Convenience at the Cost of Individual Freedom
Most of you have probably noticed that the use of cash has been diminishing for the last ten years as technology evolves and more people use contactless cards, Apple Pay, online banking and other kinds of rapidly evolving technology. Covid-19 and the government-imposed lockdowns of 2020 and 2021 were also used as an excuse to increase our dependency on digital and electronic payments. The Bank of England and the HM treasury have recently published a consultation paper on creating a digital pound and will have it up and running by the end of the decade. So today we will look at the difference between cash and other kinds of payments and how it could affect your freedom of action.
As of now there are basically two kinds of currency; The first is the deposits held at privately-owned commercial banks. This money is created by the private sector banks whenever you take out a loan and your account is credited by the bank. Believe it or not, this money is conjured up out of thin air and written down on the bank’s ledger as a credit onto your account. Sometimes you might want to withdraw these funds from your bank account and the banks will debit your account and hand you public Central Bank or Bank of England notes. These notes and coins are what we call cash and everything else is card payments. So why should we be concerned, in my opinion, about the disappearance of notes and coins and the possible extinction of these forms of payment?
We need to go back in time and perform the Austrian School of Economics and Ludwig von Mises regression theorem analysis of money. Before money, people were subsistent farmers or hunter gatherers and bartered value for value. The commodities and items they directly exchanged were their private property and did not belong to anybody else. Eventually as societies advanced and trade grew, merchants found that some commodities were desired by almost everybody so these commodities could act as sort of money and allowed for indirect exchange. Usually these marketable commodities have been precious metals like silver and gold as they were portable, relatively scarce, durable and a good store of value.
So how come we have gotten away from real cash or gold and silver coins? I would say that money has been gradually hijacked by Central Banks and governments and it has been a slow but steady process. The original function of the state was to mint the coins or cash in order to ensure that they were of a certain weight of gold and silver. The state mints usually received what was called a seignorage or a small percentage of the gold and silver minted into coins. U.S. law for example, Under the Coinage Act of 1792, should provide the public with a minting service. Back before FDR banned gold in 1933 you could take gold and silver jewellery or bullion to your local mint and have coins minted for a small fee. Here in the U.K. the monetary system began to be hijacked back in 1694 with the creation of the Bank of England. Over the centuries the Bank and HM Treasury have worked together to finance major wars and slowly move the country away from cash or gold and silver coinage.
The cash that we still use today are actually bank notes and these are promissory notes. The goldsmiths of the City of London issued them as receipts for safeguarding clients gold. Eventually these receipts became accepted as money or cash and they were bearer instruments which meant that anyone holding them could redeem them for gold coinage. Silver coinage usually circulated as the value of silver was lower than that of gold. The goldsmiths eventually started issuing more notes than the gold that they held as they realised a small percentage of their depositors hardly ever redeemed the notes. The goldsmiths were the original bankers and bank runs occurred when depositors lost trust and demand their money or gold back. A bank would fail if it could not pay all its depositors.
So back to the digital pound. The Bank and HM treasury’s argument is that as people opt for card and other kinds of payments, bank notes will not be necessary – but the Bank needs to issue some kind of digital coin that has the credibility of a Central Bank. The authorities are aware of the privacy and anonymity questions so in the working paper it has been stated that the Bank and government will only provide the coin and will not know the identity of the owner. That sound very good until you read on to find out that the provision of the digital wallets will be outsourced to private companies or banks that will need to carry out all the KYC (Know Your Client) and AML (Anti Money Laundering) vetting of the holders of the digital pound or CBDC (Central Bank Digital Currency). If this plan succeeds it is possible the privacy and anonymity that our forefathers had in using cash and even bank notes will be lost forever and what is more your “money” will not be really 100% yours as it will be at the mercy of the digital wallet provider.