the financial efficiency of the economy.

An interesting solution I call Duration Manipulation Monetary Policy consists of the reserve bank controlling, the minimum monthly repayment of loans, within a no base rate economy; this effectively changes the duration of loans, by forcing them to be paid off sooner or later, based on how much is to be paid per month. Changing the monthly repayment rate, changes the capacity for individuals to repay debt. An entity wishing to get a loan for a sum of money, may not be able to meet these repayment terms and will be deterred from borrowing. This effect is amplified by a risk premium placed on loans; the larger the repayment, the greater the chance of default and hence a higher the risk premium.

This system potentially outperforms current monetary policy in its effectiveness, due its ability to be applied differently depending on the individual. The flexibility to stimulate growth within one region, Industry or social class and not another, gives a reserve bank the capacity to target growth disparities within an economy.

Such a system also gives a reserve bank, much more leverage over economic stability, potentially removing the need for fiscal stimulus, when current monetary policy would become ineffective. Consider the stimulating effect on an economy, that would occur when the loan period is extended to twice its size. The principle fraction would halve and due to the ease at which individuals could pay back loans, the risk premium would significantly decreased in relation to the principle. When you compare this level of stimulating power, to current monetary policy, where dropping interest rates from low to ultra low, don’t significantly alter repayments enough to stimulate an economy when it is affected by an economic crisis.

A cashless economy isn’t needed, for such a system to be possible. Reserve banks can treat their ability to print money, as an unlimited supply; which they then lend to banks with a risk premium attached. This would eliminate the base rate within the economy, allowing the reserve the then use Duration Manipulation Monetary Policy effectively.

What are your thoughts?

Link to comment
Share on other sites

[...] This problem concerns the ability to conduct monetary policy in a cashless society, [...]

I'll stop you right there. You see, Objectivists probably agree that "not being able to conduct monetary policy" is actually a good thing.

I think we all look forward to a world in which currency is not within the realm of any particular government--that its all handled privately.

Now, I do agree that we're rapidly approaching such a world in practicality because of technology. At many online stores you can purchase items in a number of international currencies--the exchange rate for which is (essentially) attached, real time, to a world market for said currencies. They all float around relative to each other.

If you stretch your mind a bit, you can imagine where this will end up. You can get to the point where the "money" (value) in your bank account (portfolio) is just a random set of instruments decided upon by yourself of some paid expert. You might use a particularly stable currency as a (temporary) benchmark to see how you are doing, but philosophically it won't matter.

The old-world mindset around thinking of "money" as a pile of paper bills in your mattress has been obsolete for a number of decades...

Link to comment
Share on other sites

I actually don't understand the scenario described in the OP. I get that there is no cash, as in dollar bills and coins. So, I get that the scenario is one where the banks do not keep any "vault cash". My question is: does the scenario also assume that banks do not keep deposits at the Federal Reserve -- the so-called "high-powered money" of today. Today, a bank's reserves consist of vault cash plus deposits at the federal reserves. In your scenario, do both of these disappear?

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...