A world without paper money, cash, coins and bills

The purpose of this document is first to study the situation where all financial transactions are done electronically without using coins and bills (commodity money) and secondly to what extend this flow of electronic money can be controlled, specific by a central bank.

1. Consider a country with only one Bank. The people own 10000 in cash and they bring 8000 to the bank.
   The initial balance sheets of the Bank and of all the people combined is as follows:

   Bank Activa Passiva Cash 8000 Capital 2000 Assets 2000 Deposits 8000 Total 10000 Total 10000	People Activa Passiva Cash 2000 Capital 10000 Deposits 8000 Total 10000 Total 10000
   Balance sheets 1

2. Consider there are also "Companies". The bank uses all its money (8000 in total) to give loans to the companies. The companies use that money to create assets. The capital of the companies increases. The companies pay 4000 to the people for the work done. As a result the capital of the companies decreases.
   At the end the situation is as follows:

   Bank Activa Passiva Cash 0 Capital 2000 Assets 2000 Deposits 8000 Loans 8000 Total 10000 Total 10000	People Activa Passiva Cash 6000 Capital 14000 Deposits 8000 Total 14000 Total 14000	Companies Activa Passiva Cash 4000 Capital 16000 Assets 20000 Loans 8000 Total 24000 Total 24000
   Balance Sheets 2

3. Now assume that all the people bring all their money to the bank and decide to perform from now on all their money transfers online. The same for all the companies.
   The following table shows what will happen:

   Bank Activa Passiva Cash 10000 Capital 2000 Assets 2000 Deposits 18000 Loans 8000 Total 20000 Total 20000	People Activa Passiva Deposits 14000 Capital 14000 Total 14000 Total 14000	Companies Activa Passiva Deposits 4000 Capital 16000 Assets 20000 Loans 8000 Total 24000 Total 24000
   Balance Sheets 3

4. The bank again can use all its money (10000) to make loans. The companies will pay 6000 to the people. Both will return all the money to the bank. As a result of the work done will the assets of the companies increase with 20000.

   Bank Activa Passiva Cash 10000 Capital 2000 Assets 2000 Deposits 28000 Loans 18000 Total 30000 Total 30000	People Activa Passiva Deposits 20000 Capital 20000 Total 20000 Total 20000	Companies Activa Passiva Deposits 8000 Capital 30000 Assets 40000 Loans 18000 Total 48000 Total 48000
   Balance Sheets 4

5. Companies need more money. To do that they will issue shares.
   The result will be as follows:

   Bank Activa Passiva Cash 10000 Capital 2000 Assets 2000 Deposits 28000 Loans 18000 Total 30000 Total 30000	People Activa Passiva Shares 10000 Capital 20000 Deposits 10000 Total 20000 Total 20000	Companies Activa Passiva Deposits 18000 Capital 20000 Shares 10000 Assets 40000 Loans 18000 Total 48000 Total 48000
   Balance Sheets 5

6. The next step is that the Bank buys for 5000 shares from the people. However because of increased demand the price of the shares owned by the people will increase with 3000
   At the same time because of work performed the companies will pay the people 10000 and the assets will increase with 20000.
   

   Bank Activa Passiva Cash 10000 Capital 2000 Assets 2000 Deposits 33000 Loans 18000 Shares 5000 Total 35000 Total 35000	People Activa Passiva Shares 8000 Capital 33000 Deposits 25000 Total 33000 Total 33000	Companies Activa Passiva Deposits 8000 Capital 40000 Shares 10000 Assets 60000 Loans 18000 Total 68000 Total 68000
   Balance Sheets 6

7. The next step is that people need mortgages to build houses. The bank will do that for 10000. Following is the result:

   Bank Activa Passiva Cash 10000 Capital 2000 Assets 2000 Deposits 43000 Loans 18000 Mortgages 10000 Shares 5000 Total 45000 Total 45000	People Activa Passiva Shares 8000 Capital 53000 Deposits 35000 Mortgages 10000 Assets 20000 Total 63000 Total 63000	Companies Activa Passiva Deposits 8000 Capital 40000 Shares 10000 Assets 60000 Loans 18000 Total 68000 Total 68000
   Balance Sheets 7

Explanation

1. What the different situations above describe is the total balance sheet for a large country with many inhabitants and with all sorts of economic activities: Education, Industry, Mining, Housing etc etc.
   The important point is that there is only one Bank and the people nor the companies have cash. In the past there always was a Central Bank which controls the amount of money involved inorder to influence the market. In this scenario that is not possible. The idea is to discuss what the consequences are.
2. One of the two most important amounts on the balance sheet of the bank are the parameters: Deposits and Cash. The parameter Deposits represents (part of) the total amount saved by the people. The factor Deposits divided by Cash is 4.3
   A serious problem arises when all the people decide that they want cash. It just is not available.
3. When you study the balance sheet "People" you should realise that this balance sheet represents the total of all individuals. In reality you have to deal with single individuals. Of those individuals there are two extremes:
   • You have individuals who have shares, deposits and assets. They have work. They are rich.
   • You have individuals who have debts. They have no work. They are the poor.
     Debts could mean a surplus in mortgage versus assets.
4. The balance sheet People does not show any debts. Suppose all individuals together have 10000 in debts than the following modifications have to be made:
   • On the balance sheet "People" you have to increase the amount Deposits to 45000 and on the "Passiva" sight you have to add a line: "Depts" 10000.
   • On the balance sheet "Bank" on the "Activa" sight you have to add a line: "Depts" 10000 and on the "Passiva" sight you have to increase the amount Deposits to 53000
   What this means for the total financial system is that it becomes more unstable.

