Mon 12th July 2021
With everything which has been going on in the world recently, from a terrifying heat dome emerging in North America to England making it to their first Euros final, it can be forgiven that speeches from key economic figures exploring the potential end of the monetary system as we currently know it flew under the radar.
Over the past couple of weeks, both former Bank of England governor Mark Carney and outgoing Bank of England chief economist Andy Haldane gave speeches in which they spoke more frankly than ever about the opportunity for transformational change offered by a central bank digital currency (CBDC).
Speaking at a Bank of International Settlements conference last Monday, in what might be his most radical speech yet, Mark Carney (now Boris Johnson’s finance advisor for COP26, among other things) astutely noted the flaws of commodity theories of money behind ideas like the gold standard and Bitcoin, and instead called for money to “be inclusive and promote solidarity.” In words that would have been unthinkable when he was governor of the Bank of England, it was welcome to see Carney say “Promoting solidarity means never going back to forms of money, like the gold standard, where the burden of adjustment falls most heavily on one class, labour.”
But what was even more interesting from Carney were his predictions that we will see a shift away from the banking system as the main provider of money in the economy. As the current bank-based payment system has significant costs hidden from the consumer, Carney foresees that payments will be made with cheaper and more efficient new forms of money, such as CBDCs, relegating commercial bank deposits to mainly being used as remunerated stores of value. Under a system where we are no longer forced to rely on them to make electronic payments, banks may well become redundant, or at least less powerful as they will be denied such easy access to funding. But as Carney points out, this isn’t something that should concern us too much: “Banks are a means to an end—not ends in themselves—and they will have to adapt to a much more competitive environment.” We only wish we could have heard Carney saying such things back when he was governor of the Bank of England!
There’s plenty to agree and disagree with in Carney’s speech. We obviously agree with a lot of the implications of his words – that the current banking system should not be seen as an end in itself, that money is a social technology that should be inclusive and promote solidarity, and that a public digital currency, with strong protections for privacy and data sovereignty, should be at the core of any new monetary system. However we may be more weary of other views of his, such as the idea that market-based finance could (and perhaps should) replace the role of bank credit creation in providing funds to the rest of the economy.
A couple of days later, in a lengthy but insightful and entertaining final speech in his role as BoE chief economist, Andy Haldane demonstrated why he will be missed as such an original and open-minded thinker at the top of the Bank. As well as making England football references and numerous central banking jokes, Haldane talked about the legendary (at least for some of us political economy nerds) Macmillan Committee, which explored UK finance’s failure to support the real economy after the 1929 crash. His proposal for a UK Development Bank, which would operate on a decentralised basis, to address those same issues which plague us to this day, is very much welcome, and hopefully something we will hear more of from him.
But again, perhaps most interesting was Haldane’s comments on CBDC. Haldane suggests that a CBDC could lead to something resembling what Positive Money has called a ‘Sovereign Money system’ (or as he calls it ‘narrow banking’), in which there is a separation between transaction accounts and investment accounts, and private banks are no longer freely able to create new credit money. Almost as if revealing himself as a secret Positive Money supporter, Haldane said:
“This radically different topology, while not costless, would reduce at source the fragilities in the banking model that have been causing financial crises for over 800 years. Given the costs of those crises – large and rising – this is a benefit that needs to be weighed.”
As both speeches make clear, the coming of a CBDC threatens the banking system as we know it. The question however remains whether we will simply replace banks with other private financial institutions, who may be even less accountable. Or whether we take this opportunity to build a monetary system which works for the wellbeing of people, communities and our planet.
Simon Youel is Head of Policy and Advocacy at Positive Money. You can find him on Twitter @youellog.