Positive Money has made an appeal asking that people support the idea of a Bank of England central bank digital currency (CBDC) in the UK. In particular, they have asked that people make submissions to the Bank of England on this issue. A number of people have asked me for comment, and I have decided it appropriate to do so. The Bank of England survey is here.
I regret that as has been so often the case Positive Money get most of their logic on this issue hopelessly wrong. Quite staggeringly they are using this proposal to demand the end to the right of private banks to create money, and as I note below the Bank of England will not want to take on that role, so what Positive Money are proposing is that we crash the economy by denying it access to any new money. As ever, Positive Money remains committed to some perverted sort of gold standard that would drive the UK into deep recession. All that reveals they simply have no idea how money works. I regret having to say it, but you would think by now that they would have learned what money is and what the needs for it within an economy might be, but apparently not.
So, let me state the obvious to start this response. That is to say that we already have a digital currency in the UK. Your bank account is already part of a wholly digital currency system. So, there is no obvious need for a CBDC unless it does something better than your existing bank account or existing money can do.
Then let me as clear as it is possible to be: no one, anywhere, has yet found any evidence that a so called digital currency of any form can do that.
The truth is that for an individual to switch their banking to a CBDC account with the Bank of England may well make them very much worse off. There are a number of reasons, and broadly I'll move from the specific to the more general in the argument that follows.
First, I rather strongly suspect the Bank of England will not consider granting personal overdrafts as part of a CDBC service. In that case anyone who needs one had better look elsewhere. A CDBC is not for them.
Second, given that many transactions are digitally recorded on credit cards and not debit cards and I cannot see the Bank of England issuing credit cards I cannot see their CBDCs as a way of digitising most transactions. For those requiring credit card facilities you will still need to look elsewhere. So a CDBC may well not be for you.
Third, anyone with chaotic financial affairs - which is the reason why many on low incomes remain unbanked through no fault of their own - is not going to find their chaotic scenario aided by a sympathetic Bank of England manager. So the claim that CBDCs might improve access to banking is just wrong.
Fourth, banks lend. That is their business. But, I cannot see the Bank of England doing that to individuals any more than they might offer overdrafts. So they would not be providing what might be called a banking service. You'd still need banks for that. So CDBCs are not alternative banking, at all.
Instead, and fifth, what the Bank of England might do is simply offer what will in effect be savings accounts, whether they be current accounts for day-to-day transactions where the accounts stay in credit as far as the customer is concerned, or term deposit savings accounts. So CBDCs will provide a small part of the banking service people need. Which makes them pretty irrelevant then.
Sixth, this creates a real conceptual problem because rather bizarrely when anyone saves with the Bank of England they currently increase what is called the national debt. Central bank reserve accounts held by the UK's clearing banks at the Bank of England are supposedly part of the national debt even though they are simply bank deposit accounts. So too are National Savings accounts part of the national debt. So, running CBDCs would apparently require that this paranoia be overcome. No one is suggesting how that might be done. Nor is anyone discussing what the Bank of England might do with the funds deposited with it. That is the most massive going flaw in their whole paper - and in Positive Money's response to it.
Seventh, despite lip service to the issue neither Positive Money or the Bank of England (based on some of their comments on their website in this proposal) seem to be aware that savings are not what creates the UK money supply. The UK's money supply is created by lending. Savings are then created by that lending. But the savings are never lent on: they represent money stored inactively in the economy. Seeking to focus banking reform in the inactivity that saving represents would appear to be the most unhelpful way of addressing the issue.
I could go on, but by now I hope you will appreciate that I have major reservations about what is being proposed.
That said, I have many reasons for thinking banking reform is necessary, and that some aspects of CBDCs might have a role in that.
I have argued for a long time, and right through the 2008/09 banking crisis, that the bank payments platform should be taken out of the control of creating banks and be brought under state control. This is because the creaking architecture of private banking cannot be permitted to hold the country to ransom during banking crises, requiring that banks be bailed out to maintain the infrastructure for bank payments.
What is instead required is a banking system where the accounts and payments structure is all under state control but banks provide a credit creation service based on that infrastructure in which private capital takes the risk of default without their being macroeconomic risk to the state, or risk to bank depositors because the accounts of a failed bank can be readily transferred to another operator if a bank fails. Call this the Railtrack model of banning if you like, with the infrastructure being state owned and with licensed banks working on it.
This is the risk the Bank of England should be concentrating on, but which it is not.
Positive Money, with its residual enthusiasm for gold standards and non-fiat currencies and banking, seems to not even see the issue.
A CBDC could be the inter-bank currency in my model - replacing central bank reserve accounts - but that is about it.
This whole issue of digital currencies is a problem seeking a reason for existing. The sooner digital currencies are simply seen as the Ponzi schemes that they are the better. And that is what the Bank of England should be saying if it is a responsible banking regulator that understands the issues it is addressing, which this consultation implies it does not.
