THE DIFFERENCE BETWEEN CASH MONEY AND BANK MONEY
We all use cash money and bank money, but we might not realize how different they are. Almost any item or verifiable record can be used as money if it is accepted as payment for goods and services or repayment of debts in a particular country. Many things have counted as money. For example Roman soldiers were paid in salt. Money is generally used to:
facilitate trade or exchange
serve as a unit of account
store or preserve value.(1)
In Australia today we use two kinds of money, cash money (Australian currency) or bank money. Cash money consists of physical things you can hold in your hands and put under your mattress. Bank money consists of files on a bank's computer. This kind of money did not exist until banks began to keep our financial records and perform transactions using computers.
We may not realize that the bank money in our accounts is not the same as the cash money we actually possess. First, the bank controls our access to it. They insist that if we don't have their special plastic card or its account numbers, we don't have access to “our” bank money. There are also events know as “bank holidays” when banks close their doors and refuse to allow cash to be withdrawn from our accounts.
Second, thanks to unannounced rules, under certain circumstances banks are now allowed to use our bank money for themselves to avoid bankruptcy. When they take our money in this way it is called a “bail in”. This is different from a “bail out” where governments give the banks enough money to stay solvent. The first “bail in” occurred in 2013 when banks in Cyprus got into trouble. It was reported that depositors at Cyprus' largest bank lost 47.5% of their savings exceeding 100,000 euros ($132,000) so the bank could remain solvent.(2)
WHAT! BANKS CAN TAKE OUR BANK MONEY?
Yes they can! The policy was adopted by the West on the weekend of November 16th 2014 right under our noses. Remember the G20 meeting in Brisbane? The one where Tony Abbott was going to “shirtfront” Vladimir Putin? Somehow amid all the media attention given to the visiting world leaders we learned nothing of a decision which completely changed the rules of banking. As well as giving Putin a hard time about MH-17, world leaders at this meeting accepted a recommendation from the Financial Stability Board entitled “Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution.”(3)
Adopting this “recommendation” means that it is now legal for banks in Australia and many other countries to take part of any money deposited with them to keep themselves solvent. This sounds important. Why didn't we hear about it on the news? Perhaps the banks didn't want this change widely known because there would be some objections raised by depositors. Didn't you know that the banks run the world? How else can you explain why the banks just handed this suggestion to world leaders – let us use depositor's money to save us from bankruptcy – and the leaders quietly change their laws to make this legal?
YOU KNOW ABOUT THE “BAIL OUT”. NOW MEET THE “BAIL IN”
Why would banks need to resort to highway robbery to avoid going broke? This policy was devised to assist the too-big-to-fail banks and their super-rich owners. After the crash in 2008 they were bailed out with huge injections of cash from governments in the US and the UK. However nothing has been done to fix the system, so we know it will happen again. Another crash is expected but governments are so loaded with debt themselves that they will not be able to keep the banks solvent as they did after the crisis in 2008. As a result governments will now allow banks to take, appropriate, steal funds from depositors to allow the bank to avoid bankruptcy. This is what too-big-to-fail (TBTF) means. The following passage is from an article by Ellen Brown which describes the reaction of some financial commentators:
“Russell Napier, writing in ZeroHedge, called it the day money died. In any case, it may have been the day deposits died as money. Unlike coins and paper bills, which cannot be written down or given a haircut, says Napier, deposits are now just part of commercial banks capital structure. That means they can be bailed in or confiscated to save the megabanks from derivative bets gone wrong.
“Rather than reining in the massive and risky derivatives casino, the new rules prioritizing the payment of banks derivatives obligations to each other, ahead of everyone else. That includes not only depositors, public and private, but the pension funds that are the target market for the latest bail-in play, called bail-inable bonds.
“Bail in has been sold as avoiding future government bailouts and eliminating too big to fail (TBTF). But it actually institutionalizes TBTF, since the big banks are kept in business by expropriating the funds of their creditors.”(4)
BAIL INS AND NEGATIVE INTEREST RATES CHANGE THE NATURE OF BANK MONEY
Above we saw that one of the main uses of money is “store or preserve value”. With these legal changes bank money is now far less reliable as a way to store or preserve value. If you sell something for $100,000 dollars and deposit this money in a bank, during a financial crisis the bank can take as much of this as they need to stay solvent. Is this a good way to preserve the value of what you sold?
There is also another very real threat to the ability of bank money to store or preserve of value. Some central banks are starting to charge negative interest rates on deposits of money. “Negative interest rates” is just insider-speak for charging someone to deposit money. What is the purpose of this? Governments realize that the economies of the West are in real trouble. They think that if people spend money rather than save it, this will get the economy going again. So they charge people to deposit their money to encourage them to spend it instead.
When there is the threat of negative interest rates or a financial crisis investors know that if they act quickly they can avoid losing their bank money by withdrawing it as cash. However the banks also know this, and many think that moves to stop the circulation of large denomination notes or completely get rid of cash is nothing more than a move to stop investors using this strategy to protect themselves. Such a view is held by the financial commentator Martin Armstrong:
“The central banks are (…) planning drastic restrictions on cash itself. They see moving to electronic money will first eliminate the underground economy, but secondly, they believe it will even prevent a banking crisis. This idea of eliminating cash was first floated as the normal trial balloon to see how the people take it. It was first launched by Kenneth Rogoff of Harvard University and Willem Buiter, the chief economist at Citigroup. Their claims have been widely hailed and their papers are now the foundation for the new age of Economic Totalitarianism that confronts us. (…) Physical paper money provides the check against negative interest rates for if they become too great, people will simply withdraw their funds and hoard cash. Furthermore, paper currency allows for bank runs. Eliminate paper currency and what you end up with is the elimination of the ability to demand to withdraw funds from a bank.”(5)
This is where a cashless financial system, or even a financial system without large denomination notes hinders an investor's ability to move their money in a way that suits their interests. If you cannot take your money out of a bank when you want to, you have lost your financial freedom. It is somewhat ironic that for decades investors have lived in fear of having their money confiscated by communist or left-wing governments. Now they face the real possibility that our supposedly pro-capitalist governments have allowed the giant too-big-to-fail banks to expropriate their money instead. Note that it is not just the “left” that hates these giant banks. Small and medium sized investors not in the same league as the super-rich have no love for them either!