A 'National Conversation about the Future of Money'

They talk; we listen

‘Let me issue and control a nation’s money and I care not who writes the laws.’

-Mayer Rothschild

If you asked the man or woman on the street whether they think we should have a ‘national conversation about the future of money’, they would probably say something like: ‘Yes, we need to talk about how we can have more of it.’

The Bank of England, however, has a different discussion in mind. It seems to be growing ever fonder of the idea that we should have this ‘national conversation’. But what it wants to talk about is not increasing wealth; it is ‘the future of payments’ (code for introducing a Central Bank Digital Currency or CBDC, the ‘digital pound’). The Bank of England, you see, lives on a rather different country to the rest of us - one in which the pressing economic problems we face are not to do with inflation, interest rates, quantitative easing, or overleveraging, but to do with how we pay for things. In the version of Britain which it inhabits, we have the national bandwidth to devote major resources to the designing of a ‘future payments ecosystem’ so that the UK can ‘remain at the forefront of payments technology’, and we also need to do this as a matter of urgency.

This is the conclusion of a recent paper published by the Bank, along with HM Treasury, responding to some 50,000 communications it received after putting out a consultation document on the ‘digital pound’ in February last year. The words ‘national conversation’ appear in it 13 times. We are left in no doubt that this ‘conversation’ is taking place. And the ‘conversation’ mostly seems to be happening with regard to two themes. The first is how we can ‘help deliver the next generation of world-class retail payments’ (to repeat: this is code for introducing a digital pound). And the second is risk: the word ‘risk’ appears 37 times in the document, and refers typically to the ‘risk’ that money will cease to be uniform if unregulated digital currencies take off - although, paradoxically, ‘risks to competition’ also seems to be a topic of great import within this ‘national conversation’ that we are apparently all having.

More on risk in a moment. Let’s deal first with the ‘need’ for this much-vaunted national conversation in respect of ‘world-class retail payments’.

Indulge me for a moment while I tell you a little story. I used to work in an office in which we all had printers next to our desks. We liked this; our jobs involved doing an awful lot of reading, and reading off a screen is ineffective, headache-inducing, and vision-destroying. At a certain point, though, we were all of a sudden told by The Powers That Be that we were going to have to have a ‘conversation’ about printing in the building, because it was jolly expensive and bad for the environment. Sure enough, a few months later, an Excel spreadsheet was circulated by email, in which we could write down our opinions about the matter. Around 95% of us said something to the effect of: we like things the way they are; it helps us do our jobs properly. A few weeks after that, however - to absolutely nobody’s surprise - we were informed that, sure enough, we were shortly going to switch to a system of centralised printing whereby we would lose all of our personal printers, and a few large ones would be installed at various locations in the building. And this would be good for us because the new printers would be whizzo and fab and have all kinds of wonderful bells and whistles. Oh, and it would be good for the environment. Oh, and cheaper.

I often think about this incident when I hear people in positions of authority and decision-making power using words like ‘conversation’ and ‘consultation’. It raises the interesting question as to which is more insulting: to not be consulted about a matter that affects you at all, or to be consulted in such a way that it is made plainly evident your views do not matter. I’ll leave that question to the philosophers. The important point is that whatever is the outcome of this ‘national conversation’ we’re having, it’s going to mean the digital pound will be introduced. Why are they even pretending?

The illustrative thing about the office printer story, though, is that in the end, although the decision was dressed up as being something that would be good for us, the employees (‘You’ll be able to print in A3! You’ll be able to make colour posters!’, etc.), and good for ‘the planet’, the real reason it was being made was purely to do with the bottom line. It would be cheaper to run, and therefore good for the employer. And, of course, exactly the same kind of a trick is being played by the Bank of England with respect to the digital pound. It is going to be introduced not because the public are clamouring for a ‘world-class retail payments’ system and insisting that the country ‘remain at the forefront of payments technology’; they aren’t. (Ironically the only times I can remember experiencing a problem making a retail payment in the past 5 years and felt the system not to be ‘world-class’ have been to do with outlets refusing to accept cash.) It is going to be done because it suits the Bank’s needs - not to mention those of the Treasury - and that is really that.

