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The Future of Banking: The Dangers of Electronic Currency

We live in a world in which more and more things happen electronically. It is now possible to buy all your clothes online, all your books, all your food, and have them all delivered to you. Online communication allows us to communicate with almost anyone on the planet, anywhere, at any time. Someone who had fallen asleep 30 years ago would be amazed at how different things are. That extends to the realm of payments as well. Millions of people now access their bank accounts online, transferring money between accounts and paying off credit cards. Payment services such as PayPal are used by more and more merchants. Cash is being displaced by credit and debit cards, which are themselves beginning to be displaced by new digital currencies and payment systems such as Bitcoin, Samsung Pay, and Apple Pay. A world in which everything is transacted digitally may not be far off. But will this digital revolution enable a dream world for consumers or a never-ending nightmare?

The Future of Banking: Banking as a Public Service

Banking today is not the same as it was 100, 50, or even 20 years ago. The next 20 years will see even more changes to the banking system, perhaps a complete upheaval. At the turn of the 20th century, banknotes could still be redeemed for gold, and silver coins circulated in everyday commerce. Fifty years ago, silver had just disappeared from everyday use and credit cards were entering the mainstream. Twenty years ago the restrictions on interstate branch banking were being done away with, leading to a wave of bank mergers that created the large megabanks we know and love today. So what will the banking system of the future look like? The problem with making predictions is that no one can know the future with certainty, we all assume that the future will continue onwards from the present. Just as Europeans on the eve of World War I assumed that the Central European monarchies would continue to exist for centuries, just as they already had, let us assume that the banking system will not suffer any cataclysmic breakdown within the next couple of decades. What then will the banking model look like 10 or 20 years down the road?

Moral Hazard: The Federal Reserve And Financial Markets

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One of the problems with central banks acting as a lender of last resort is that of moral hazard. With the cost of bailouts spread out across society and benefits concentrated to a few large firms, the temptation to engage in excessively risky behavior is ever-present. Financial firms have become so used to getting their way from the government that they assume the Fed will bail them out of every difficult spot that comes along. The Federal Reserve’s monetary policy of the past eight years has been one huge bailout, funneling trillions of dollars of easy money to Wall Street, boosting stock prices, and creating bubbles throughout the economy. This loose monetary policy has led to such malinvestment that the economy will definitely fall into a recession or depression once the Fed takes away the punch bowl. Stock markets realize that the economy’s fundamentals are unsound, that firms are reliant on cheap central bank money for their continued performance, so the specter of Federal Reserve rate hikes and monetary policy normalization is leading to panic.

Will Monetary Policy Ever Return to Normal?

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If you hoped that monetary policy would ever return to normal, you’re in for some disappointment. It appears as though central banks are hell-bent on doubling down on their mistakes. The past century has demonstrated time and again (Germany, Yugoslavia, Zimbabwe) the destructiveness of creating money out of thin air. Yet central banks continue with their money printing, going to greater and greater lengths and unveiling new tools and policies to try to stimulate their economies. It’s been so long now since monetary policy was “normal” that we’re into a new normal: permanent easing.

The Central Planning Mindset Has Won

Line for bread in Siberia.

Line for bread in Siberia.

If you thought the Soviet Union’s collapse meant the end of central planning, you were wrong. Central planning is alive and well. In fact, it’s even stronger now than it was during the Soviet Union’s heyday. What’s even more disturbing is that many who would strongly oppose Soviet-style central planning and who consider themselves to be defenders of free markets fail to recognize their acceptance of central planning and see no contradiction between their acceptance of central planning and their alleged support of the market economy.

A Crack in the Central Bankers’ Armor?

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The years during and after the financial crisis saw a consensus of monetary easing among central bankers around the world. The Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan all engaged in loosening their monetary policy, creating trillions of dollars worth of new money in an attempt to boost their economies. None of them wanted to be the only one not easing monetary policy, and none of them wanted to the first to return to “tighter” monetary policy. But are we beginning to see this easing consensus breaking down?

