Greece – Ground Zero in the War on Cash?

We believe it was our friend Claudio Grass of Global Gold in Switzerland who first mentioned that the eurocracy may possibly have plans to use the Greek crisis as an opportunity to expand the ongoing war on cash. It stands to reason: Greece is well known for its extremely large “shadow economy” (the name for economic activity that flies under the radar of the greedy grasp of the State). Greece’s citizens not unreasonably regard the State as akin to a mafia organization which they are trying to avoid as much as possible (unless it promises them free goodies to buy their votes – they do of course gladly accept those).

We vividly recall an interview with a Greek shipping magnate about the constitutional provision that has relieved the country’s shipping industry from income tax. The interviewer asked (we are paraphrasing) whether the magnate thought it “fair” that this was so, and if he wasn’t troubled by his conscience in light of the Greek government debt crisis. The shipping magnate replied (again paraphrasing) along the lines of: “Just look at the government in Athens. They’re nothing but a bunch of crooks. Would you hand over your money voluntarily to Al Capone? Surely not. Well, neither do I.”

 

al caponeNot someone you want to hand your money to…

Photo credit: Bettmann / Corbis

 

A great many ordinary Greeks undoubtedly agree with the shipping magnate. They have a very cynical, but ultimately quite well-informed view of the political class and the State. The reason why the Greeks are way ahead of most other European citizens in this department is rooted in history. Greece had been under Ottoman occupation from the 15th century until 1821. The so-called millet system led to the Orthodox Christian Greek community remaining a fairly cohesive group. However, the Greeks certainly chafed under Ottoman rule.

The occupation caused two waves of migration. In the first, many fled to Western Europe, in the second many fled from the plains to settle in the mountains. Greeks who remained in the plains either had to put up with the disadvantages of the Ottoman apartheid system, or they became so-called “crypto-Christians” – people pretending to convert to Islam, while secretly remaining Christians. Needless to say, the Greeks deeply resented the Ottoman State and its bureaucracy, developing a healthy disrespect for the State in general in the process.

 

organized crimeThe view of the nature of government encapsulated in this timeless cartoon is widely accepted in Greece.

 

The Legal Fiction of the “Demand Deposit”

The eurocrats recently brought the Syriza government of Alexis Tsipras to heel by reminding Greece that its fractionally reserved banking system is in fact insolvent. This becomes glaringly evident as soon as the backstop provided by the central bank and its unlimited money printing powers is removed. That is all the ECB ultimately did – by refusing to increase the provision of ELA (emergency liquidity assistance) to Greek banks, the latter were no longer able to pay depositors who attempted to withdraw their own money. Nota bene, this money was contractually promised to be available to them “on demand”, this is to say, anytime they wanted it.

Demand deposits are of course little more than a fraudulent legal fiction in a fractionally reserved banking system. Banks are actually not warehousing the money given to them by depositors. The nature of the demand deposit contract is in fact quite different from what one would normally expect, based on common sense alone. The money paid in is simply not there, as it is immediately used for the bank’s own business purposes. In effect, the fractionally reserved system creates legal claims on the same amounts of money that are held by several persons at once.

 

Circularity

 

In no other industry would the courts accept such a legal absurdity without demur. Indeed, from antiquity to the early middle ages bankers would quickly lose their heads over such fraudulent business practices. This changed the moment the State got in on the scam, upon realizing that it could use it for its own purposes – primarily the financing of warfare (and later welfare as well), by means of theft by inflation.

The judicial system is just another arm of the State, in spite of its nominal independence. And this is how it came to be that judges all of a sudden had the epiphany that a demand deposit was really just a “loan to the bank”. These rulings remain a legal absurdity, but today’s system remains based on them. We have written extensively on the issue previously, inter alia discussing the history of fractional reserve banking (see: The Problem of Fractional Reserve Banking, part 1, part 2 and part 3 and Fractional Reserve Banking Revisited). C. Jay Engel over at the Reformed Libertarian has also penned several essays on the topic, one of which we want to highlight here: Fractional Reserve Banking and the Present System.

In this article, C. Jay Engel among other things discusses Hans-Hermann Hoppe’s contribution to a debate that raged for a while between defenders (Larry White and George Selgin) and opponents (H.-H. Hoppe, Joerg-Guido Huelsmann, Joseph Salerno, to name the most prominent ones) of the practice in Austrian circles. We want to repeat one of Hoppe’s arguments on the legal question here. His reasoning appears flawless to us:

 

“[Selgin and White (defenders of fractional reserve banking, ed.)] fail to recognize that a fractional reserve banking agreement implies no lesser an impossibility and fraud than that involved in the trade of flying elephants or squared circles. In fact, the impossibility involved in fractional reserve banking is even greater. For, whereas the impossibility of contracts regarding flying elephants, for instance, is merely a contingent and empirical one (it is not inconceivable that in another possible world, somewhere and sometime, flying elephants may actually exist, thus making such contracts possible), the impossibility of fractional reserve banking contracts is a necessary and categorical one.