But, in summary, please do not support Positive Money on this issue: they are, as is usual, completely wrong when it comes to money.
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Sensible prognosis from a ‘Mile End Economist’ – those who reperesent the interest and advocate for the well being of man or woman on Mile End Road omnibus.
Richard,
For your third point did you mean to have a “not” inserted when you wrote:
“Third, anyone with chaotic financial affairs – …… – is going to find their chaotic scenario aided by a sympathetic Bank of England manager.”
Corrected
Trying to go too fast this morning….
Thanks for that Richard – from general commentary I hadn’t picked up that the BoE wanted to replace commercial bank customer accounts, I thought it was just going to be an enhancement to cash, a bit like your “fifth” and that this might be a useful route for any “personal QE” or whatever it might end up being called, where the Gov can target support rather than using the markets and the myth of trickle down?
I’m confused by your “seventh” in that both the BoE and Pos money commentaries expressly state that new money is created by lending, do you think they then contradict this?
Finally, yes to the State Control of money creation but, again Pos Money also seem to be in favour: “Private bank credit creation could be replaced with forms of public money creation”? The trouble with so much of this stuff is that for lay people like me, we are given various versions of the same thing (nowhere is this more true than under the banner of MMT) without anyone drawing up comparisons between them.
I had, for example, always liked the Green Party’s ideas around state money creation through a National Monetary Authority but that now adds yet another State Money alternative to be read and compared, and I have a garden that needs weeding!
The the seventh – Positive Money explicitly have never excepted this idea and still don’t whilst the BoE in some places in the commentary calls the money supply the stock of savings – revealing confusion on their part
The Green Party idea came from Positive to Money and us how to crack the economy – it denies the nature of money and would mean credit rations or gluts – both likely to be as harmful as the other
On this issue Positive Money should be called Positively Harmful
I’m going to guess that loupe service should probably read as lip service. Moving “form the specific to the Bernie” however, yet eludes me 🙂
That was general…..typing too fast…..
Thanks for the link. I have submitted a response to the BoE. CBDC is a sexy new solution in search of a problem. Better to use the Post Office to provide basic bank services to the unbanked if that is the issue you want to address. Full digital access to all transactions is wide open to abuse by the State and security services, e.g. blackmail or discrediting of opponents. Even just switching off financial access entirely would be possible, e.g. for somebody the Home Office decides to deport. We should encourage smaller more local banks, credit unions, building societies and the like. Not sure what they mean by encouraging competition from ‘alternative financial providers’ but if they mean pushing folk into the arms of the shadow banking sector, that would hardly be an improvement. CBDC by providing an easy access alternative to banks could increase instability by allowing a bank at risk to be almost instantly denuded of deposits. The payments infrastructure should be nationalised entirely and provided as an at cost basic utility.
Agreed Tim
Oh, what japes? What sagacity?
So, a myth that we are short of money is created so they try to create a new type of it to make up for it (or allow those pushing the agenda to influence the situation – never let a good crisis go to waste eh?).
But the most worrying thing to me is that these crypto currencies get sucked into a world that is very opaque and easy to commit daylight robbery.
That is the goal, no doubt
Your objections make sense… if your assumptions about the proposals are correct. As yet, I don’t understand what is proposed. It seems to be an effort to look ‘up to date ‘ and little more.
There are big issues surrounding the payment system. It’s based on 1980s technology and is creaky. No one wants to build a new one as it is too expensive and, above all, too risky. But it does need to be done and it must be led by the BoE with all banks contributing. I think that new system should open up the possibility of more organisations (banks but possibly others) having BoE accounts not just the incumbent clearers. I suppose you could call this CBDC but really it’s just modernisation of the Clearing and payment system.
I agree with all that
A you say we already have a digital currency, cannot see what advantages there are for society in diluting confidence in this.
If the crypto miners had been required to produce £37 billion of Bitcoin to cover test and trace or the other exigencies of the pandemic then what? Surely Covid has demonstrated once and for all that a socially constructed currency capable of rapid expansion and contraction is existentially necessary.
Paying homage to the Bitcoiners via emulation is dangerous, silly and superficial. Yes we need to understand the downside of the creation of money by banks and it’s use for speculative and socially damaging purposes but not by making the system even more opaque.
For me the main problem is that private banks are producing the national money as interest-bearing debt. Positive Money, if I recall correctly, started out with the standard money reform proposal, that only the government should produce our money, debt-free. Since then PM has dliuted its message and this distracts from the main issue. I’d like to see them simplify their efforts and raise awareness by asking people something like “why is the government letting private banks produce our national money? Why are we in debt to private banks that create this money with almost no effort?” That might start to wake people up.
Do you understand what money is?
