Speculative musings, from an inadequate historical background.
We tend to take it for granted that the world looks like this, from a monetary perspective:
The world is divided into currency areas. Each currency area has one alpha bank (the king). All the other banks are beta banks (subjects, who follow the king). The beta banks promise to redeem their money for alpha bank money at a fixed exchange rate. The alpha bank makes no such promise the other way. Asymmetric redeemability. The alpha bank is the leader, who decides on monetary policy for the whole currency area. The beta banks just follow along, because they fix their exchange rates to the alpha bank. The world is divided into monetary monarchies.
There may be sub-monarchs, who play alpha to the beta banks within their own sub-area, but who in turn play beta to some greater alpha bank. Like when the Canadian commercial banks fix their exchange rates to the Bank of Canada dollar, but the Bank of Canada in turn fixed its exchange rate to the US dollar. The Canadian commercial banks follow the Bank of Canada, but the Bank of Canada used to follow the US Fed. The Bank of Canada used to be a sub-monarch, before it floated the exchange rate and declared monetary independence, and then became a full monarch.
Does the world have to look like that? Is monetary monarchy inevitable? Is oligarchy an unstable system? Can two or more banks play both alpha and beta to each other, where each promises to redeem its money for the other's money at a fixed exchange rate, and so share monetary sovereignty? Or will monetary monarchy inevitably reappear, where the strongest bank becomes the new alpha bank?
In the couple of years immediately preceding the Euro, and the creation of the ECB, were the central banks of France and Germany true oligarchs, who shared the pooled monetary sovereignty over France and Germany by fixing their exchange rates symmetrically to each other? Could this have continued? Or would one of the pair have become the alpha, and the other the beta, if the ECB had not been created?
Suppose the Bank of Canada disappears. Because people stop using Bank of Canada currency, so nobody ever asks to redeem their Bank of Montreal deposit money for Bank of Canada paper money. And because the Canadian commercial banks stop settling their own accounts on the books of the Bank of Canada, so none ever holds either positive or negative balances at the Bank of Canada. The King is dead. How long before one of the Canadian commercial banks becomes the new King? What determines which of the commercial banks becomes the new alpha central bank? Will it be the strongest bank with the tightest monetary policy? I think it will. The tightest bank will refuse to redeem other banks' money for its money, if that would force it to loosen. The other banks must either follow the tightest, who becomes alpha to their beta, or else declare independence and float their exchange rates. Most banks aren't strong enough to declare independence; nobody will use their money if they do.
Gold used to be the alpha money, and gold miners the nearest thing to an alpha bank. But gold became less used as money, and people used beta paper money that followed alpha gold. Then the beta banks stopped fixing their exchange rates to gold. They stopped following the king, so the old king was no longer king. The strongest of the beta banks, like the Bank of England, became the new kings, within their own currency areas.
Bitcoin is not a beta money, because it does not fix its exchange rate to anything. Is it an alpha money? Does it have beta followers, who fix their exchange rates to Bitcoin?
(Synmetallism, where a bank pegs its exchange rate to a basket of currencies, does violate this simple monarchist perspective. The beta bank follows an average of two or more alphas. And inflation targeting is like synmettalism. The King agrees to be bound by his own laws. (Bimetallism is where you can redeem your money for fixed amounts of gold or silver. Synmettalism is where you can redeem your money for fixed amounts of gold plus silver.))
