Legal Tender Laws Need Review Says Swedish Central Bank

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Cash is becoming a thing of the past in Sweden where some restaurants only accept card payments, a recent development that can have significant ramifications for the monetary system.

“The general public no longer having access to any form of central bank money can make it more difficult for the Riksbank to promote a safe and efficient payment system in Sweden, not just in times of crisis and war but also in peacetime,” the central bank, known as Riksbank, said.

As you may know, although everyone thinks 1 USD = 1 USD, there are in fact three forms of USD and only one of them is legal tender, that meaning it has to be accepted for payment of debts.

There’s obviously cash USD, and that’s the only legal tender available to the public. Then there’s the digital USD printed or created by the central bank.

Most of what we know as USD, however, is commercial bank money. This is your savings account, or your current account, or any dollars in the bank.

Such commercial bank dollars are not legal tender. They are promissory notes, IoUs, and technically someone does not have to – by the force of law – accept them for the payment of debt.

Practically they do because such bank dollars is what everyone knows as simply dollars because until recently the bank would give them cash.

In a world where there is no cash, complications can arise because there wouldn’t be that sort of base accountability which keeps the bank behaving in as far as their creation of money by lending is limited by the amount of cash that might be demanded by the people at any point.

If there is no such cash demand at all, then the entire concept of reserve money could potentially collapse because the level of trust would be so skewed in favor of commercial banks to the point where there’s potentially almost no anchor at all.

There would still be some, and that’s central bank dollars. Commercial banks transact with each other only on central bank money. That can keep a lid, but generally just four banks dominate in any country and they probably do have a direct line to Fed.

Without an external constrain, such as cash withdrawals, there could potentially be a complete merger between central banks and commercial banks, as opposed to an ostensible checks and balances between the two.

In such monetary system where commercial banks and the central bank are effectively one entity because the latter has been captured either semi-explicitly or has just been ignored as it has no accountability measures, then the only limitation for both would be gold reserves.

The current monetary system does still run on gold although to a far lesser extent than it used to. When central banks transact with each other, they do so only with gold through the Bank for International Settlement (BIS).

Central banks however rarely transact with each other except during times of war, but even in peace gold might move around between them.

The US constitution says only gold and silver can be legal tender. A creative stretching of that interpretation would argue cash complies because the central bank is – albeit in a very limited way – constrained by gold in their money printing.

If however there is no cash and if the public can not access central bank money, there is basically no legal tender except for the four dominant banks.

The press release by Riksbank doesn’t explain what exactly they want reviewed, except for a brief quote by Stefan Ingves, the central bank governor. He says:

“We believe that the concept of legal tender should become technically neutral so that it fulfills a function even in a digital future.”

That very brief statement is difficult to interpret because it can mean many things. It can mean he is suggesting commercial bank money should be legal tender. Or he is implying digital central bank money is not legal tender and should be legal tender.

The latter is more probable because the statement mentions cash was declared legal tender in 1850. The absence of a statement that digital central bank money was declared legal tender, thus, indicates that it isn’t.

That’s quite something if so is the case because others have said central bank digital money is legal tender. It would make sense however for it not to be so because these laws have not been looked at in 100 years or more since the last time there was a public debate on the matter of money.

If central bank digital money is not legal tender, then we basically have a monetary system which has no explicit approval of parliament. That suggests our elected, and thus the people, have completely lost control or say over our money.

The central bank now wants them to have a say, but it is difficult to see what they can say because whatever can be said about cash, the expression “it’s not worth the paper it is printed on” has a significant meaning.

There’s a cost to the production of cash, and although such cost is far lower than its value in most cases, the cost of production acts as a floor, conceptually in any event.

If instead money is merely some guy or gal entering a number on a database with there being effectively no cost of production at all, then there’s no anchor. And if this money which needs not have any constrain must also be accepted for payment of debts, then it is not too difficult to see why the system might not be able to function even in peace time.

Nor is it easy to see why this fiat money should be legal tender, while bitcoin or ethereum isn’t. The latter has a cost of production, has some restrains. The former has all the qualities to become completely detached from reality.

That’s obviously something no one wants, even commercial bankers. So such debate at parliament would be very much welcomed, but Riksbank has to publicly explain what role interest plays in money creation if there is to be a fruitful debate. Otherwise everyone is flying blind.

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