And do you really want to crash the economy?
If you can answer those two questions and reconcile them with PM’s position you would work a miracle
They don’t understand money
They do want to crash the economy
No money reformer wants to crash the economy, Richard, you’re misreading the intent. Plus you’re not addressing my comment on private production of the national money. Any thoughts on that?
Tell me how else you want to produce fiat currency used in private sector lending?
And tell me how you think that would work?
Forgive my getting involved here Marc but I think the issue is that there is no national bank in the UK to distribute Government fiat money.
So the Government and the Bank of England rely on the private banking system to distribute it’s currency and even issue it.
It’s what the Government can do after the money is created that I think really counts such as the tax system, arrangements for bank failures and the base interest rates to name a few (I think that the way these are set up now is a very blunt instrument and lacks finesse – we should in my view tax and apply interest to money based on how socially useful the outcomes of the expenditure are for example).
Positive Money’s response to me is a reaction to a mirage – something that is not actually there.
What they propose is rather damaging when in fact they need to think more broadly and imaginatively.
Also remember that if the private banks are a problem (and yes, they cause trouble, no doubt about it with some of their activities), then who is supposed to be keeping them under control?
Answer: Back to Government and its regulatory frameworks. Or lack of them.
🙂
I’d like to see the debt aspect of money creation removed. The relationship between borrower and lender in private banking is extraordinarily unequal and while it may be legal it’s still fraudulent. It’s underpinned by the borrower’s belief that they are borrowing someone else’s hard-earned money and so the borrower feels a strong moral obligation to pay it back. I don’t think society would tolerate this situation if we understood it. Instead, the government could spend our money into circulation by funding the programs and services that should be a normal part of a genuine democracy, issuing the funds straight out of the Treasury. No debt. Of course private money creation would have to be stopped.
I realise I’m being idealistic but the debt scam is just so galling.
So if debt is not what gives value to money, what does?
And yes, I know tax does – but to be clear, that’s because it is debt
What gives fiat currency value is the uses to which it is put when it’s created. Create for someone a few grand to build a porch on their property, and they do, results in there being more money in the system (to eventually be taxed out) and the value of the currency is maintained. Create for someone a few grand to build a porch on their house, and they don’t, instead they go down the pub with it and get royally hammered, then the currency is devalued and society suffers accordingly so such behaviour should be criminalised. We could start by criminalising those who’d create money to gift to their cronies under the guise of building a functioning testing system for Covid, I believe £37bn was conjured from nowhere for allegedly this purpose. One wonders where it now resides.
I am really not sure your logic works Bill
All spending is someone else’s income in the macro economy
I was first informed about the role of banks in money creation by Ben Dyson, founder of Positive Money, speaking at the Occupy site at St Paul’s in 2011. I subsequently attended meetings from time to time. I never got the impression Positive Money thought savings created the money supply but I haven’t followed what they’re saying closely for some time now. I always found their proposals for reform of the monetary system odd and, as you say, reminiscent of “gold standard” thinking.
I think PM deserves credit though for publicising the facts about bank lending as the source of most money in circulation. Without their campaigning it may never have been possible for the Bank of England to publish its seminal 2014 paper on money creation, which told at least some of the story.
I note Ben Dyson went on to work at the BoE , leading research on digital currencies, cryptoassets and stable coins, and now works at the BIS Innovation hub on cross border payments.
Thanks
I wonder how much Ben Dyson has to do with this paper
It has his confusion written on it
Marc
All I would say is that I appreciate your concern about the issue which does you credit (no pun intended!) and its great to see people asking questions.
All I would advise though from my own steep learning experience about these issues is not to focus on one issue or aspect. Money – as well as being ‘money’ if you see what I mean, is part of a system of delivery and exchange and value and outcomes. If you alter one part of it, it will have a knock on effect somewhere else. Some of the things you are concerned about do that already.
Those seeking to change things must aware of that because they have to be. Those running the system as it is ignore the knock on consequences as it is, with bad results for too many people.
See money as a system Marc. It’s a bit like the nervous system to be honest.
If you change one part of that system, you have to deal with the knock on effects too. Believe me, you just can’t act on one part of it without expecting consequences.
Well said
Hi Richard, fyi, there is no “reply” option in your replies to my posts. I click reply elsewhere.
Yes tax gives fiat money its power and sure we can think of it as debt if you like, but that is still besides the fact that private money creation is issuing our national currency as interest-bearing debt; and thereby putting unsuspecting borrowers into debt peonage to private actors who have essentially done nothing. If our money was spent into the economy debt-free by the gov on our behalf and in the public interest and in whatever amount was deemed necessary to benefit the people, and then was taxed back at whatever rate to ensure a well-functioning egalitarian economy, surely that is preferable and democratic. After all, we’re only talking about digits in a database so I don’t see any technical difficulty. The difficulty is entirely political.