Worthwhile Canadian Initiative 
… banks could still have special “reserve” deposits though, which might earn IOR, etc.
that might work
what was the original purpose of this single beta idea
what were you trying to demonstrate
“Why not have the gov’t bank at the one commercial bank” … well perhaps because that would definitely make the commercial bank the alpha bank. Why should those shareholders be given that power? Do you want monetary policy designed to maximize profits for the bank shareholders? Maybe, if you’re one of the shareholders… 😀
I described Treasury banking at the alpha bank – as it does now in its primary account
With one private beta bank
difference between an alpha and a single beta verus alpha and no beta
JKH,
“what were you trying to demonstrate”
Was that for me? Originally I was just trying to make Scott Sumner’s already extreme (cashless) HPE example a bit more extreme and see if that changed Scott’s story any. It didn’t. So I was curious what other people thought. The way I put it to Scott was this: say the CB sells all its assets and reduces MB to zero, do prices go to zero too then? He and Sadowski said “yes.” Even with 1 commercial bank, no reserve requirements, etc. The whole deal.
purpose of alpha in my example is to set the risk free rate
beta is then free to set risk premia for its own private sector rates
with one beta, there’s no competition
goes without saying such a system is a travesty of course
Nick,
I think this single beta no currency idea is off track relative to your asymm theme
But maybe helps work through some of the logic
Central banks did not evolve, they are a creation of the state. In particular, to manage state debt. So, since they are not a creation of the market, the question then becomes what market functions do they perform that would happen anyway?
This is all, of course, assuming we have a restrained state that will not appropriate bank assets or allow debtors to do so.
There is evidence that you would get a dominant bank, given that was the role the Bank of Amsterdam (Amsterdamsche Wisselbank or literally Amsterdam Exchange Bank, established 1609) which came to dominate the bill of exchange clearing system and whose notes were more reliable and stable than the coinage of the time. Up until it declared itself insolvent in 1790.
But since the reasons why states have central banks don’t seem likely to go away any time soon, it all seems a bit moot. (And yes, I have been reading “Fragile by Design”.)
JKH, my intuition about rates is lacking… so I’m going to reread your comments. However, you discussion reminds me a bit of this:
http://catalystofgrowth.com/theory/fiat-currency-construction/
Nick,
In the original gold, US dollar, Cdn dollar, BMO dollar chained example, is there any way you would consider the gold miner playing some sort of beta role to some higher alpha or the BMO depositor playing an alpha role to some lower beta – i.e. does that sequence close the chain
Nick,
If I were viewing the world monetary system from Jupiter, I’d probably begin with the monetary base, as monetarists tend to do
Or more completely, management of central bank balance sheets
I also view it that way viewing it from ground earth
Just that I tend to skip reference to monetary balances per se and move right on to interest rates – i.e. how those monetary balances are priced
Tom,
“Why not have the gov’t bank at the one commercial bank and accept demand deposits for tax payments (no currency or central bank reserves required)?”
You could do that, but then the commercial bank wouldn’t really be a commercial bank. As well as being a monopoly (for some reason), its liabilities would be de facto State money. So the so-called “commercial bank” would effectively just be part of the government.
Nick,
Zero is also a rate of interest.
And central banks always have a choice as to what rate of interest to pay on any monetary balance category.
With the possible exception of currency, but monetarists have creative suggestions for that too.
I know you disliked Mosler’s natural rate of interest is zero because it mangles the usual idea of natural rate – and I agree with that objection
But I have a much greater objection to it
Which is that the effect he’s talking about – which is the straightforward idea that excess uncompensated reserve balances will drive short rates to zero through beta competition – is not about anything natural
It only occurs because central banks have a choice as to what rate to pay on reserve balances
And zero is a choice
Its a choice, not a natural phenomenon – even in the way he’s used that word at all
There is no discontinuity in rates of interest at the zero interest rate level, at least approaching nominally from above
Better to say – pays a zero rate of interest – than to say doesn’t pay interest
JKH, my purpose in bringing up the 1-beta cashless case here was to see if OMOs (or the impossibility of them) had something to do with Nick R having declared the king dead in that case (in the comments to your post). His declaration made sense at the time, but I noticed you and winterspeak assumed like I did that OMOs were still possible. If they are still possible (or made possible by law), I don’t get why the king dies now. Philippe says it’s all about taxes ultimately being paid in CB liabilities. I’m not sure what to think.