This takes us to what the whole thing is really all about: the second theme which I mentioned, which is this business about risk. The Bank is very worried about risk, you see. But you have to be prepared to read between the lines on this. There are the risks which it says it is worried about. And then there are the risks it is really concerned with. These are not the same.

Let’s begin with the risks which the Bank talks about. These fall into two categories, as I mentioned earlier. The first is the risk to the ‘“uniformity” or “singleness” of money’; the second is the risk to ‘competition in payments’.

The risk to uniformity first, then. The worry here is simply stated: people are using cryptocurrencies more and more. And there is some likelihood that big tech firms like Facebook, Google, Amazon, etc. (not to mention smaller operators, like gaming platforms), will at some point issue successful digital currencies for use in online marketplaces, and that these will be usable only behind so-called ‘walled gardens’. The result might be that the way in which we pay for things could become fragmented. At the moment, it is more or less the case that all payments in the economy take place in pounds sterling (whether in the form of commercial bank money or cash). But the Bank of England envisages a world in which this can no longer be said to be true.

In the Bank’s view of things, this would be bad (‘risky’) because it would somehow be destabilising. It would threaten the status of the pound as an ‘anchor’ and undermine trust. I don’t believe for a moment that this is anything to do with the ‘walled gardens’ issue; the idea that firms issuing digital currencies would want to make it difficult to convert them into pounds, or each other, is extremely unlikely for the simple reason that consumers would hate it. The real issue is crypto. And the plan here is stated pretty openly:

[T]he Bank and HM Treasury consider that a digital pound is likely to be needed in the future to safeguard the UK economy against risks to uniformity…as a complement to regulation.

Blink and you might miss it, but it’s there, as plain as day: the use of private digital currencies is going to be regulated to within an inch of its life, and the digital pound is the alternative we will be pushed towards. And this is simply because the Bank and HM Treasury hate cryptocurrencies and want to squish them, for reasons that one doesn’t have to be Friedrich Hayek to understand. The thinking has nothing whatsoever to do with the benefits of a digital pound, in other words. It is all about protecting against the downside of increased adoption of private currencies, which threatens ‘stability’ simply because it will make life more difficult for the Bank and the Treasury. There is not much more to it than that.

The second category of risk which the Bank is worried about is, as we have seen, the ‘risk to competition’. Here, the reasoning is even more tendentious - indeed, self-contradictory. The worry, at face value, is that privately issued digital money might, due to network effects and economies of scale, lead to ‘the payments landscape being dominated by a small number of firms’. And this would be bad because it would be anti-competitive and harm consumer choice. So there needs to be a digital pound so as to keep options open.

Why competition and consumer choice are good within this context but bad within the context of ‘uniformity’ of money is not discussed. It doesn’t really seem like a circle that can be squared, and the two sets of arguments sit in odd juxtaposition, the former appearing literally in the next paragraph to the latter in the text (on p. 16). I suppose if somebody representing the Bank or the Treasury were here, they would say something like: ‘competition is good in terms of payment technology, but bad in terms of currency, because the latter is inherently more destabilising’. In other words, having network effects and economies of scale is great when it’s a matter of something that is quintessentially within the remit of the Bank, because that builds trust and stability, but those same phenomena are anti-competitive when they relate to things being done by firms. Does this distinction make sense? Best not think about it too hard.

In any event, the Bank’s own documentation here paints it into a corner. On the one hand, it is keen to trumpet the introduction of the digital pound’s potential to stimulate innovation in the form of smart contracts, atomic swaps, and so on. But on the other, innovation in the form of private currencies and cryptocurrencies is portrayed relentless as a risk to stability - despite being perfectly compatible (as indeed is humble commercial bank money) with any of the use cases which the Bank itself offers as examples of future innovation. This suggest that this risk is in fact not all it is cracked up to be. But it also draws our attention to the risk which is really at the forefront of the Bank’s mind, but which is largely unspoken: that it will lose its monopoly power over monetary policy levers in the UK.

