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Argentina’s Central Bank: An Entity That Doesn’t Accept It’s Own Money?

April 7, 2017 9:33 pm A+ / A-

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 Argentina’s Central Bank refuses to take cash. This may seem odd since it is not reasonable that a currency issuer does not accept the currency it issues itself. However, monetary authorities argue that they have nowhere to stock them, which ends up becoming a public imposition on part of the banking system. This problem can be explained because a) Argentines use banks relatively little b) In recent years, given our previous government refusal to issue larger denomination bills and high inflation, large amounts of banknotes were produced to maintain the nominal stock necessary for the economy to be able to operate normally and c) Towards the end of year, expecting an increase in spending due to the holidays, there is a tendency to keep larger amounts of cash so the central bank is able to issue money without consequences regarding prices or exchange rates. However when, during the first trimester, the cash is spent  the demand for money is lower.

   The problem is that all this cash ends up in banks in such quantities that often they lack room of their own to keep it, forcing them to rent space to keep it at great expense.

Furthermore, not all banks face this. Only those who are net cash receivers do. Net cash givers, on the other hand, can avoid this problem. As a solution, the central bank incentivized a market in which institutions trade cash among them.

 Hence, cash-receiving banks can sell excess cash to those that need it to pay, for example, pensions. The problem is that this does not lower the excess in stock of cash since once payment is received it ends up once again in a bank because this was not accompanied by an increase in the demand for currency.

 Recently, required reserved have been lowered, which has been interpreted by some as a compensation to banks for the public charge that had been forced upon them when they were ordered not to receive cash. If the idea is to allow them to loan this freed funds and obtain profits that will compensate for the cost of stocking cash this was not an efficient measure. It has had no benefit for the financial system, when only some banks had to face a public charge.

Others believe its purpose is to increase available credit so the banks can lend money and cash leave their deposits. However, this fails to recognize that demand for money does not imply wanting to retain the money. Loans are taken to spend the money, not keep it. Hence, the loan will end up as a mere transfer between bank accounts or, if the transaction is carried out in cash, after being spent it will eventually return to the system though the recipients’ accounts.

   Some propose destroying a significant amount of bills, which could turn to be counterproductive. Only currency that is too old to be useful should be eliminated. The seasonality we explained above should be taken into account: people will continue to spend more cash towards the end of year and, to a lesser extent, during winter vacations. Hence, the bills that were destroyed will have to be printed again.

 Fomenting the use of electronic money does not solve the short-term problems. It can even deepen them because demand for cash would become even lower, however, over time, the use of electronic money could to moderate seasonality that is currently strong precisely because the financial system is used very little.

   A possible solution to seasonal excesses of cash in banks is to allow the banks to use this cash as part of their reserves. The monetary result would be similar to what was achieved with the lowering of requirements, but it would benefit only entities that are forced to treasure a huge amount of cash. However, some believe it is difficult to control this integration. Essentially, since it is not reasonable for a monetary authority to disavow the currency it had issued, it is recommendable that it starts receiving it once again and takes care of hiring the deposits to keep it, avoiding arbitrary impositions to any banks.

 

*Por Aldo Abram

Argentina’s Central Bank: An Entity That Doesn’t Accept It’s Own Money? Reviewed by on .  Argentina's Central Bank refuses to take cash. This may seem odd since it is not reasonable that a currency issuer does not accept the currency it issues itsel  Argentina's Central Bank refuses to take cash. This may seem odd since it is not reasonable that a currency issuer does not accept the currency it issues itsel Rating: 0

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