Will Cyprus end up with free banking and a parallel currency (for a while)?

by on April 10, 2013 at 9:34 am in Current Affairs, Economics | Permalink

From Willem Buiter:

The lack of internal convertibility of euro notes (through the limitations on cash withdrawals and on electronic payments) will, if they persist for more than a few weeks, likely lead to a search for alternative media of exchange for internal transactions. IOUs of large, respected enterprises could for example be countersigned and start to circulate more widely as media of exchange and means of payment. This was the case, for instance, during the 1970 bank strike in Ireland, uncleared cheques were made negotiable (like bills of exchange) and pubs and shops served as credit verifiers. These could later develop into more full-fledged parallel currencies, if internal euro liquidity in Cyprus remains very scarce.

1 Ray Lopez April 10, 2013 at 9:43 am

I’d like to know what George Selgin says

2 Phil April 10, 2013 at 9:57 am

I too want to know what the free bankers think about the situation in Cyprus. This situation reminds me of Friedman’s frozen monetary base proposal.

3 Peter D April 10, 2013 at 11:59 am

Sounds like an opportunity for a mobile app using PKI signatures. Let’s call it “iIOU”.

4 Hoover April 10, 2013 at 12:24 pm

The Irish bank strike was not a happy situation.

eg a pub owner who’d been accumulating cheques stuffed them up the chimney for want of anywhere safe to keep them. His wife lit the fire the next morning and it was all gone in a puff of smoke. Or so the craic goes…

More here: http://www.independent.ie/business/how-sixmonth-bank-strike-rocked-the-nation-26130249.html

5 George Selgin April 10, 2013 at 7:03 pm

The use of any claims, private or public, as exchange media–whether endorsed checks or commercial IOUs–presupposes the belief that they can ultimately be converted into the basic money in which they are denominated. That belief in turn depends upon the belief that the banks through which they are payable are payable are solvent, or (in the case of commercial promises) that the firms themselves have access to the necessary means of final payment. In this respect at least Cyprus isn’tlike Ireland in 1970, or like the U.S. during its pre-Fed “restrictions” of payment (when checks were “payable” at various clearinghouses, in the sense that they would still be cleared and settled, though not payable in cash at any bank). The problem in Cyprus is that the banks aren’t merely illiquid: they are broke, and no one now knows precisely how the piper is ultimately going to be paid.

Nor is the frozen base analogy sound: so far as I’m aware, the ECB is still capable of injecting Euros into the Cypriot banking system, and will probably do so one way or another notwithstanding the failure so far of attempts to abide by its (and the IMF’s)bailout conditions.

In short, don’t expect to see a free banking experiment in Cyprus anytime soon!

6 mulp April 10, 2013 at 9:18 pm

What is this alternate currency denominated in?

Other than Euros? Are the checks denominated in dollars? British pounds? Irish pounds?

If everything is in Euros, then it isn’t a new currency, just IOUs in Euros.

If you think it is a new currency, then I carry Visa and Discover currency transacted in the cloud, which means the US has multiple examples of “free banking”. Of course, in some cases I can pay taxes in “Discover” “currency”, but I can’t use bitcoin to pay taxes.

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