The financial system is undergoing continuous reorganization. Governments, central banks, and international organizations are taking various steps to deal with financial instability and to stimulate their economies. Sometime these steps are contradictory, and sometimes they are inconsistent, but they give a general idea about the direction in which the financial system evolves. Can we, at this point, determine the trend and see what architecture is beginning to emerge? There is no doubt that we can.

The following conclusions can already be made with regard to the national debt, the banking system, and government budget deficit and monetary demand-stimulating steps:

Government bonds are likely to become perpetual and nonredeemable. Their ability to be exchanged for central banks’ money will become an integral part of the system, rather than a one-time program. The national debt pyramid is likely to disappear, giving way to a money stock pyramid. It should be noted that the change will be more legal in nature since, economy-wise, things have already happened.

At the same time, the government will become a money-issuing monopoly. Commercial banks that are currently entitled to issue money are likely to lose the privilege. 

The banking system of the future will evolve into a full-reserve system. With regard to clients’ funds all bank clients’ accounts will be 100 percent secured with money issued by the government, which, on one hand, will render bank insolvency impossible and, on the other, will strip money deposits of any profitability.

The financial intermediation functionality is likely to be ousted from the banking business. While financial organizations attracting clients’ funds for further investment will undoubtedly survive, maybe even retaining the word “bank” in their names, their operation principles will be different since they will no longer be able to create new money independently and will have to deal only with clients’ funds management. Any income-generating deposits in financial institutions will lose their status as money and will not be covered by the government insurance system. They will become risk investments. Such deposits may turn out to be profitable or loss-making, depending on the success of the projects they are used to fund. This is the way the economy works—there are no benefits without risks, and the financial system will simply come to the point that will give this rule an appropriate legal form.

Governments are likely to start imposing a direct tax on cash to stimulate demand and replenish their budgets, while decreasing income tax to stimulate economic activity. This tax will consist of a percentage charged on amounts owned by a physical person or a corporation, thus differing from the income tax charged on the amounts earned. Currently, the tax is already being charged but latently, through the seigniorage, the monetary policy according to which any money, while still held in full by its owners, loses its purchasing power to inflation, which is greater than the interest rates. Bearing in mind that growth of money stock has already reached its critical level while the economic and fiscal role of this tax is very significant, proper balance of government finance may be achieved through transition to direct money taxation.

Today, with the existing nominal negative interest rates, advanced financial instruments, and electronic money, this idea appears to be neither exotic nor exigent. It simply reconciles the financial system with reality.

As you have probably noted, when describing one anticipated system development or another, we stated that these developments, in fact, already exist, and the only problem is that their legal form and public awareness do not correspond to their economic essence. The cause of the financial crisis lies in this inconsistency between the real economic processes and the social (legal, cultural) norms governing them.

Uncovering these inconsistencies will enable us to make confident forecasts of the future evolution of the financial system, because the new financial architecture will represent inevitable formalization of the economic reality that already exists.