This is the real problem that it has to grapple with. And, it is important to emphasise, it is not really a problem for us, the users of money, but rather the Bank itself and its status in the UK’s framework of governance. This will take us back to a familiar theme at this substack, of course: political reason, of which the Bank’s consultation response provides a classic example. A governing framework must always and everywhere justify its ongoing existence to the governed, because without such a justification, it will lose whatever legitimacy it has. In the Bank of England’s case, this means giving us the willies about the terrible consequences that will follow if it is no longer in charge of the money supply. But at the root of this is the risk to its own status (and, needless to say, that of the people who work there) that would follow from a more fragmented monetary landscape in which the pound is just one of many options as a medium of exchange - not whatever risks might be associated with the population having the choice to use private currencies.

The grim irony here, of course, is that while the Bank likes to present itself as the guarantor of a risk-free monetary environment, the reality is that we, the people, have much to fear from it. You can all do the basic maths: if inflation is running at 10% for a year, that means that the value of our assets has declined by a tenth (all else being equal) in 12 months. Our recent bout of inflation almost got that high, and has still not abated. A big share of the blame for that has to be taken by the Bank of England - acting in cahoots with the Treasury - who for much of 2021-22 were insisting that inflation would be ‘transitory’ and that the best thing for ordinary people to do was to not ask for pay rises. To be told by the selfsame Bank of England that it would be a dreadful ‘risk’ if its grip over monetary policy was loosened is, in light of all this, more than a little galling. One might indeed be forgiven for asking where the real risk, when it comes to monetary matters, lies.

And one might also be forgiven for speculating about other sources of potential risk associated with the introduction of the digital pound. Of these there are four (though you may be able to think of others):

1 - The risk to civil liberties associated with the public being nudged, cajoled or coerced into using a digital currency which is not anonymous, and access to which is controlled by intermediaries (PIPs) which are regulated by delegated legislation issued by government ministers.

2 - The risk of cyberattack, which could cause a collapse in the monetary system if the digital pound were widely adopted.

3 - The risk of system/software problems, made much more acute by the fact that the digital pound would essentially in itself constitute a ‘single point of failure’ for the monetary system if widely adopted.

4 - The risk of sheer mismanagement or incompetence somewhere resulting in a design flaw or operating failure.

These risks in themselves, to my eye, clearly outweigh any risk associated with failing to issue a digital currency at the policy level. In many respects this is a story as old as the hills, of course: too much centralisation of power is always a bad idea, in the same way that one should not carry all of one’s eggs around in one basket. We have never been in the position in which we now find ourselves, where centralised control over all transactions taking place in the economy is so tantalisingly within reach of central banks; the risk of all of our eggs being smashed is therefore growing practically by the day. If a genuine ‘national conversation’ was taking place (and if one of the major political parties were to take up the cause of scepticism) we could perhaps express our reservations about this; as it stands, intolerably, the best we can hope for is that common sense will at some point prevail.

At the personal level, though, there are a few things we can do. The presence of the risks I mentioned clearly reinforces the case for what Nassim Taleb calls ‘convexity’, meaning availing oneself of options which have little downside but a big potential upside. In this case, having some amount of physical cash (as well as physical assets such as land, gold, etc.) somewhere on hand is a no-brainer, because if and when a digital pound is introduced, and if and when there is a catastrophic failure, you will not only then be yourself robust to the consequences; you will also be able to clean up in the aftermath (assuming the result is not complete financial, and societal, collapse, in which case we’re all screwed anyway). This is an important idea to bear in mind for when the ‘national conversation’ comes to an end and we are finally told what is going to happen to ‘the future of money’: sometimes the old-fashioned way of doing things has much to recommend it.