Central Banks and Wasted Productivity

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Economic activity can be either productive or non-productive. Productive activity is that which satisfies the wants of consumers and increases their well-being. Non-productive activity is that which detracts from consumer wants or lessens their well-being. Consider the example of a grocer who sells fresh food to consumers. His activity is productive in that he is providing a desired good to consumers, allowing them to purchase food that they wish to eat. If someone comes to his store and steals some of that food, that loss is non-productive. If the store owner has to put up security cameras or hire a guard to prevent theft that is also non-productive, as resources that he could have devoted to selling food to consumers instead have to be diverted to defending against theft.

The Continuing Demonization Of Cash

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The insidious nature of the war on cash derives not just from the hurdles governments place in the way of those who use cash, but also from the from the aura of suspicion that has begun to pervade private cash transactions. In a normal market economy, businesses would welcome taking cash. After all, what business would willingly turn down customers? But in the war on cash that has developed in the 30 years since money laundering was declared a federal crime, businesses have had to walk a fine line between serving customers and serving the government. And since only one of those two parties has the power to shut down a business and throw business owners and employees into prison, guess whose wishes the business owner is going to follow more often?

A Brief Monetary History Of The United States: Part I

On this Throwback Thursday, we’ll run the first part of “A Brief Monetary History of the United States” from Ron Paul’s Monetary Policy Anthology. Subsequent sections of that history will run every Thursday for the next several weeks. If you haven’t downloaded the anthology yet, you ought to do so. The anthology is a compilation of Congressman Paul’s tenure as Chairman of the Subcommittee on Domestic Monetary Policy, including his exchanges with Ben Bernanke, the transcripts of his monetary policy hearings, transcripts of the “Tea Talk” lecture series, and additional commentary from prominent economists from the Austrian School such as Bob Murphy, Tom Woods, and Jesus Huerta de Soto.

The installments in this monetary history series can be found here:

  • Part I – Colonial Money and the Coinage Act of 1792
  • Part II – The Banks of the United States, McCulloch v. Maryland, and Private Coinage
  • Part III – Government Begins to Monopolize Currency
  • Part IV – The Legal Tender Cases and the “Crime of ’73”
  • Part V – The Rise of the Fed
  • Part VI – The Great Depression, Gold Confiscation, and the Gold Exchange Standard
  • Part VII – The Dollar Reigns Supreme: From Bretton Woods to Stagflation
  • Part VIII – The 1980s to the Great Recession and on to the Future
  • A BRIEF MONETARY HISTORY OF THE UNITED STATES

    “Those who cannot remember the past are condemned to repeat it.” – George Santayana

    I. INTRODUCTION

    To avoid repeating the mistakes of the past and to provide for a more prosperous future, the lessons of history must be both explored and understood. This is no less true for something used in everyday life: money. The present monetary regime did not appear overnight. Rather, it is the result of centuries of concerted action, much of which has been forgotten by history. The following pages are intended to provide the reader with a brief yet relatively comprehensive introduction to the history of money and monetary policy in the United States from the late-18th century to the present. While not an all-inclusive look at American monetary history, this section covers the main historical events that have led to the current U.S. monetary system. If America seeks to achieve a sound and stable economy, it is necessary to examine the history of money in the United States and its evolution over time.

    Pennies And Nickels: More Expensive To Mint Than To Use

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    It’s not breaking news, but the cost of producing pennies and nickels is still higher than their face value. This has been an issue for the past decade, with no progress being made. If the US Mint decides to change the composition of the penny and nickel, operators of vending machines and other coin-operated machines would have to spend hundreds of millions of dollars retrofitting their machines, while the Mint would save a sum that’s only in the tens of millions of dollars. A far better solution would be just to stop using pennies and nickels altogether. Since the Coinage Act of 1792, the United States monetary system has used mils, but no coin was ever minted to provide for that 1/10 of a cent of value. The half cent was eliminated in the mid-19th century. Now it’s the turn of the penny and the nickel. The Federal Reserve’s inflationary monetary policy has so eroded the value of US coinage that those small coins aren’t even worth producing anymore. It’s only a matter of time before they will disappear from circulation anyway. One of the best commentaries on the government’s continuing fiasco with the penny and nickel is from Congressman Ron Paul’s statement at a Congressional hearing on coin production. It’s well worth a read.