I Listen to Money Singing

On the siren call of programmable money

‘Quarterly, is it, money reproaches me: “Why do you let me lie here wastefully?”’

-Phillip Larkin

The modern State loves the idea of having control over the circulation of money. This is in keeping with its love for manipulating circulation in general - of people, goods, data, and so on. The reason for this is not complicated. As I have repeatedly emphasised here at News from Uncibal, it is all in Machiavelli. Modern government is characterised strongly by the rationality of the prince, wherein the very existence of rulership is justified on the basis that it ‘governs’. Government must always be made to seem necessary lest it lose its legitimacy; and it can only be necessary, obviously, because the population needs it. It is important then that government should see the nation’s wealth as its own to divide, manage and apportion as it sees fit, because this is one of the most significant ways in which it can justify the necessity of its own existence. Without the efforts of the prince to ensure the economy is stable, the argument always runs, society would face impoverishment and ruin.

To put it into Machiavelli’s own words:

It was…necessary for Moses to find the people of Israel slaves in Egypt and oppressed by the Egyptians, in order that they might be disposed to follow him to escape this servitude.

In a sense, the entire sociology of modern government can be understood in this single sentence. Pay attention to the words carefully. It is not that Moses simply found the people of Israel slaves and rescued them. It was necessary that he found them slaves, because that is what allowed him to present himself as their rescuer, and what disposed them to follow him. This is what we call raison d’Etat in a nutshell: it is necessary for the State to find the population weak, vulnerable, needy, because that is what makes them accept its legitimacy. And if they aren’t actually weak, vulnerable and needy, it follows, they need to be convinced that this is nevertheless the case.

So the State likes the idea very much that it should be able to stimulate the circulation of money in the economy - spending, in other words - as it desires. When a downturn threatens, turn on the spigots. When inflation is too high, dial it all down. The economy can’t be left to its own devices, and people can’t be trusted to spend or save money rationally on the basis of what they see happening in the economy around them. Instead, like the Israeli slaves of Egypt, they must be found to be economic dunces, so as to provide the justification for Moses pulling his policy levers in order to guide them through the recessionary Red Sea.

Central bankers have previously had to attempt this through fairly crude techniques - fiddling with interest rates, money printing, quantitative easing, and so on. Modern technology, however, now promises to realise the wonderful dream of perfect control over monetary velocity, and it does so through a concept with which we all probably need to become familiar: ‘programmable money’, which is to say, digital money which has an integrated mechanism that governs the conditions under which it can be spent.

The programmability of money has a vast allure for those who are imbued with the values of the prince. Take, for example, the beautiful vision of society dreamed up by Bossone and Faragallah, two specialists at the World Bank:

Programmability could be applied to digital cash for all kinds of purposes, including to pay a positive interest rate or charge a negative interest rate on cash; to set conditions for the transfer of money to specific types of users or types of goods and services; to automate the transfer of specific values, such as tax payments for each purchase from a merchant, or to ban certain users from access to cash in a way similar to blacklisting. It can facilitate pay-per-use, for example for automated payment of rented items. It could facilitate so-called Internet of Things payments, where ”smart” machines make buying orders and authorize payments when needed (e.g., a refrigerator could automatically order milk from a grocer when running low, or a printer tracking toner usage could buy it via Amazon once it reaches a certain level)….Programmable money could eventually allow for far-reaching scenarios where the government limits access to scarce resources, applying dynamic fees on the use of, say, electricity or tolled roads, based on their usage or carbon emission measurements, and attaching pay-per-use systems…

Sounds great, doesn’t it? Exactly what we are all crying out for. But there is too much packed into the above paragraph to deal with in a single Substack post, at least for the time being (you can read more about the wonders of programmable money, including its capacity to facilitate ‘whitelisting’, from Deutschebank here) so let me focus for now on the idea which I think excites Central Bankers the most, which is the notion of money which is programmed to expire and become worthless after a particular date or time period. They love this so much because it will allow the ‘incorporat[ion of[ monetary policies seamlessly into the currency itself’; it will create a form of currency which by design prevents people doing that most pesky and pernicious of activities - saving their money - and thus holds out the possibility of ‘rais[ing] aggregate demand permanently’, or at least in response to a crisis.

Bossone and Faragallah continue:

Expiring money would increase both the velocity of money and overall economic activity, similar to applying a negative rate to digital cash. In practice, a carrying fee on money would encourage people to spend it and thus prevent it from being hoarded…the money would keep its full value for a predetermined interval after issuance and would decline in value from then onwards…. [This would affect] spending decisions directly by generating a positive wealth effect. The wealth effect would be compounded by the certainty that the additional wealth would vanish if it were unspent before expiration.

