In the latest instalment of the How to be a MoneyMagpie podcast, our founder Jasmine Birtles spoke with guests to discuss Central Bank Digital Currencies (CBDCs) and why we should be worried. Joined by John Butler, an economic historian and author of The Gold Standard and Gordon Kerr from Cobden Partners.
You can listen to the whole podcast and read the summary below!
Hello and welcome to the MoneyMagpie podcast. If you’re watching this podcast, don’t forget to share and like the video if you’re listening to it. Just tell everyone you know how fabulous it is because you know it is. I’m Jasmine Birtles, and I’m the founder of MoneyMagpie.com.
And today we’re looking at a subject that I think needs a lot more attention from everyone quite urgently. Frankly. It’s CBDCs or central bank digital currencies. Our government has already announced that it’s creating one; “Britcoin”, as they like to call it. China already has something like it, other countries are champing at the bit to create their own CBDCs. It’s literally a new currency, a new form of money entirely digital and using a lot of the elements of cryptocurrencies, but unlike cryptocurrencies which are decentralised?
In other words, there’s no central authority ratifying values and transfer and transactions. This would be totally centralised, it all go through the central bank or basically government so that they know exactly what you’re owning, when you’re owning it, where you’re owning it, and where you’re spending it and telling you where to spending it, spend it and how to spend it and all of that complete control. Basically, you’re happy about that? Does it make you just a teensiest bit worried maybe? Well, it should do I consider? I think it’s a very worrying possibility. And so I’ve brought in a couple of experts to talk about this.
Firstly, I have John Butler, who’s a former banker and an economic historian and the author of The Gold Standard. And also Gordon Kerr, who’s director of Cobden Partners and a capital markets and currency hedging specialist. Thank you very much for being here, both of you. Thank you, John, let’s start with you. Let’s go through in a bit more detail. What is a CBDC? Can you explain?
Well, money itself is a technology, right? It’s a it’s a way to conduct transactions with third parties using a medium of exchange, and allows you to avoid direct barter. And money throughout the ages has taken many forms, usually some commodity money, such as gold or silver, more recently, national fiat currencies, which in our lifetimes had been, of course, printed on paper, but have increasingly been represented by electronic media, such as cards, or nowadays, you can have a virtual card as they call it on your phone, so on and so forth. But physical cash has still very much been a part of our lives.
The idea of moving to an entirely digital currency, which is popular now, as you’ve pointed out, is a new step in this technology, which completely eliminates the need for any paper form of money whatsoever, any physical form of money whatsoever. So you’re talking about a currency, which is run 100% simply as bits of an algorithm, which creates that money distributes that money. And then of course, the transactions that take place in that money all become purely electronic with zero physical representation.
Gordon, do you have anything to add to that? Because I mean, does the lack of physical money matter? Is that an actual problem, do you think?
It’s a very serious issue for any form of society, as we know it to continue, it’s essential that we retain access to cash. And this proposal to create central bank digital currencies is obviously designed to remove access to cash. We should put this very briefly in its recent historical context, I refer to the evil trilogy emerging over the last 2025 years. First of all, we have the the emergence of a very, very weak banking system.
The reason the banking system collapsed in 2007-09 very simply put, was that banks constantly have to grow otherwise their share prices fall dramatically, people lose jobs, there was not enough legitimate business to find. So banks put on increasingly weak business and eventually the bubble bursts. But the failure to recognise the to the seriousness of that has led to these insane government bailouts, which of course in four or five European countries have actually been had such a bad consequence as to lead the sovereign itself to fail.
Then in parallel with this, we have the emergence of what I call crypto babble. Obviously bitcoin is the most famous kind of crypto currency this is this is pure financial junk, you know, that we’ve had, we’ve had scams going on ever since the Industrial Revolution. Crypto is the latest one of these. And the next thing that emerges from that is of course, governments and central banks constantly thinking how can How can we continue to kick the can down the road and preserve the friction of a normalised banking system? Well, the only way to do it, of course, is to abolish cash. Otherwise, the signs of banking weakness are going to become very visible as opposed to being hidden.