Btw, great article in the Mirror. Kudos.
Thanks re The Mirror
But you miss the point: all money is debt, even government created money. We owe tax for it.
You are confusing two issues, money and debt
I think there is a clear distinction between tax debt which is owed to our own government i.e. ourselves, and private debt to banks that have done nothing and thereby hold us in a state of perpetual debt peonage. It is the interest-bearing debt attachment to private fiat money that is my main point and that I’m hoping we can discuss.
As I’ve said, the debt attached to private fiat is a scam underpinned by a fraudulent perception that banks are financial intermediaries. It is an imposition on society by the powerful and upheld by our undemocratic governments. In an ideal world, private production of our national currency would be abolished.
The government is not us
That’s my point
That’s why there is no taxpayers’ money
It is government money
Is there any room for a stimulus CDBC? When the country is in recession, rather than devalue fiat we give CDBC stimulus checks to everyone. Essentially helicopter money. The issue of returning the money back to the government would be resolved through a holding fee or what is commonly known as a negative interest rate.
Of course it is tricky to put to practice. We would need to update the existing payment infrastructure to support a CDBC for what amounts to be a one time event and incentivizing companies by letting them pay their taxes with the CDBC would inevitably lead to companies prepaying their taxes rather than letting the money circulate.
No way
And no, we don’t need helicopter money – which makes no economic sense at all
Nonetheless, debt is not a prerequisite for the issuance of fiat money. The gov could and should issue all of the national money debt-free and in the public interest. Ideally. This is the goal of money reform and there is no technical reason not to do it. The fact that it lets private banks issue our national money as interest-bearing debt is a scam that needs to be illuminated. The fact that debt is money or money is debt is still the result of an arbitrary imposition on our lives that need not be.
I disagree
This would be economically disastrous because artificial constraints on activity would exist akin to the gold standard or vastly too much money would be created
If you want to crash the economy this would be a way to do it
“we already have a digital currency in the UK.”
Well said.
The BoE should know better. Its pure FOMO (Fear Of Missing Out) on their part – ‘Lets follow the crypto fad with our own offering, so that we look like we’re up with the latest in Fintech’.
Sadly this shows the BoE has self-doubt about the ‘digital currency’ it ALREADY has only serves to reveal how little they understand crypto…if they did, they would realise how utterly useless it is as a currency.
So you’re ok with private banks issuing our national money out of thin air as interest-bearing debt? I can’t imagine that you would be because it doesn’t square with what I’ve read of yours and which I really like. Anywho, I still see the ideal system of fiat money as being produced debt-free by our government and taxed back as necessary to maintain equality, democracy, and sanity. I am sooo sick of the debt scam.
I do think we need private banks creating money
It is, for example, the way of privatising the losses on credit decisions. How would you do that?
Agreed by me – you would crash the economy if you did not inject cash into the economy acknowledging the reality of how it works as it is now.
To issue cash like that is like playing with explosives or inflammable gas.
The clue is to see the economy as a bucket constantly filling with water. But the water has to have the opportunity to run away otherwise the bucket overfills, it is no longer acting like a container. This filling and emptying is how money in the economy should work – and in the economy tax is one the outlets that stops it spilling out everywhere, maybe the interest rates too (issuing money at cost can inhibit spending which might be beneficial in stopping inflation).
The mistake I feel Marc is making is that he is over-focussed on the debt issuance part but is not thinking that through although I agree broadly with his basic sentiment as we know that private debt did mushroom for sometime as Government spending retracted during austerity. But debt can be dealt with by a whole load of other policy decisions – better wages for example.
Better wages to pay debt would still be debt peonage. We shouldn’t have to deal with debt at all. I often wonder, how much evidence do we need? What words are adequate to describe the effects of private debtmongering on people and the planet? The empirical evidence is in. It’s a horrific shitshow. Elite power resides in the private banking system. That’s how they’ve become the elite. And so we get their despotic austerity while they shake their heads at our bottomless gullibility. Fiat debt-money cannot be justified.
Marc
I think we have heard you
We are not going to have an economy without debt and we are going to have fiat money so I think you’ve had your run on this theme now
Richard
Robert Hockett (Cornell) gives a cogent argument that CBDC is the logical end point of the development of currency.
THE DEMOCRATIC DIGITAL DOLLAR
https://www.hblr.org/wp-content/uploads/sites/18/2020/02/The-Democratic-Digital-Dollar_HBLR_FINAL.pdf
Admittedly he doesn’t seem to address RM’s good points re the various services provided by commercial banks- such as overdraft and credit card facilities. Nor various edge cases where the public good and private need overlap / conflict.
JC
Dogma over reality is the problem with all views of CDBC I have seen so far – when all central banks already have a CDBC of varying effectiveness, I admit