Got that? You get your monthly wage packet of 5,000 digital pounds, but those pounds come with an expiry date. After a month, they become worthless. You have to spend them. Start now and stop hoarding!

Anyone with a brain can tell that there are going to be some difficulties associated with this, not the least of which is that no sane person would want to receive expiring money - it would achieve nothing except the triggering of the world’s biggest ever game of pass-the-parcel, with each participant wanting to ditch their digital pounds as soon as possible lest they be left holding a handful of gossamer when the music stops. There is a solution to this, though:

For this money to be acceptable, however, the expiration mechanism should be designed on a “resettable timer” basis, so that while the interval to expiration is fixed for each holder, the clock is set back to zero anytime money passes hands. This would give its new holders the full time interval before the new expiration date sets in. An automated alert system could advise holders of the approaching expiration dates.

But the much bigger problem is plainer than that - indeed, it is plainer than the nose on your face - and it is that our good friend, that ‘sane person’ who I have just mentioned, would quite naturally fear and loathe the very notion of expiring money. Indeed, any attempt to introduce such a currency (let alone mandate its use) would surely face implacable resistance. In what universe do there exist sentient beings who would welcome such a concept?

Policymakers and central bankers are keenly aware of this problem, of course. This is why they almost always (at least those of them who occupy official positions) tend, in a ‘read my lips’ sort of fashion, to be careful to insist they do not intend to themselves deploy programmable currency. The Bank of England, for example, says that programmability is ‘not currently relevant to the Bank and HM Treasury’s policy objectives’; Ulrich Bindseil, Director General of Market Infrastructure and Payments at the European Central Bank, meanwhile, has also insisted that central banks are generally ‘distanc[ing] themselves’ from using programmable currency. Why, then, worry about it?

There are three reasons. The first is easily stated: in 2019, if anybody had suggested ‘lockdown’ as a policy option for responding to the spread of a virus, or that one day in most Western democracies adults would be required to display their ‘vaccine status’ in order to work, go shopping, and so on, they would have been laughed out of town. And yet it all happened. Something changed forever in 2020; it was revealed that when push comes to shove, our governing classes are capable of doing really dramatic and foolish things, and persisting in doing so long after it has been conclusively shown just how stupid and mendacious those things are. Would you really put it past that same governing class to one day find a reason - perhaps a real or imagined economic crisis, say, when aggregate demand ‘needs’ to be boosted - to ‘temporarily’ mandate the universal use of a CBDC with programmable functions such as an expiry timeframe?

The second is also relatively easily understood. While central bankers do indeed tend to ‘distance’ themselves from programming digital currency, they don’t distance themselves from actors in the private sector doing so. ‘During our research’, the Bank of England says, ‘stakeholders highlighted the benefits of programmability for innovation and user experience’. So ‘the Bank would aim to support programmable functionality’. It’s just that the people making use of programmable functionality would be the intermediary firms who operate the digital wallets used to make payments with digital money (the PIPs, who I have written about before). The programmable infrastructure would in other words be there. It’s just that we would have to rely on the Bank of England’s wisdom and fortitude in restraining itself, like Marcus Aurelius, from availing itself of that selfsame infrastructure, rather than, like Diocletian, finding a reason to do so. I’m not sure I entirely like those odds.

The third reason is philosophical, and it takes us back to good old Machiavelli - and Moses. The logic of State reason, rasion d’Etat, remember, is that the State governs because it is necessary that it governs; the exercise of government is itself carried out recursively so as to give a reason why it needs to happen in the first place. In order to get the loyalty of the Israelites, it was necessary that they be found as slaves so that they could be rescued and led to freedom. Since this is the rationale at the heart of State government, the path on which we are on is clear. If central bank-issued programmable currency exists in theory, it will come into existence in practice - so long as it can be made to seem necessary in order to save us benighted fools from our enslavement to our own desperate incapacity to manage our own affairs. And, similarly, if it is imaginable that we will sooner or later be required to use such currency, then, following the same rationale, there is a strong likelihood it will happen. In my next post, I’d like to focus on a very interesting speech delivered in 2021 by Gertjan Vlieghe, former external member of the Bank of England’s Monetary Policy Committee, which brings these issues into sharper focus.

[I was greatly aided in preparing this post by some very interesting reading provided by Kevin Dowd. Thanks, Kevin.]