Now we’re moving into a sharp inflationary environment. And individuals, when they realise that it’s the banking system would remove their cash from the banks causing the banking system visibly to collapse. So that that’s the third limb of this trilogy, is to remove cash and replace it with some kind of digital money.
John, if we remove cash, and, you know, basically remove physical money, does that then mean that the bank/government can can just do anything to you know, print as much as they like? I mean, let’s face it, they’ve been printing a whole load and we have physical money that that didn’t stop them, did it?
No, it didn’t. And yet physical cash does, in a way, allow the individual household saver to at least try temporarily, to escape the potential risk of a bank of the financial system generally, by withdrawing physical notes holding them outside the banking system. And indeed, if there is some sort of collapse, if there is a default, if there is a bail in say, you can basically ride that one out, or sit, you know, sit that one out, as best you can.
Now, that said, the monetary authority when it comes to paper currency, can dilute you buy printing evermore of it. So if there is a run on the banks, they just print more and more money. And those individuals and households who withdrew physical notes and coins, the value, the purchasing power of their physical money gets diluted over time, perhaps in a higher in a hyperinflation, it would get diluted very, very quickly. And so that is not a true safe haven.
Yet, it does give you a little bit of flexibility to lose that little bit of flexibility that remains in the system, to try and avoid the potential risk of the financial system is just one more nail in the coffin of money being a fair level playing field for savers for borrowers, big, small, public and private. It really does remove one of the last if relatively limited, safe safety nets that the saver would have access to. Were they concerned about the health of the financial system?
John, you’ve written a book on The Gold Standard. And so you know, I’m looking at what’s happening in Russia, for example, the ruble looks extremely strong, backed by gold and now commodities as well. I’m guessing that your preference if we’re going to move from from the current system, and it does look like it’s coming to the point where it’s pretty much broken, your preference would be that we go to something that’s gold backed, rather than fully digital. Am I right in that?
Yes, that’s correct. And if you take a look at history, there are very good reasons why commodity money in particular gold and silver emerged as the dominant medium of exchange throughout recorded history. And in particular, and this is something we forget, in particular, during those periods, when economic progress was substantially above average, is no coincidence that the Medici led renaissance in Florence was of course, based on a gold backed monetary system. In fact, it wasn’t even gold back it really was gold itself.
And if you take a look at the industrial revolution, in Great Britain, Northern Europe and a few other places around the world, all of those lead great leaps forward in economic progress occurred on gold backed monetary systems. Why does gold make such good money? Because it’s a high quality source of information. You can’t just create it out of thin air. You can’t therefore, easily dilute the existing supply to fatten your own coffers at the expense of prudent savers.
Gold, look, the world is an imperfect place and I won’t for one minute claim there is such a thing as a perfect monetary system, right? Human beings are imperfect, but we can we can try our hardest gold is the closest thing we have ever come to in terms of a clear transparent, fair level playing field for monetary and and ultimately credit affairs to the extent that the credit system itself is ultimately one that is backed by a gold back money.
So Gordon, do you think that essentially, the idea of CBDCs really is is to create as John says create money out of out of thin air really, because because my concern, particularly is the control element that the government essentially can control everything to do with your money. But do you think it’s really the joy of just creating bits on a screen and suddenly you’ve got a load of money?
I think I wouldn’t entirely agree with your main point there, Jasmine, because I think central banks are very expert. Indeed, right now, they’re creating money. They don’t need to do this, if their sole purpose is just to create almost infinite amounts of new pounds and euros. I would prefer to return the focus to the broken banking system, which no one ever talks about these days. Because it’s so complicated.