Tom,
That’s Chartalism, which has to do with the acceptance of CB or government currency as the core medium of exchange
Nick’s paradigm is about getting BMO dollars accepted as a substitute for CB or government dollars
There’s a simpler theory that ranks higher than Chartalism, IMO, which is that the government just enforces legal tender laws – that positions Chartalism as a convenient derivative explanation but not the primary explanation
Tom Brown said: “Too Much Fed, the BoC doesn’t have to do anything except exchange paper notes for BoC deposits and vice versa. They turn the computer on to do that (after issuing some currency and reserves) and lock the doors and walk away.”
Let’s go back to the fed.
What about the bonds? Who sets the risk-free overnight rate? Who sets the reserve requirement? Who sets the capital requirement?
Philippe, I think you misattributed this comment to me:
“Why not have the gov’t bank at the one commercial bank and accept demand deposits for tax payments (no currency or central bank reserves required)?”
Fed Up wrote that. I responded to it. Or were you responding to my response?
yeah I though it was you.
JKH,
“the government just enforces legal tender laws – that positions Chartalism as a convenient derivative explanation but not the primary explanation”
In Tom’s specific example, there’s one (so-called) commercial bank which has the only account at the central bank, no physical currency, and we assume either taxation or no taxation.
In the case of no taxation, I can’t see why the ‘commercial bank’ has any need for central bank money (reserve balances). As such I can’t see how legal tender laws would have any effect in that regard.
Philippe, let’s change that slightly.
Why not have the gov’t bank at the one commercial (beta) bank and at the alpha bank, accept demand deposits for tax payments (now central bank reserves might be required), and help with central bank reserve management to help the alpha bank hit its risk-free overnight target rate?
not sure what you mean. But if the govt banks at the alpha bank then it doesn’t really accept demand deposits for tax payments. Rather the ‘commercial’ bank has to pay it with central bank money.
Phillipe said: “In the case of no taxation, I can’t see why the ‘commercial bank’ has any need for central bank money (reserve balances). As such I can’t see how legal tender laws would have any effect in that regard.”
The beta/commercial bank still needs to maintain a zero balance of central bank reserves/vault cash for the alpha bank requirement. In this case, the desired level and required level are both zero. Assume a 5% risk-free overnight rate. The alpha bank buys a bond/sells central bank reserves. I’m thinking the risk-free overnight rate starts falling towards zero. The alpha bank sells the bond/buys central bank reserves at 2% so the balance goes back to zero. It has forced the risk-free overnight rate down by choice. Anything wrong with that scenario?
Legal tender laws. MOA is currency. It is also MOE. Now fix currency to demand deposits. Demand deposits become MOA along with currency. Demand deposits are also MOE. Borrowing from the beta bank must be done in terms of currency or demand deposits.
Phillipe, think about what happens if I get taxed, and someone else gets a tax credit. It is as if the demand deposit went from my account to the account of the gov’t at the alpha bank and then back to the other person.
Gotta go for now.
“Assume a 5% risk-free overnight rate” On what, Reserves? Why?
“The alpha bank buys a bond/sells central bank reserves”
why does the commercial bank accept the central bank reserves? I don’t get the point of the rest of your comment, sorry 🙂
Donald Coffin,
Advocates of free banking would disagree with you (e.g. George Selgin, Lawrence White, etc.) The latter lot always quote Scotland, Scandinavia and Canada between roughly 1750 and 1850 to illustrate how a central bank free system can work well. But I take your point that that system did not work well in the US. There could be a cultural factor here: that is, possibly a central bank free system works in serious, Protestant, honest, Northern countries, but not in others.
All: Yep, I couldn’t get onto this blog yesterday evening either. I don’t know what happened.
I’m going to be away from the internet for a few days, taking a short break.
JKH: Re Warren Mosler. That seems a good counter-argument, though I never did really get what his point was.
