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Cash is King?

Ottoman engraving above the main gate to Istanbul’s Grand Bazaar reads Al Kasibu Habibullah (God loves those who earn).  

The Bank of England is printing notes in the millions featuring the new King to go into circulation next year. This raises an interesting question: is cash still king?

The phrase comes from the importance of cashflow in running any business.  If you do not have sufficient cash to pay debts as they fall due, then you will not have much of a business left to speak of.

In the age of contactless payments and online banking, physical cash usage might have declined.  However, in the world of banking rapid withdrawals of cash can lead even big banks to collapse. We witnessed a glimpse of this earlier this year.  The collapse of tech lender, Silicon Valley Bank in the US, and the once mighty Credit Suisse in Switzerland, had one thing in common: loss of confidence in their ability to pay up cash when due.

The problem with modern banking is that it is based entirely on confidence or trust.  Trust in your bank to return your cash when you ask for it. That works perfectly well so long as everyone does not ask for their cash at the same time.  And that’s because the cash you keep at your bank isn’t just sitting pretty in some vault.  The bank makes money on your cash by lending it out multiple times over.  Banks are both a community service and a business: they provide a safe place to put your money, but also a place where you can make more money.  It is these two roles performed concurrently that causes the tension (or conflict) and is the root cause of every financial crisis.  Banks cannot be both very stable and very profitable. The greater the risk, the greater the profit. The greater the risk, the greater the losses. The greater the losses, the greater the loss of trust.  A lack of trust in one bank spreads quickly to others as they are all connected, lending to each other. 

Mobile banking has made this risk of contagion worse. Whereas in the last global financial crisis of 2008, a bank run could take days, maybe weeks: you had to queue patiently outside the likes of Northern Rock to withdraw your cash.  Now it takes just a few clicks through internet banking.  $42bn was withdrawn from Silicon Valley Bank in a matter of hours - a quarter of their total assets[1].

No government is going to allow depositors (voters) to lose their deposits (cash).  And banks know this. This is known as moral hazard: banks enjoy the gains from their risk-taking, and governments (tax-payers) pick up their losses.  Banks are in theory capitalist enterprises, but in practice are state guaranteed.

There is nothing wrong with capitalism per se as Benedikt Koehler’s brilliant book on ‘Early Islam and the birth of capitalism’ points out.  The Ottoman engraving above the main gate to Istanbul’s Grand Bazaar reads Al Kasibu Habibullah (God loves those who earn).  

So is there a better way of banking?  Splitting the deposit-taking and the more riskier investment side might be a good place to start.  Banks should be properly ringfenced so cannot gamble your cash away in the casino of high finance.  But the profit motive is too strong, and regulation too weak to change things any time soon. 

So cash isn’t about to be dethroned.  It remains king and will likely outlive even our new monarch. So enjoy those new notes with the King’s head, wherever you decide to keep them.

Asim Siddiqui