They all have fallen for the line, every major entity falls for the line that central banks have learned from the crash, they’re on it. They’re they’re scrutinising everybody, millions of yards of rules have been written, every single transaction gets reported by banks and central banks. So people think it’s okay, but it’s not it’s completely broken. And to pick up John’s point, though, back to the Medici bank is very interesting, indeed. Because since the dawn of the renaissance, I guess you’ve had bankers, trying to gain the rules and profit improperly from people’s savings and deposits.
And this indeed was in the very fall of the Medici Empire was was the Venetian banking collapse and your your viewers may or may not know that, if you’ve, like I’ve done have had the pleasure of going to the wonderful city of Venice. The reason all the gondolas are black, they used to be beautifully multicoloured things was as a penance imposed upon the bad bankers. So I’ve often told the panel maybe in London and New York and San Francisco, we can mark this banking crisis which is become a bit of visible by dictating that all future Ferraris should be painted black, rather than red.
So unless we can wake up to the broken banking system, the Publican are going to are going to fall time after time for all these scams and cons, which which central bankers have no incentive to alert us to. And central banks don’t want us all to realise how Bitcoin and all this crypto babble is just pure junk. They want us to believe there’s some value in that because that that creates the environment in which they can sell this, this insane concept of some kind of digital Central Bank, digital currency.
But the day to day your your other question that the day to day effects will be that when I next have the pleasure of taking my dear friend John out for a beer. So I know you’re so healthy, you don’t drink aspirin. Or when I take John for a beer, you know, he might actually buy one or buy another one, then when we go with our Bitcoin card to get the third pint, big brother gumballs. I’m terribly sorry, Gordon, you’ve had two beers already. That’s enough for you to do.
Right. Yeah. So there is, you know, the control element, which as I say, is a particular concern of mine. So you say, Gordon, that this is all to cover up? The problems that the banking system has, how would that happen?
If people like you, me and John have given airtime on mainstream media, on a weekly basis to make these sorts of points, then people will go holy cow. There are plenty of millionaires out there, I think I think these guys are talking sets, I’ll take my million pounds out of the bank.
But we’re all would only take a run of maybe as little as a billion pounds, there’s plenty of individuals with a billion pounds, if a billion pounds in cash was was withdrawn from the UK banking system, that might be enough to cause a major a major run on the banks, the way that central banks who are fully aware of the veracity of the points that we’re making, the way central banks can prevent that happening is by abolishing the ability for anybody to remove their money from the banking system.
Yeah. John, who really gains from this? It sounds to me like it’s government/central banks, surely, the banks, the the high street banks, that they would lose all their business from this, what I’m surprised that they’re not fighting this this concept?
Well, the way the way the the push is coming behind central bank digital currencies is that they will simply create the digital money, they will not be involved in its distribution, the distribution will still be left to the high street and other banks to go ahead and extend credit when and where they think it’s a sensible thing to do to grow their balance sheets and their profits. And so that’s the way it’s being presented.
But you’re raising an interesting point here, you incorporate both, which is that, look, this isn’t new technology and like any technology, it can be used for good or ill. And absolutely in principle, a purely digital central bank issued currency is one that gives the central bank far more flexibility to do whatever they want, create as much money as they want. Impose negative interest rates, which is effectively attacks on idle balances.
If they want it as Gordon even said, if there’s evidence that you’re spending your money in a way that is not deemed socially desirable, they can curtail your access to that money, because there will no longer be any true financial privacy. And that’s when it begins to look potentially a bit Orwellian and a bit frightening for those of us familiar with 20th century dystopian literature. Exactly.
I mean, this is as as a consumer, this is what particularly bothers me, that also at some point, the government, the central bank, or whatever can go, Oh, yes, you know, that money you’ve got in your account? Yeah, you’ve got to spend it in the next two weeks, because after that, it’ll just be disappeared, that literally could happen, couldn’t it?
