Banknotes - bonds of the people

Swiping and wiping. The two activities that most of us began accelerating when worry over the COVID-19 pandemic began. Swiping at the cash register with our debit and credit cards, then wiping ourselves with the endless rolls of toilet paper that we purchased.

But sales receipts and TP weren't the only kinds of paper we began hoarding. We also began hoarding banknotes.

Yes, demand for banknotes has increased during the pandemic. Hard to believe given the strong desire of retailers to keep them at bay (rather than 'at pay'). The LCBO even has a pre-recorded voice on their intercom kindly requesting that you pay any other way but 'that way' (and they're careful with the wording so as not to upset these people).

The jury is still out on the details of what is going on. But one likely contributor is the behaviour of a panicked population seeking flight to safety. Typically we hear of demand for gold rising in such a scenario, but what of a population where gold is not readily accessible? And in a country where gold does not have a historically strong grasp on the culture and its reaction to fear?

Well, the next best thing to gold is banknotes, at least in a country where the population trusts its government. Perhaps future research will reveal that populations which most actively trusted and followed their governments' advice on COVID-19 restrictions, were also the ones which more readily sought flight to safety by hoarding pieces of paper.

Back in the day though, banknotes were in fact redeemable for gold. So we felt comfortable holding them if only because of the inflation anchor that such a peg provides. Now that banknotes are at the top of the pyramid, and inflation seems a distant memory, our perceptions have maybe changed. Today we might think of our bank accounts as being redeemable for bank notes.

And while this modernized redemption deal may not provide as much assurance in managing inflation (which we now manage in other ways), we at least have comfort in knowing that a commercial bank liability can be converted into a central bank liability, which we can then store under our mattress.

Alas, banknotes will never actually be gold in the sense that they have no intrinsic value. So perhaps we should think of them as bonds. (Or a mix that we might call a Gold Bond, which could additionally provide relief from all that wiping).

Banknotes are bonds of the people

In a flight to safety scenario, I mentioned earlier that regular people can't readily or easily access gold. Well, they can't readily or easily access Government bonds or treasury bills either. Not without going through a commercial bank, paying fees, and potentially having to participate in some kind of mutual fund. Sovereign debt is inaccessible to regular people, now more than ever in Canada following the cancellation of the Canada Savings Bonds program a few years ago.

Banknotes. Bonds of the people. What amounts to a perpetual sovereign bond that is issued via syndication (i.e. the banks), pays no interest, and is redeemable for anything in this country - a bottle of wine (albeit reluctantly), a ski pass, a deposit liability of a federally regulated deposit taking institution.

So perhaps the newspaper headline should really be "central bank balance sheet grows as citizens seek flight to safety in sovereign(ish) debt".

And that balance sheet will continue to grow if the population wants it to - by redeeming their bank accounts for bank notes.

In the end, 2020 might be remembered not only for the pandemic, but also the year we panicked and ended up flush with (and flushing) lots of paper. And with banknotes back on the monetary throne, if only temporarily, to soften the blow.