Because only money is legal tender

It is absurd to want to get rid of cash and just use bank money because in the current system cash is the only legal money. money in the bank instead They are not legal tender And the European Central Bank for example shows that, See here the recent document from 2015 in which he discusses different definitions of currency which also talks about cryptocurrencies.

But there is a good reason for that Money in the bank cannot be legal tender. The reason is that I owe you the bank, which corresponds to a credit to another person who in turn owes the Bank. This means that you “deposit” the money in the bank, but then the bank uses your money or more accurately, an investment, mortgage or credit appears on its balance sheet. This credit can lead to losses, for various reasons related to the activities of banks, and since banks keep on average only 10% as equity, if the losses exceed equity, they are insolvent.

without a guarantee from the state, Customers can request a refund Which, however, are almost all involved in investments and other credits that banks can’t suddenly return. To do this, they have to demand it back from those who lent it to them and liquidate their investments, creating a chain of bankruptcies. The last time they did this was in the 1930s and there was a global depression that is still remembered today as the Big disappointment. Since then, banks have in fact been guaranteed by the state, because the state has the power to create money out of thin air (through the central bank or directly). Also in 2008, there was a global banking collapse similar to what happened in the 1930s in the UK, USA, Ireland, Spain and other countries, in which banks were run in different countries, but this time they were immediately stopped thanks to the massive creation of state funds from banks central.

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This phenomenon indicates that payments through a bank balance are useful and practical, but they are not really “money”. In fact, they are, as long as there is confidence in the banking system, because compared to 50,000 euros in a bank, somewhere on its balance sheet there are 45,000 euros in credits, mortgages or various investments. And those who received it for various reasons may not return it.

Money in the bank is “debt money”Because for the bank they are debts to you, and then there is someone who owes the bank that they must pay so that they can be returned to you. Indeed, 96% of the time a problem does not occur because not all banks have losses together, and above all because the state intervenes if necessary. But the fact remains that in the case of cash, if you have €5,000 it is €5,000 of money and there is no one owed behind it. (Bitcoin’s raison d’être, by the way, is to create something like cash that you can hold digitally, but without the risk associated with banking.)

This mechanism whereby 95% of the money in the bank, which is in debt to a person to a bank, is the main reason why money in a bank is legal tender in any country.

State money is also needed and in the current system it has two forms: Cash and “reserves” of the central bank They are balances that banks have, for example, with the European Central Bank, which can increase at will, without restrictions, by simply adding zeros. Until 2009, this money was scarce, about 700 billion in the eurozone, of the nearly 50 trillion in money in the bank and about 3 trillion in cash.

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In recent years, central bank balances have exploded to the tune of $9 trillion to keep the entire system together. Theoretically, you could say that these central bank balances are just “legal tender” and remove cash, but it was only recently that all this money was created that way through the central bank.

Currently, in extreme emergency situations, the state can also simply print money, as has been the case for centuries. It should be noted that in 2011 planes loaded with cash arrived in Greece for Greek banks to reassure customers and end the run on banks.

Basically, money can’t just disappearHowever, the money in the bank, because of the way the modern financial system is structured, must be guaranteed directly and indirectly by the state because it can disappear if the banking system fails. This is why, although everyone accepts bank payments, it is not legal tender in any country. or better, In China, cash has practically disappearedBut the big banks are owned by the state so there is confidence that the state will intervene immediately if one bank fails. In the case of the European Union, banks are privateThe state guarantees deposits up to 100,000 and always saves them, and also guarantees loans sometimes, as in the case of an epidemic emergency. However, banks in turn buy public debt, so in Italy the state guarantees about 300 billion credits and banks buy about 400 billion BTPs. If something goes wrong, the European Central Bank is expected to get involved, but it must be agreed upon by representatives of different countries.

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Simply put, the current financial system uses funds created and managed by banks in 90 or 95% of cases, but then also has to guarantee them in emergency situations with state intervention. A huge experiment taking place since 2008 The European Central Bank creates trillions out of thin air Supporting banks and countries that, in turn, support banks. It is not known how it will end because the amount of debt in the system has increased so much that it is now a total of 300 or 350% of GDP in the eurozone (we are talking about public debt and then about all debts of households, companies and banks themselves).

Cash, gold and Bitcoin are the only forms of “money” that stand out from this huge pyramid of debt that has accumulated over the past few decades. If this complex and heavily indebted system were to collapse, these would be the forms of money that would come in handy.

Paolo Becchi and Giovanni Zepordi, December 5, 2022

Thelma Binder

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