Sorry, they have, it has recently happened in India. Another little trick that they they tried out in India is abolishing high denomination rupee notes. And now that you’ve got to spend them all within the next two weeks, or present them to a bank, to have them exchange with for the new rupees. When you go there, you have to explain how you obtained this money. And then they check that against your historical tax records and cause all kinds of problems.
So other people just ended up burning their paper money. So these things will be experimenting with all the time. And I think you yourself, Jasmine a month ago, pointed out the tactic of that wonderful leader of Canada, Mr. Trudeau, who when the truckers were blocking this bridge to North America, he decided to basically freeze all the bank accounts.
So these things are sadly no longer in the realms of 20th century dystopian fiction literature, these are actual policies being considered on a daily basis by many of the world’s leaders. Is it any coincidence that the the pioneer of central bank digital currencies is China? A country that for 30 years adopted a one child policy literally withdrawing the second baby from the mother at birth, if she infringed upon the policy?
Yeah, I’d forgotten about that. You’re absolutely right. Yes. The Canadian banking scandal I consider does show exactly what what banks it will governments right now can do and are willing to do. John, do you? Do you think that this is part of the the plan? If I mean, I say there’s a plan, I often wonder genuinely if governments have very much of a plan. But Is it is it really extra control. So on the one hand, they can print as much as they like, they have all the flexibility they’re like, but on the other hand, they control can control us to do things that are, you know, going to be for the environment rather than against the environment and all that kind of thing?
Well, potentially, yes, I mean, this is a bit of a zero sum game, what they gain in flexibility by introducing a purely digital currency, the typical household saver loses in flexibility, what they gain in monetary power and control and perhaps the power and control over credit distribution more generally, the ordinary household saver and borrower loses. Now, again, just because you give a government or government agency more power, does not necessarily mean they’re going to abuse it. However, if you take a look at history, you do notice a bit of a pattern here, don’t you that when public institutions gain additional incremental power, there does there is this tendency towards abuse and corruption of that power. I mean, Lord Acton summed it up very well.
There are others who have discussed this point. And when it comes to the world of monetary economics, Nobel laureate, the Jewish foreign Hyack, who was professor at the London School of Economics, among other places, during his very distinguished career, you know, he wrote his famous book following the Second World War, called The Road to Serfdom, and in which he put forward the thesis that entirely benign, well meaning public, are politicians, bureaucrats, administrators, so on and so forth.
They can mean well, but when they do make a mistake, their natural tendency, it’s trying to fix the mistakes they’ve made by acquiring new powers, which they then implement trying to fix those mistakes again, perhaps entirely, genuinely, but then they end up making even greater mistakes, because what they don’t realise is that in general, the public sector is not very good at policing itself, it tends towards monopoly, it tends towards inefficiency and mis allocation of resources.
And so he called his book The Road to Serfdom for a reason he was pointing out how a capitalist oriented society could end up becoming a very socialist one, almost unwittingly, just through this nefarious dynamic of one mistake becoming a bigger mistake becoming a bigger mistake, power becoming ever more centralised in the process. This is the monetary Road to Serfdom. We are on that we are discussing the introduction of central bank digital currencies is a big milestone on that road.
It really is, I think, you know, what you’re describing is exactly where we are. And one of the things that it keeps being said by central governments is that this will stop the grey economy, you know, the people who are using cash, sort of working for cash, not paying tax, John, is that something that we should be bothered about? I mean, surely there are different ways that we can make sure that people pay their taxes.
Well, look, when you have a byzantine tax code, such as the UK, I mean, look, it’s the fact is, is it it’s so full of loopholes, it’s so full of ways to to avoid tax. Obviously, tax avoidance has been in the news quite recently, for very prominent political reasons. When you look at ways in which taxes can be implemented in effective ways, they tend to be relatively low rates of tax, relatively simplistic tax laws that are transparent and easy with which to comply such that compliance costs are low. And we have none of that today.