That is, it is inconceivable—praxeologically impossible—that a bank and a customer can agree to make money substitutes (banknotes, demand deposit accounts) debts instead of warehouse receipts. They may say or certify otherwise, of course, just as one may say that triangles are squares. But what they say would be objectively false. As triangles would remain triangles and be different from squares, so money substitutes would still be money substitutes (titles to present money) and be distinct from debt claims (titles to not yet existing future goods) and equity claims (titles to existing property other than money). To say otherwise does not change reality but objectively misrepresents it.”

 

(emphasis added)

Amen. It follows from this that the legal doctrine that holds that a demand deposit is a “loan to the bank” is utterly absurd. If it is indeed a loan to the bank, then it is no longer a demand deposit. If it is indeed a demand deposit, then it cannot be a loan. By lending out a customer’s demand deposit, the bank essentially asserts that both the original owner of the deposit as well as the borrower receiving the loan (in whose demand deposit account the money now resides as well) have a legal claim on the same money and that the money substitutes held in their respective demand deposit accounts represent “money” and not (at least in part) debt claims of some sort. This is simply impossible.

Note here that we will of course continue to count such uncovered money substitutes as part of the “money supply in the broader sense” as Mises put it. Their legality may be highly questionable and bereft of logic, but the fact remains that individuals holding demand deposits regard these money substitutes as equivalent to cash and can in normal times (i.e., as long as there is no banking crisis revealing the reality of the situation) use them to effect final payment for goods and services in the economy. Hence one cannot exclude them from money supply aggregates in economic analysis.

 

TMS-2US money supply TMS-2: nearly $7 trillion of the total of approx. $11.2 trillion consist of uncovered money substitutes created by banks from thin air by lending out demand deposits – click to enlarge.

 

The Greek Situation

After the ECB – bound by its own statutes, as it repeatedly stressed – issued the reminder about the inherent insolvency of fractionally reserved banks to the inhabitants of Greece, the Greek government in time-honored fashion sent the country’s banks on an unexpected “holiday”. Thereafter it limited cash withdrawals and money transfers to EUR 60 per day by decree (later amended to “EUR 420 per week” – which is exactly the same amount, only depositors can now withdraw it once a week instead of having to visit the bank every single day). Had it not done that, Greece’s banks would have gone bankrupt “officially” and de iure instead of merely de facto, and would likely have closed their doors forever within a few days.

The unruly almost-revolution of the Syriza-led government ended right then and there. Readers may recall an article we wrote long before this happened, in which we ruminated about the possibility that Mr. Tsipras was merely a “Trojan horse” (see: Greece and the EU – Nothing but Political Theater?). We noted that there was a significant caveat – namely that Tsipras may indeed be contemplating a default and an exit from the euro; after all, we are not mind readers. However, we pointed out that his visits to assorted grand poobahs of the eurocracy (including the godfather of the banking cartel, Mario Draghi), long before the elections that brought him to power, were a subtle hint that some sort of sub rosa planning had already taken place – with the ultimate goal of keeping the status quo in place. It certainly seems we guessed right. It is also worth repeating the conclusion to said article:

 

“Greece’s citizens would do well to remember Cyprus. Before access to the banks was shut down, the government swore up and down that a depositor haircut was completely out of the question. The public is never told the truth before bank holidays, sudden currency reforms, imposition of capital controls and similar measures.”

 

We admit it wasn’t exactly difficult to make this particular prediction. As the throngs of desperate pensioners and depositors besetting Greek banks later showed, numerous Greeks failed to properly ponder the implications of the Cypriot example.

 

expensive hug-2Probably the most expensive hug of all time: JC Juncker and Alexis Tsipras

Photo credit: François Lenoir / Keystone

 

After bowing to the demands of creditors and then some, Mr. Tsipras was forced to call yet another snap election, as the far-left faction of Syriza no longer supported him. The weary Greek populace – those who could be bothered to vote again, anyway – confirmed his parliamentary majority. The biggest surprise was perhaps that the break-away faction led by Panagiothis Lafazanis – previously a kind of “gray eminence” in Syriza – sank without a trace. So now it is up to Tsipras to implement the demands of the “troika” (or “the institutions” or “the quadriga” or whatever it is called these days), while trying to wangle as many concessions from Greece’s lenders as he can.