Bank Activa Passiva Cash 10000 Capital 2000 Assets 2000 Deposits 53000 Loans 18000 Mortgages 10000 Shares 5000 Debts 10000 Total 75000 Total 75000	People Activa Passiva Shares 8000 Capital 73000 Deposits 65000 Mortgages 10000 Assets 20000 Depts 10000 Total 93000 Total 93000	Government Activa Passiva Assets 1000000 Capital 100000 Total 100000 Total 100000
Balance Sheets 8

5. The above balances sheet shows this new situation. The balance sheet "Companies" is replaced by "Government".
   The above case represents a healty government because there are no depts. This will stay as long as yearly income (taxes received) and outcome (salaries paid etc are equal)
   Suppose this is not the case. Suppose the government has paid a surplus of 20000 to the civic servants which is shown as an increase of 20000 in the deposits of the "people balance sheet". In order to finance those obligations the government has to issue Government Bonds for an amount of 20000.
   As a result the amount Capital decreased with 20000. The following tables show the result:

Bank Activa Passiva Cash 10000 Capital 2000 Assets 2000 Deposits 73000 Loans 18000 Mortgages 10000 Shares 5000 Debts 10000 Gov Bonds 20000 Total 75000 Total 75000	People Activa Passiva Shares 8000 Capital 73000 Deposits 65000 Mortgages 10000 Assets 20000 Depts 10000 Total 93000 Total 93000	Government Activa Passiva Deposits 0 Capital 80000 Assets 100000 Gov Bonds 20000 Total 100000 Total 100000
Balance Sheets 9

6. I already empasized above that the above balance sheet represented the total of many individuals. The same is true for the balance sheet companies. This balance sheet represents the total of many companies.
   Also here we have a scale:
   • There are companies who have only deposits and no loans (They are healthy)
   • There are companies who have no deposits and only loans (They are unhealthy)
7. The primary strategy of a bank is to make a profit.
   One way to do that is to grow. For example to increase loans to the people. When you do that people will buy more and the companies will increase productivity. Buying more will increase deposit transfer from the people to the companies. Increase productivity increases deposit transfer (salaries paid) from the companies to the people. In order to increase productivity the companies can build new companies and do investments. If they have to borrow that is exactly what the bank wants, because both the people and the companies have to pay more interests.
8. The second strategy of a bank is to make at least the same profit or more year after year
   This is an even more difficult startegy, because this startegy requires (one off) that both the people and the companies year after year should borrow more from the banks.
9. A different strategy to reach this goal is that a bank starts to buy shares.
   The reason could be:
   • If we do nothing with our money than its return is zero.
   • It is good for the shareholders of the bank.
   • all the other banks also buy shares.
   Studying Balance Sheet 6 you can see what happens:
   The bank buys the shares from the people, that means there is a money transfer to the people. But the people need no money, that means they transfer it back to the bank. The result is that the amount of deposits will increase with the same amount.
   However there are two additional issues:
   1. First this increase in demand will increase the price of the shares.
   2. Secondly, the companies don't benefit from this trade. In fact it has an disadvantage because dividends paid (as a percentage of the price) will be less. To counteract this they have to increase dividends. My advice to the companies is not to do that.
   IMO this whole trade by the banks should be prohibited.

Lessons

1. One of most important changes of the present day economy is that cash is not important. In the past the amount of cash and the exchange rate was a way to control the economy a of specific country. This capability is not available any more. What counts in the present day economy for Europe is the total amount on "your" bank account. This amount on your account can be negative.
2. From the point of view of a bank your account are deposits and loans.
   If your account are mainly deposits than your account is positif. You will earn interest.
   If your account are mainly loans than your account is negatif. You have to pay interest
   The strategy of the bank is to try to loan as much as possible, because this will create income for the bank in the form of interest.
   

   However this also creates a risk: What counts is that at the end of their life (time) individuals have to pay back their loans and debts in full.
   That means that each individual at the end when he sells all his shares and assets, and when he pays of all his mortages and loans that his account should be possitif. That is the amount he or she can give to their heirs. If that amount is negatif the burden is on his heirs.

   What is true for individuals is also true for all governments. Governments (countries) can have a debt and they can issue government bonds. However at the end of the life time countries should pay back all their government bonds (securities) in full and not by issueing new loans.

   One of the worst things to do is to make large funds inorder to support countries with large debts. In that case you institutionalise something that is basicly wrong.

   • Without a support funds investors require high interests yields because the risk they take. In fact this will make it more it more difficult for a country to borrow money and will force them to reduce their debts.
   • With a support funds these same investors all of a sudden make high profits because they all will be paid back in full. This will also make it easier for countries to borrow money and not to take any measure to reduce their debts.

   What is also important is the influence of a central bank. In fact central banks are becoming less important because they lack control (tools) to influence the money flows within a single country.
   

That is what this document is all about.

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