Sovereign money is legal tender. It is different from commercial bankmoney on account. Sovereign money is issued by a state authority, in Europe a national bank, or the European Central Bank (ECB). It exists in the form of cash (coins and banknotes) and non-cash central-bank money, called reserves.
Bankmoney (i.e. the present system of fractional reserve banking) is not money proper, not legal tender, but just a claim on money, a claim on having paid out cash, or having transferred such ‘deposits’ on demand. Bankmoney is simply a balance-sheet item of a bank, thus basically unsafe and unreliable. In a banking crisis, money in a bank account can disappear.
The Issue With Bankmoney
For the most part, demand deposits are backed up with central-bank money, but only to a very small fraction of less than 1.5% in the US and the UK, and 2.5% in the euro zone. This is why the system is called fractional reserve banking. In the US the minimum reserve requirement is officially 10%, minus cash in vault, but due to various exemptions the requirement has ‘rapidly been losing relevance’ and is now near the cash in vault only.
In contrast to what your average textbooks say, money and capital markets do not bring about stability. The reason is that modern money is not ‘scarce’, unlike gold or Bitcoin, but it is fiat money which can easily be created at the stroke of a key. Banks’ credit creation almost always tends to be overshooting in the course of business and financial cycles. This causes inflation and, as we are seeing today, asset inflation and financial bubbles.
Typical business areas where over-investment and over-indebtedness occur on the basis of overshooting credit and deposit creation are bull markets in real estate, stocks, or mergers and acquisitions. Some might argue that Bitcoin’s current bull rally falls is driven by this as well and that may be true. However, in contrast to real estate or stocks, investors in Bitcoin are differently motivated. Increasingly, investors in Bitcoin see the latter as the end-station, not to be sold for dollars, but rather kept as a long-term non-sovereign store of value.
Towards a new system
The dysfunctions and illegitimate privileges of the present bankmoney regime require a monetary reform which phases out bankmoney. Traditionalist would argue in favour of a money supply that exclusively consists of sovereign money; some more forward-looking bankers might see merit in Central Bank Digital Currencies (CBDCs). And then, there is the idea of the Bitcoin Standard.
In this outcome, Bitcoin becomes the global store of value, medium of exchange and unit of account – three fundamental properties of money. States might accumulate Bitcoin, either through purchasing, acquisition, taxation or mining, and as such Bitcoin could be included in a state reserves. Smaller island-states might move to adopt Bitcoin as the main reserve currency, with a CBDC pegged to state holdings.
However, while this might sound appealing to the maximalists and freedom-loving anarchists, there are many aspects that need to be considered.
What happens once the first nation-states start moving into Bitcoin; how will other states respond? What does it mean when the government no longer controls money, or at least not to a significant degree – what happens to the political process? If Bitcoin is adopted as a global reserve currency, and money printing no longer existed, how would social programs be organized? Over the coming weeks, these are some of the questions we’ll be exploring.
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