JKH and Tom: Clearly, the US Fed does not set Canadian monetary policy, now that the Bank of Canada does not fix the exchange rate of the Loonie to the US dollar. But the interest rates set by the Fed still have a big influence on the interest rates set by the BoC, given high capital mobility. Under perfect capital mobility, there would be interest rate parity between the US and Canada (including expected changes in the exchange rate), so in that sense the Fed would set Canadian interest rates, but it would still be true that Canadian monetary policy is independent of the Fed.
Similarly, all of us who borrow and lend and pay interest or get paid interest, and who negotiate the rates of interest we get paid, influence the rate of interest the Bank of Canada will choose to set. But that does not mean that we set Canadian monetary policy. The Bank of Canada sets Canadian monetary policy. If it wants to target 10% inflation, rather than 2% inflation, it can do so. Monetary policy is not interest rate policy.
JKH: “Returning to normal asymmetric redeemability, what’s your view on the prospects for disappearance of hand to hand currency because of technology.
What happens to the asymm idea then.”
My guess about the chances of the disappearance of currency is little better than anyone else’s guess. When I see the kids buying a cup of coffee in the university cafeteria with the credit or debit cards or student cards, I wonder if it might disappear. But the data on stock of currency don’t seem to confirm this yet, IIRC, though that is maybe just because of low nominal interest rates. Maybe the costs of anti-counterfeit notes will be the biggest determinant of that question.
What happens to asymmetric redeemability then? That’s what I’m trying to figure out in this post. While the commercial banks still settle on the books of the Bank of Canada, the BoC is still the alpha bank. But that does not seem to be written in stone. Suppose they all switch to settling on the books of BMO? Or figure out some other clearing medium? Your guess on that question would be better than mine. That question is right up your old street.
Ramanan: this is my reading of Nicky Kaldor there: the Queen is very powerful on paper, but she won’t keep those powers if she over-uses them. Similarly, the BoE (which used to be privately owned until quite recently) was very powerful on paper, but dare not overuse its powers. If the Bank of Canada disappeared, and BMO became the new alpha bank, on paper it would be able to create very high profits by printing lots of money. But if it actually used those powers it would lose them, because it would lose its beta followers and lose it’s alpha position. It would be deposed as King.
On that reading, I agree with Kaldor.
Lorenzo: ah, thanks for adding more needed history. My reading of Bagehot was that he was struggling to invent the concept of a “central bank”, and arguing that the BoE was indeed a central bank, even though the BoE at the time thought it was just a regular bank, just like the others. Yes, its relation with government helped make it the strongest bank, so that if any bank became King it would be the BoE. But it’s role as monarch was nevertheless something that evolved. The government made it the strongest candidate to be the monarch, but the government did not create the monetary monarchy. Monarchy is the natural order of things; but the government has a role in determining who gets to be the monarch.
Nick Rowe: “When the Bank of Canada floated the exchange rate, the Bank of Canada was strong enough to declare independence from the Fed. People still accepted the Canadian dollar, and valued it.”
Moi: “What does strength have to do with it? Canada has never been a province of the United States. Are you claiming that people only accepted Canadian Dollars because they could redeem them for U. S. Dollar? C’mon.”
Nick Rowe: “No. I am claiming the exact opposite. Obviously. Because we still accept Canadian dollars, even after the Bank of Canada floated the exchange rate. C’mon.”
OK. So both before and after floating the exchange rate, Canadians accepting Canadian dollars had nothing to do with the Bank of Canada declaring independence from the Fed. (Which it was, anyway.) That really had nothing to do with the relative strength of the two banks, right?
Nick, I’d probably describe the early BoE as a quasi-state or state institution controlled by private interests, rather than a genuinely private or ‘regular’ bank. Sort of an oligarchic institution if you will.
Tom, JKH
If the single beta bank accepts alpha cheques for, say, OMO purchase, then the alpha bank will have some influence on beta’s balance sheet.