As we have noted in previous missives, a great many of the demands of the creditors are not at all unreasonable. Everything in the list of demands that concerns economic liberalization has to be welcomed. With every productive Greek worker supporting more than six strangers (i.e., State dependents), Greece cannot emerge from its doom-loop unless it radically frees up the economy and shrinks the State. Mixed in with the reasonable demands are unfortunately a number of utterly idiotic ones (mainly consisting of tax increases) that are certain to make it even less likely that Greece will ever be able to repay some its debt. These are fairly typical of the EU’s approach to “austerity”, which generally consists of burdening the private sector ever more, while leaving the Moloch State untouched as far as possible.

 

live with lessThe EU approach to “austerity”

 

However, in spite of the fact that both the Greek State and the Greek banking system are extremely cash-strapped, there still seems to be money available for “special projects”. In order to receive the first tranche of the new bailout loan, the Greek government must deliver on 48 “milestones” – which will require the rapid adoption of new laws and decrees. In recent reports in the European press, one particular “milestone” stood out to us. Until October 15, the Greek government has to present a “plan for financing the promotion of electronic means of payment”. Say what?

Presumably those depositors who refused to be lulled in by the government’s promises and actually did get their money out of the banks before access was restricted now have a sizable amount of cash at their disposal that will allow the shadow economy to continue to flourish. On the other hand, the existing restrictions on cash withdrawals appear to be seen as an opportunity by the eurocrats to wean the Greek citizenry off cash use. There is already a ban on cash payments exceeding €1,500 in place since 2011. We are surprised no-one has challenged the legality of such restrictions yet. After all, the state-issued scrip is “legal tender”. How can anyone refuse payments made in it?

Anyway, it appears that Greece is indeed becoming one of the battlegrounds in the war on cash – based on the well-worn statist principle “never let a crisis go to waste”. Hence the Greek government is now ordered by the “institutions” to spend money on promoting the use of easily traceable electronic means of payment. We wouldn’t be surprised if this were followed by additional restrictions on cash use in the future – probably right after the Greek banks have been recapitalized and the current restrictions on depositors are lifted (after they have been “haircut”, alas). In fact, we firmly expect this to happen and hereby predict it will (another easy prediction to make). We also predict that Greece’s citizens will resist such impositions with all the cunning they have developed during centuries of foreign occupation and decades of rule by one of the most corrupt political castes in all of Europe.

 

government-goliath-cartoonThe Greek population isn’t likely to meekly submit to statist oppression

 

Conclusion

Greece offers us an interesting example. It will allow us to observe the spread of the tentacles of Europe-style statism as well as the measures the population will undoubtedly take to resist it. Since the Greeks are unlikely to meekly submit to statist oppression, this promises to be quite exciting. Who knows, we may eventually even get the opportunity to see what happens if a total cash ban is introduced. Given that Greece is brimming with British gold sovereigns (also for historical reasons – gold sovereigns were parachuted in to finance the resistance during WW2 – they remain the most popular gold coins in the country to this day), we can already guess how such a decree would be undermined by enterprising Greeks.

 

sovereignThe British gold sovereign – to this day the most popular gold coin in Greece. It has the distinct advantage of being a relatively small coin that could be useful in day-to-day transactions.

 

Chart by: St. Louis Federal Rteserve Research

 

 
 

 
 

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10 Responses to “Legal Fictions and new Battlegrounds in the War on Cash”

  • VB:

    A total cash ban is presently impossible. The war on cash is real but it is nowhere near “victory”. There are many people who don’t even have a bank account. The removal of cash from circulation will be long and steady. Caps on cash payments will have to go down, several times. Bank accounts will have to be made mandatory for everyone. The whole infrastructure will have to be expanded significantly (and just the costs for it are currently outside the abilities of the Greek economy).

    As for the Greeks using gold sovereigns instead of cash, that’s a pipe dream. Try buying groceries or any other relatively cheap item with a gold coin. You still need cash for the change.

    No, more likely the Greeks will ignore the cash caps (like they are ignoring the taxes, the paying of which is also supposed to be mandatory) or will use the cash of the neighboring countries, like Bulgaria, as they did during the latest bank holiday.

    It is much more likely to see a “cashless society” implemented elsewhere first – my bet is on the Nordic countries, for instance Denmark or Finland, where there are already bank branches that don’t handle any cash and people are accustomed with paying with their mobile phones.

