When interest rates are zero and it costs a bank to look after your money
it becomes an unattractive asset. Banks in some jurisdictions (such as
Switzerland, Denmark and Sweden) are even charging customers interest on cash
and deposits. And if you go to your bank and withdraw large amounts in the
form of folding notes to avoid these charges you will be lucky if you are not
treated as a sort of pariah. For the moment, at least, these problems do not
extend to sound money, in other words gold.
There are two distinct issues involved with government-issued currency:
zero-to-negative interest rates, which all but eliminate any interest turn on
deposits for the banks, and a systemic issue that arises if too many people
withdraw their money from the banking system. The problems with the latter
would become significant if enough people decide to effectively opt out of
holding money in the banks.
Conversion of bank deposits into physical cash increases reserve ratios,
restricting the banks' ability to create credit. However, while the banks are
contractually obliged to supply physical cash to anyone who wants it, a
drawdown on bank deposits is a bad thing from a central bank's point of view.
A desire for physical cash is, therefore, discouraged. Instead, if the option
of owning physical cash was removed and there was only electronic money,
deposits would simply be transferred from one bank to another and any
imbalances between the banks resolved through the money markets, with or
without the assistance of a central bank. The destabilising effects of bank
runs would be eliminated entirely.
In the current financial climate demand for cash does not originate so
much from loss of confidence in banks, with some notable exceptions such as
in Greece. Instead it is a consequence of ultra-low or even negative interest
rates. The desire for cash is therefore an unintended consequence of central
banks attempting to inject confidence into the economy. The rights of
ordinary individuals to turn deposits into physical cash are therefore
resisted by central banks, which are focused instead on managing zero
interest rate policies and supressing any side effects.
Central banks can take this logic one step further. Monetary policy is
primarily intended to foster investor confidence, so any tendency for
investors to liquidate investments is, therefore, to be discouraged. However,
with financial markets getting progressively more expensive central bankers
will suspect the relative attraction of cash balances are increasing. And
because banks are making cash deposits more costly, this is bound to increase
demand for physical notes.
Monetary policy has now become like a pressure cooker with a defective
safety-valve. Central bankers realise it and investors are slowly beginning
to as well. Add into this mix a faltering global economy, a fact that is
becoming impossible to ignore, and a dash-for-cash becomes a serious
potential risk to both monetary policy and the banking system.
There is an obvious alternative to cash, and that is to buy physical gold.
This does not constitute a run on the banking system, because a buyer of gold
uses electronic money that transfers to the seller. The problem with physical
gold is a separate issue: it challenges the raison d'être of the banking
system and of government currencies as well.
This is why we can still buy gold instead of encashing our deposits, for
the moment at least. It can only be a matter of time before people realise
that with the cash option closing this is the only way to escape an
increasingly dysfunctional financial system.
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