The Decline of Bank Deposits

"Central banks and governments consider that the future relationship between CBDCs and bank deposits will be one of peaceful coexistence rather than a competitive struggle to be the dominant currency"

The latest book by Professor Joseph Huber is essential reading for those who want to know what is happening - and what can happen - with Money, Payments and Banking.

Your title – The Monetary Turning Point. From Bank Money to Central Bank Digital Currency- It pretty well sums up the two most important aspects of the revolution that is taking place in money, payments, credit and the financial system. It tells us that we are in a moment of change, in a “inflection point” in the monetary system. And it also shows the direction of that change: we're going to go."from bank deposits to CBDCs"

deposits, or “bank money” as Huber calls them, they are today the only non-physical currency that citizens can use. There is also digital money that is public and safe but today only banks can use it. We call them “reserves” but they are CBDCs (Digital Money issued by Central Banks). Now many central banks are studying how to make this public money accessible to all.

Huber's view is that the bank money, that is, the money issued by private banks will lose weight and the CBDC, the digital money issued by the State through central banks, will become the "dominant" money.

Joseph Huber proposes us to observe the current evolution with a historical perspective. His book describes the transformations that have taken place in the monetary system since the XNUMXth century and exposes the change that is going to take place now. This historical vision is the most original of the book, because it is not usually found in what we normally read about CBDCs.

Joseph Huber assumes that the reader knows the advantages that CBDC has over bank deposits, surely because he had already explained these benefits in his blog and in his penultimate book entitled SovereignMoney. In The Monetary Turning Point devotes more space to describing the decline of bank deposits as a consequence of new technologies and the appearance of CBDCs.

In this book Huber not only presents his historical vision, but also reflects on many other issues. For example, she imagines what the coexistence between CBDCs and bank deposits could look like.

The reader, as has happened to me, may not agree with some of his reflections, but the greatest value of the book is that it raises the questions that we should ask ourselves to understand the complexity of the moment we are living in terms of money, payments, credit and, in general, financial activities.

I copy and translate here some excerpts to give an idea of ​​the variety of reflections that Professor Huber presents to us in this book:

"Bank deposits have become the dominant means of payment because central banks and governments actively support bank money and come to the rescue of banks from one crisis to the next. If this had not been the case, bank deposits would have been a private means of payment without state support and bank money would have perished long ago as private bank notes did in the past.

“Central banks and governments see the future relationship between CBDCs and bank deposits as one of peaceful coexistence rather than a competitive struggle to be the dominant currency.”

“The result of central banks financing the banking sector whenever the banks demand it is that the central banks have become a bank of banks and fulfill this function not so much in the exercise of monetary sovereignty but rather as a aid tool for the private banking sector.”

“Commercial banks are not financial intermediaries that borrow money from their customers to lend to other customers. Banks don't do that, banks are not money intermediaries but bank money creators whenever they lend to non-banks or buy securities from other non-banks.”

“After 1800 the classical economists were divided into the 'banking school' which advocated letting private banks issue banknotes into circulation whenever they wanted. The "money school" was against it on the basis of both possible inflation and the problems created by banking crises and they thought there should be an institution, in this caso, the Bank of England, which had a monopoly on banknotes”

“Politicians and central bankers, instead of reflecting on how the current monetary system works, have time and again preferred to reinforce the privileges of private banks by falling into the illusion of being able to make banks safe thanks to the regulations”

“Trying to ensure that banks are risk-free and therefore that bank money is safe is an impossible mission. In the first part of the 30th century, banks in Europe had capital ratios between 40 and 40%, and in America between 50 and XNUMX%, but even this did not prevent them from going into crisis... It is not by chance that the term bankruptcy come from Bank"

“The quasi-monopoly of bank deposits in transactions is going to dissolve due to the rise of CBDCs and digital private currencies”

“As long as central banks guarantee the liquidity of private banks and governments guarantee the money deposited by clients, depositors will have no reason to abandon their deposits in favor of CBDCs”

“The existence of bank deposits in the future with CBDCs and Stablecoins will fundamentally depend on the extent to which central banks and governments are willing to continue guaranteeing the deposits of private banks”

“Tokenized deposits will face the problem of maintaining 1:1 parity with the currency and could end up having exchange rates between them as is the case now with national currencies or with cryptocurrencies. Maintaining the fractional reserve system would be just as inappropriate for tokenized deposits as it is now for non-tokenized bank deposits."

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The Decline of Bank Deposits

About the Author

Miguel A. Fernandez Ordonez

Miguel A. Fernandez Ordonez

State economist. Former Governor of the Bank of Spain and member of the Governing Council of the European Central Bank (ECB). He currently teaches Seminars on Monetary Policy and Financial Regulation at IEUniversity.

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