But, it is worth noting that this is qualitatively different from the normal situation because it s only operating on the average return on beta assets, rather than on the marginal return and the marginal cost of funds. To have an impact the alpha bank would have to force enough alpha deposits on the beta to represent a significant part of its asset base. In the real world, with competing betas, it can exert an influence through relatively small amounts.
So if the alpha forced enough low paying reserve deposits on to the beta bank, that would affect the beta bank’s profitability if the beta bank wanted to keep paying higher deposit rates. It’s less clear that it would have any impact on its lending rates.
But you have to remember that the beta bank would not be managing its balance sheet like a regular commercial bank, because as monopoly provider of publicly held money, it’s in a completely different position. Its paper profit is irrelevant; instead it is concerned with ensuring there is continuing demand for its deposits. As long as people accept its deposits it can buy anything it wants.
It can never be in a position of being unable to repay its debts. The only reason it might care about its balance sheet is if we imposed a condition that it would be wound up if its paper net worth went negative.
And of course all this is highly hypothetical.
Also, asymmetric redeemability should have nothing to do with the existence of currency. (Actually the issue here is not currency per se, which is just like bank deposit in bearer form, so much as central bank obligations held by non-banks.)
Ralph Musgrave: “For details about Bank of Scotland versus Royal Bank of Scotland skulduggery which I mentioned above, see 35.10 to 38.00 here:
“http://www.youtube.com/watch?v=Dd-UHqibj5c”
Thanks, Ralph. 🙂 Interesting talk.
White uses the example of the two Banks of Scotland to argue that banks would normally accept each other’s notes at par. He then notes that that did not happen in the U. S. during the free banking era. But the reason he gives is misleading. He says that was because branch banking was against the law. (Besides, that does not follow, as branch banking was not a factor in the examples of reciprocity that the did give.) Whatever the laws about branch banking may have been, a bank in Atlanta that was chartered in Georgia but was not chartered in Illinois, could not do business in Chicago. But notes of Atlanta banks did circulate in Chicago, at a significant discount, and vice versa. As I recall from a talk a few years ago, there were at least two reasons for that. One is that the notes from the out of state bank could have been counterfeit. Another is that the bank could have gone out of business and nobody knew it yet.
Min: the BoC’s strength had little or nothing to do with its fixed exchange rate with the Fed. But the Bank of Montreal’s strength depends a lot on its fixed exchange rate with the BoC (I think). The BoC could easily declare independence from the Fed. BMO cannot (I think) easily declare independence from the BoC.
Nick,
I like the following line of thought when thinking about these alfa-beta issues:
1. Inflation targeting banks have two goals, not one. The first goal is the inflation (or some other nominal) target, the second goal is low standard deviation of some nominal and/or real variables. You can achieve the first goal by targeting inflation expectations, but how do you achieve good outcomes with the your second goal?
2. Beta banks are powerless against alpha banks with respect to the first goal of monetary policy. But they can cause a big mess with the second goal.
3. Suppose the actions of beta banks cause very high expected deviations of inflation and/or output, as measured by market indicators. At which point do we say the alpha bank has failed, even though technically the expected mean inflation (or NGDP) is always on target?
“Gold used to be the alpha money, and gold miners the nearest thing to an alpha bank”
Sometimes I find it useful to consider a gold coin (or the collection of all gold coins) an alpha bank. However, gold coin is a very special extreme case of a bank. Gold coin is a zero risk alpha bank. If we analyze the balance sheet of gold coin alpha bank, we will see that it has no liabilities on the liability side of balance sheet, gold coin is 100% equity.
Nominal GDP targeting differs from gold in this respect. Suppose we have NGDP futures convertibility. In this case, NGDP futures are alpha money, and NGDP future is a real risky alpha bank. While gold coin is a 100% equity zero liability instrument, NGDP future is not. NGDP futures require collateral, and there is a tail risk of counterparty default. NGDP future has both equity and liabilities on its balance sheet.