So the incentive to try and operate in that grey area is unusually large for everyone. Wealthy, not wealthy, public, private entities, interacting in this space, waste huge amounts of resources, trying to outdo one another, right. So a private corporation comes up with a better way to move money through the Channel Islands or Ireland or something like that, to try to net out its international tax burden. And then some public authority comes in and says, Oh, no, we’ve written a new law that closes that loophole. You can’t do that anymore. But by the time the law is enacted, guess what? They’ve discovered a new loophole.
An awful lot of accountants and lawyers get really, really rich playing this game, good cop, bad cop. And, you know, they’re they’re bright people, why shouldn’t they? And yet, and yet, those are ultimately wasted resources. What if all these brilliant people actually made a better mousetrap instead, we’d all benefit.
True, true. Gordon, one thing that has occurred to me is that we’re all talking about this, like it’s going to happen that, you know, the government knows what they’re doing. Crazy. Do you think actually, that this this whole, or the new technology probably isn’t there? And what if they did come up with a cbdc? Frankly, it probably wouldn’t work.
There’s every chance of that, I mean, of course, it’s all been based on these on these different so called crypto currencies. And and they fail all the time, you know, Bitcoin has forked five or six times because of disagreements or disputes on the code. The theory is the the view that these things are decentralised as false.
They’re all centrally controlled by a tight group of generally founders, they all went off to Greece, the theory of guys because they recognise that there’s a fundamental problem in keeping Etherium going, and they’re talking about completely reissuing the code for Etherium which obviously would confirm that he theorem itself has failed. So if even these geniuses behind these, these two and a half trillion dollar, crypto industry are making these kinds of mistakes all the time, the likelihood of your government civil servant, getting it right is is is unlikely, maybe I hear that our Chancellor Sunak was called back from a holiday to Silicon Valley recently to address some of the issues in the press. Maybe he was out there interviewing candidates to to design the new Britcoin, we’ll we’ll find that at some point.
But the issue, the issue that we should be focusing on is the catastrophic failure of existing technology and banking. I think this year, on three or four occasions, one of the major High Street UK banks has its systems have completely failed, people’s mortgages weren’t getting paid, they don’t receive their wages. This is the sort of thing that should be looked into, in my experience from the last time I was in a high street bank working was 20 years ago. And most of the computer programmers there were busily generally inserting some kind of black box into the code knowing that nobody knew how the whole thing was joined up. They put a little black box in their little poison pill to basically leverage up their own wages and make themselves unviable.
These kinds of situations exist all the time that that’s why modern FinTech banks like Monzo have been able to to do relatively well and provide services that high street banks can’t because their code is frankly thanking you the the solution to the banking crisis should have been insolvency and make a pathway for new high street banks to be creative rather than constantly trying to fix a broken clunking dinosaur.
Right. So yeah, that’s a very good point that the technology right now is rubbish. Goodness knows what they’re going to come up with next. What so Gordon, what do you think that we the consumers can do if if anybody watching this thinking I do not want a CBDC? What can we do to skapar it?
Well, if the eco loons are getting away with mainstream TV time to justify why they’re blocking oil depots and glueing their hands to roads left, right and centre short, surely we could get that the key thing, I think, is to try and make it appeal to the cool young kids. It’s the young people. I think it was a 20 year old on the main news channel this morning explaining why she knows better than the government 20 years old, and she’s telling us all we shouldn’t use oil, you shouldn’t be wearing clothes, Jasmine made of oil based products, you shouldn’t have anything ever delivered to your door to eat or things like this. She knows better. And she doesn’t believe in democracy, because it has failed.
You know, we’ve been we’ve been known that the planet is going to self Immolate in six months time for years. So we’ve got to do something about it. It’s it is not on the radar of the cool young kids to think about preserving cash, they actually think it’s cool to abolish cash, that is a serious mistake. We need that we need to get the message to him or his podcast, bring it up every single time that you’re on a TV news programme, it cash is critical to the functioning of any remaining vestige of a free society. And we haven’t even had the online House bill come into law yet.