  • rodney:

    we can already guess how such a decree would be undermined by enterprising Greeks …

    The elites are not so stupid, it goes without saying that a total cash ban would go along with gold confiscation or some other scheme to restrict the use of gold. If you are going totalitarian you don’t just leave the escape hatches open …

    I do agree, though, with the idea that a total cash ban would lead to creative innovation by the public to find substitute forms of money, i.e. they may restrict or ban gold and silver, but something else will end up being used.

    • Crysangle:

      Poverty always seems to work quite well as currency in a welfare state , everyone gets to play SIM economy all day and chat about how flawless it would all be if only …

  • PackerFan:

    So clear and concise. Maybe the only issue is replace “Greece” with United States of America, or any other country…your choice…this is not complicated peeps…

  • wmbean:

    As I understand the arguments, if I save a portion of my wage or other income and keep it in my mattress or other “safe” place, I am accumulating “savings”. Then after having accumulated a sufficient amount of savings I offer to lend the bank that sum for a specific time period for a specific return, then I have created capital. You are correct in thinking that if a demand deposit is merely a warehousing of money why should a bank wish to store and why shouldn’t the bank charge you for that service. But the law allows the bank to make you an accidental capital investor. This is done because the assumption is that you, as a depositor of savings and not capital, will not want your savings returned all at once.

    A Savings and Loan institution is of a different stripe. One is told by the management that a portion of one’s savings cannot be withdrawn without closing the account and incurring a penalty on interest accrued. Or at least that’s the way it was at one time. Credit unions still operate that way. I would believe that the confusion of fractional lending comes not from the actual physical cash but from credit creation. Credit is not actual money but its properties are similar. It spends almost the same as cash and unlike cash, can be created out of thin air. This is easy to do once we convert cash into the ones and zeros stored in computer systems. Physical money is a finite source, electronic money is an infinite source. Thus I would posit that fractional banking/lending is about credit creation and money creation per se.

    • RedQueenRace:

      “Then after having accumulated a sufficient amount of savings I offer to lend the bank that sum for a specific time period for a specific return, then I have created capital.”

      As I understand it, not quite. “Financial capital” is used interchangeably with savings and causes confusion as savings are what allow the accumulation of economic capital, but they are not economic capital themselves.

      Pater has previously presented an island example a couple of times in the past whereby one survives by obtaining coconuts or some other item. It is realized that the fashioning of a tool would allow the collection of more coconuts in the same amount of time (or less time to be spent collecting them). But to do so one must stop collecting coconuts to make the tool. So, enough coconuts must be put aside to sustain oneself while the tool is being created. The coconuts put aside are savings. The tool created is capital. Though the savings are a prerequisite for obtaining capital the two are distinct entities.

  • JohnnyZ:

    Haha, it is even worse – they use a $100 deposit to lend $1000 (or even more – depending on the reserve requirement) and they keep the $100 as a liquidity buffer. The $1000 are created out of thin air (as you see this fraud privilege is not limited only to the central bank). That is why it is called “fractional reserve lending” – they keep a fraction as a reserve.

    “Are you saying they should just charge a fee to handle the money, and that’s all they should be doing?” -> Yes. Or if they lend it, it must be with the “depositor’s” agreement on which terms, maturity, leverage etc.

  • prattner:

    This question may seem a little dense, but if a bank could not lend out deposits, why would it want them at all? It gets all the risk of holding someone else’s money, and no way to make money from holding it. Are you saying they should just charge a fee to handle the money, and that’s all they should be doing?

    • zerobs:

      That is exactly how checking accounts (demand deposits) worked until the 1980’s. I don’t remember any interest-bearing checking accounts offered before then. They still pretty much work that way, most checking accounts have fees (which are often waived if an average daily balance exceeds a certain amount).

      Other passbook and certificate of deposit accounts that bear interest do have some time limit/penalties/fees for early withdrawal. These are the typical deposit account founds that are typically the basis of the money lent to borrowers.

    • RedQueenRace:

      “Are you saying they should just charge a fee to handle the money, and that’s all they should be doing?”

      I can’t speak for all Pater believes but, imo, yes. This is for demand deposits only. Term deposits are a loan to the bank and the bank can loan them out, though they will need to take some care in matching deposit and loan durations. Those wouldn’t necessarily have to match exactly as significant bank capital could provide some flexibility, but avoiding bankruptcy, which becomes a much more real concern, would dictate a considerably more circumspect loan approach.

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