Vaidas:
Beta banks can create shocks. If the alpha bank cannot perfectly anticipate those shocks, there will be a higher variance of inflation (or NGDP) around the target. True. But then beta banks are not the only things that can create shocks. But maybe they are more important than other sources of shocks.
Yep. Gold coins are like a central bank with 100% commodity reserves (e.g. CPI baskets reserves). And if a central bank needs to reduce the stock of its liabilities, to keep inflation or NGDP on target, and lacks sufficient assets, it may be unable to do so. So there is some risk. But I think this risk is normally very small in practice. The present value of monopoly profits from seigniorage is an implicit asset.
Nick:
“The present value of monopoly profits from seigniorage is an implicit asset.”
I made the same point here in the comments of this blog several times last year. The problem is a lack of studies measuring this asset. Another problem is who owns this asset. What is the optimal use of seigniorage revenue? Is it optimal to use it for general treasury purposes, or should we use future seigniorage to stabilize the economy today? There are no studies on this trade-off (I had a guest post on Scott Sumner’s blog on this topic last year). My impression is that in many cases future seigniorage is earmarked for general treasury purposes, I cannot explain the behaviour of Ben Bernanke in September-October 2008 otherwise.
“But I think this risk is normally very small in practice”
My point was not to say that gold standard has any advantages here. The risk that your gold coins will be stolen may be well be higher than financial tail risks of NGDP futures. My purpose was to draw attention to the existence of trade-offs. Do we make NGDP futures ultra-safe, with collateral requirements too strict for normal times, so that there are almost no NGDP futures outstanding during normal times, and there is an explosion of demand for NGDP futures during financial panic. Or are riskier NGDP futures better (even though they are riskier, the demand for them is less unstable)?
Nick, no doubt you’ve seen this?
http://equitablegrowth.org/2014/04/17/saw-monetarist-drinking-pina-colada-thursday-focus-april-17-2014/
Brad talks about you and Glasner and links to one of your old posts.
Nick Edmonds,
I was never thinking in terms of interest rates. That was JKH’s line of attack, and I still don’t even understand it. I also wasn’t terribly concerned with the commercial bank’s balance sheet directly, or as it affects the commercial bank’s interest rates. I was thinking solely in terms of the CB being able to force more commercial bank deposits into the hands of the non-bank private sector through OMOs. So, yes, I think your comment applies to me too… in that there’s no money multiplier to speak of here: the size of OMO operations would have to be large to affect the kind of changes I had in mind. Is that what you’re getting at?
Regarding these statements:
“Its paper profit is irrelevant; instead it is concerned with ensuring there is continuing demand for its deposits. As long as people accept its deposits it can buy anything it wants.”
“It can never be in a position of being unable to repay its debts. The only reason it might care about its balance sheet is if we imposed a condition that it would be wound up if its paper net worth went negative.”
I’m not sure I fully understand you there… but I’m thinking if I were the sole owner of the commercial bank, I would like to maximize my bank’s equity so I could drain it all out into my own deposit at the bank. So I’m not sure why you say it wouldn’t be concerned with profits or it’s balance sheet. Also, I might live in fear of accumulating negative equity, since that’s the end of my payday, but more importantly I think we might assume that the CB still has the power to put my bank in receivership, take my bank away from me (make my stock worthless), and re-capitalize it (i.e. sell it to new owners).
re: asymmetry, I’m still thinking asymmetry applies here too… the CB can still do what it likes w/o regard to profits or solvency, but I (as sole owner of the commercial bank) am concerned about making my own personal deposit as big as possible (i.e. having lots of growing bank equity to drain off into my own account) and I’m afraid of insolvency. Also, the CB can force changes in my balance sheet, but I can’t do likewise to it.
What am I missing?
Nick E.,
…. But you have to remember that the beta bank would not be managing its balance sheet like a regular commercial bank, because as monopoly provider of publicly held money, it’s in a completely different position….