And kids that think that they should voice cash is a mistake. We’re not suggesting people should walk around with wads of paper in their pocket. I use of funds and cards all the time. It’s clearly convenient thing to do. But the ability to withdraw my millions of pounds from my banks on demand is a it’s a right that has to be preserved elsewhere, we’ll go the Chinese way, the Putin way, the way things are going in Pakistan, you know, 75 to 80% of people on the planet live in political conditions that are described as dictatorial today, you know, we’re supposedly living in the free western world that can change all the time.
John, do you think that there is a way that we can persuade the youth, the youth to take cash again, because that that is a concern? I think that you’ve got a lot of young people. I mean, you took and older people as well, who had no intention of having cash ever again, because it’s so convenient to have cards?
Well, look, well, I am frightened about this, this headlong thrust for digital money, being champions now by multiple central banks, not only the Bank of England, as a student of history, I also note that, as a general rule, people, and this includes young and old people, they generally prefer choice over compulsion, right, they generally see greater legitimacy in a government that maximises their room for manoeuvre their room to choose their own lifestyle, and then their own careers, and what products they choose to buy with their income, so on and so forth.
And why not choice in money? Why should we have a broad range of choice in money if we simply want to rely on on a digital bank account? If that’s your choice? I see no problem with that. But what if you prefer physical cash? What do you prefer using precious metals? Why shouldn’t gold and silver be eligible to be used as money, as indeed, they have been throughout the bulk of recorded human history, including particularly prosperous periods such as those I mentioned earlier, choice is a good thing. And in my experience, when it comes to young people, today, it is an extremely positive word, to be to believe in choice and to believe in choice in money.
Interesting, so this could be the way to do it. So now, finally, from both of you, I’d like to know how you think we can we can stop this and change come up with a new form of money that actually works. Gordon, go first, what do you think? Really, you know, if you were king for a day, what what would you do? Well, right, then Prime Minister for a day, what rules would you would you what laws would you put out?
You’ve got to fix the accounting system. You know, it’s, it’s the presence of a broken accounting system that has led to the so called stress test. The banks and central banks tell us that all the banks are safe based on their analysis of certain transactions, they discourage us from reading bank accounts, because they become so John says, byzantine, unless nobody knows nobody, no matter how expert can can look at any published material by any high street bank and have a clue as to how solvent or insolvent they are.
There are some indicators, but nothing like that, you know, we’ve we’ve already got a central government, oligarchic style banking system that has to be dismantled step by step. And I think the key to it is replacing the top management at the Bank of England with with people who who have got the public interest, more more more hearts, as opposed to preserving their own careers and pensions.
John, how about you? What do you suggest?
Well, again, if I were king for a day, then I guess you’re implying I’d be a king with almost unlimited power to remake the monetary and financial system. And as I described in my book, there are ways to migrate back to a much more stable, fair, transparent, monetary and financial system, they really wouldn’t be all that disruptive if done properly. You could migrate the current system back to a gold back system, step by step. And you could actually allow the existing infrastructure that we do have in place the existing financial infrastructure to be part of that migration.
Now, Gordon mentioned a moment ago, that the people in charge wouldn’t be remotely interested in that. Well, that’s because basically, by migrating back to a gold standard. You’re placing golden handcuffs on the monetary authority, which prevents them from manipulating their monetary power to benefit one group that might be politically powerful at the expense of another group, which might be less politically powerful. It really creates a level playing field, and it puts the it puts the monetary crazies back in their box, right, as opposed to giving them an entirely new array of controls linked to a digital currency that only they can create. And so in my opinion, that’s what you do.
There are ways to do it, that wouldn’t be that disruptive, what they would do, in the words of Warren Buffett, they would expose those financials, who have been out there, you know, swimming naked, as it were. As the tide goes out, and you realise that some of these banks are insolvent that would become very clear very quickly, as we migrated back to a gold backed monetary system.