You’re right.
I suppose that in the limit an unconstrained single beta could buy up all the financial assets in the economy and pay zero interest on deposits
It could ignore IOR as an alpha signal for interest rates
And beta could usurp the alpha role on interest rates
As a thought experiment, this is nuts of course, because it begs the question as to where ultimate alpha power comes from – and it seems to me its the government deciding on the architecture for the banking system
But I think you’re right on the potential monopoly effect
Nick E.,
So where do you come out on all this alpha, beta, asymmetry issue
What do you think of it top down as the explanation for CB power
Nick R.,
This paper by Woodford which you are no doubt familiar with tackles the issue of currency disappearance.
Click to access w8674.pdf
Makes eminent sense to me.
Not sure you’ll like it because its an interest rate view of monetary power.
Which begs the question about the difference between an asymmetric redeemability view versus an interest rate view.
Nick Rowe: “Monarchy is the natural order of things”
Nuff said. 😉
Tom,
Any bank can buy anything just by creating the deposits. The limit on their ability to do so is people’s willingness to accept those deposits in payment. When you have competing banks, one of the factors behind acceptability of a particular bank’s deposits is a belief in the ability of that bank to redeem the deposit by delivery of a claim on another bank, most importantly of a claim on the central bank, i.e. currency. This depends on the state of the bank’s balance sheet, which depends on profitability.
With the single commercial bank, we have taken away the ability of deposit holders to require redemption of their deposits, so the bank’s ability to deliver assets in redemption is irrelevant. It comes down to whether there is a sufficiently good market for the deposits that people are confident they can pass them on.
JKH,
I think the following are needed to give the central bank the influence it needs in a fiat system.
1. It must be able to issue liabilities which it is not required to redeem by delivery of assets, but which other banks may be required to deliver at par value in redemption of their own liabilities. This is the asymmetric redeemability point.
2. There must be sufficient demand for its liabilities. This can come from legal tender laws, formal reserve requirements, a monopoly on provision of bearer money or maybe something else.
Neither of these two requires that the central bank has any dealings with non-banks, i.e. that non-banks hold central bank claims. They could both operate purely through interbank dealings.
Nick,
What happens under your criteria if currency disappears.
Nick Edmonds, you write:
“Any bank can buy anything just by creating the deposits. The limit on their ability to do so is people’s willingness to accept those deposits in payment.”
Also a limit is staying solvent. If the bank bought a bunch of lottery tickets by crediting the deposit of the store that sold it to them, but all the tickets turned out to be losers thus driving the bank into negative equity, it may get shut down: it’s days of buying things by crediting deposits would be over.
Also I agree this is a big consideration:
“It comes down to whether there is a sufficiently good market for the deposits that people are confident they can pass them on.”
But if you are a shareholder in the single commercial bank, you also want that bank to acquire equity so it can then credit your deposit at the bank when it pays you your dividend. I agree that does you no good if nobody wants the deposits it credits you with. I’m assuming that the bank would be put in receivership by the CB if it gets to a negative equity standing.
Having taken a ridiculously long time to understand exactly which asymmetry was being referred to, I remain far from convinced that this is the way to look at things.
The potential disappearance of currency, something taken seriously by Woodford, is an indicator that something is awry in this view.
I think there’s a confusion between liquidity and capital in this framework. Asymmetric redemption is not at all the same as deposit insurance. The former is a liquidity issue. The latter is a capital issue.
Bank runs aren’t necessarily funded by deposit redemption for currency. They can be funded by people writing checks to other banks.
And currency redemption won’t protect a depositor whose bank has already been shut down. Only deposit insurance will do that.
At the end of the day, the central bank has power due to interest rate control, against the backdrop of a sound regulatory structure.
Asymmetric redemption is a liquidity management artifact that happens to convert bank deposits into currency, not a source of central bank power.