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Do we need public money? - speech by Jon Cunliffe i Given at the OMFIF Digital Money Institute, London Published on 13 May 2021 The Bank of England has issued banknotes for over 300 years. Jon Cunliffe talks about future of money in the UK in an increasingly digital world. Speech I want to talk today about whether we need public money. I should make clear that I am not talking here about public spending but rather about the form of money itself: by public money I mean money issued by the state to its citizens for everyday use. Money in the UK today This may seem a rather odd question. In the UK, the Bank of England a public institution1 has been issuing money to the public for over 300 years. Its banknotes, carrying the famous “I promise to pay the bearer” pledge are carried in millions of wallets and purses and used millions of times every day by the public to make transactions2. These notes and coins are denominated in Pounds Sterling, the currency of the UK. It is the Bank of England, on behalf of the state, that is charged with ensuring the stable value of the currency by keeping inflation at its 2% target. Public money for general use in the UK is only available in the form of physical cash. It is highly visible, trusted and, indeed, is probably the image that many people in this country have in their mind when they picture money. However, the majority of the money held and used by people in the UK today is not physical public money, issued by the state, but digital3 private money issued by commercial banks. Around 95% of the funds people hold that can be used to make payments are now held as bank deposits rather than cash. In everyday use, only 23% of payments pre pandemic were made using public money in the form of cash, down from close to 60% a decade earlier4. This private money is not a claim on the state or backed with the resources of the state. It is not covered by that familiar Bank of England promise to pay the bearer. It is not clear to me to what extent the general public understand this distinction between public and private money or even that for most of the time they are using private money. I am not aware of any surveys or research that address this question. I have, over the years sometimes asked the question of those I have met. Such an approach is statistically reprehensible of course and one certainly shouldnt base policy on it. But for what it is worth, the answers suggest that people are generally unaware of the distinction between private and public money. And, outside periods of crisis, the type of money they use, what and who stands behind it, is not something that particularly interests them. The fact that, unlike in some periods of history, we do not at present think much about these things and that people in the UK have a general confidence in the money they use regardless of its form and issuer is, I think, a good thing. It is not an accident. It is due to the credibility of the institutional framework governing money in the UK that tethers private money to the public money issued by the state. This framework has a number of important elements. An independent central bank ensures the stability of the value of the currency/unit of account. Commercial banks that issue money are regulated to ensure they are robust. They hold accounts at the Bank of England, settle transactions electronically between themselves in Bank of England public money and are able to borrow from the Bank to meet liquidity shortfalls including in times of stress. And a deposit guarantee scheme gives holders of commercial bank money the protection of a backstop should the bank fail. And, crucially, this tethering is also due to the fact that people have the right to exchange their private money, claims on banks, into public money, claims on the state, whenever they wish - as they do every time they go the ATM or pay cash in a bank account, without restriction or loss of value. We do not have to look that far into the past to see episodes when this confidence in the money used in the UK public or private has been shaken. The monetary stability framework is less than 25 years old and followed a period in which the value of all monies, public and private, denominated in sterling was unstable5. The current regulatory framework for banks and deposit guarantee scheme originate in an even more recent experience. In the financial crisis only 10 years ago, the government was forced to bailout the banking system at enormous cost to avoid the millions of citizens losing the money they held in the form of claims on commercial banks and the general loss of confidence in private money that would have ensued. To be clear, I think the reforms we have made over the last 10 years have led to a much more robust and resilient commercial banking sector. The experience of the last 12 months has demonstrated the resilience of the banking system to an extreme economic shock. But these not so distant episodes underline that threats to confidence in money or particular forms of money, is not just something in the history books. Money is in the end a social convention that can be very fragile under stress. Future Trends Money is not only a social convention, it is a very dynamic one. The forms it can take and the uses to which it can be put have varied materially through history and between societies. Change has often been driven by the interaction of technological innovation that has improved the functionality of money for example, by making it more secure or more convenient to use. We have been living through a period of such change for the last few decades. On the supply side, commercial bank, digital money has become more available to the general public, cheaper and more widely used, especially for lower value transactions. On the demand side, convenience, especially with regard to e-commerce, has fuelled the public appetite for digital money. As a result the use of public money in the form of physical cash has been declining. These changes have been very marked in the UK where they have mainly taken the form of the issuance of credit and debit payment cards to the general public6, the development of a Faster Payments System and the emergence of e-money, a derivative of commercial bank money7. Digital forms of payment overtook cash in 2015 and now make up three quarters of all payments, with debit cards alone accounting for 42% of payments. As the only digital money available to the public is private, commercial bank money, the shift from physical cash to digital payment over recent decades has meant a shift from public to private money. The pandemic and consequent huge forced experiment in remote living, working and transacting has, at least temporarily, accelerated these trends. A recent Bank of England survey, for example, found that 70% of respondents were using less cash than prior to the pandemic. There has for obvious reasons been greater use of contactless payment 8 and internet transactions9. We do not, of course, know how persistent these changes will be when we emerge from the pandemic. I think, however, that it is a relatively safe bet that the experience of the last 12 months will lead to further acceleration of the move from physical to electronic/digital money and with it a shift from public to private money. Over recent years, the technological innovations that have made digital private money cheaper and more convenient for both e commerce and face to face transactions have been the result of technologies that if not quite old hat are certainly now quite familiar10. There are, however, on the near horizon newer technologies and innovations, such as tokenisation and distributed ledger, which may further transform the money we use. Stablecoins, a form of crypto-assets are probably the best known of these. Their proponents claim that these have the potential radically to reduce the costs of digital money and to increase its functionality, the things it can do, embedding money much more deeply into the digital world in ways we can only now imagine11. The proponents of these newer forms of money are typically not banks but technology companies including the so called Big Tech internet platforms. Their business models are very different to banks: many have no interest in providing credit but rather seek to integrate new forms of money into their other, data driven services. This has attracted enormous attention, including from public authorities, like the Bank of England, who are now wrestling with the thorny question of what regulatory framework should apply to non-bank issuers of private money. (I do not propose to wrestle with that question today- the Bank of England will shortly be issuing a discussion paper on the public policy implications of non-commercial bank digital money12) Such developments would lead to a further shift away from cash and public money. They may never happen of course. However, having watched the digital transformation of other parts of the economy one would not bet against the next wave of technology leading to further major transformation: we could now, in payments, be in a Blackberry world about to see the introduction of the iPhone. The Bank of England is committed to making physical cash, banknotes, available as long as there is demand for it and is working with other authorities to support continued access to cash. I do not think that demand for cash will entirely disappear any time soon. Many still rely on it for a number of reasons13. But cash, and by extension public money, is becoming an ever smaller fraction of the money we use in the UK and increasingly unusable in a digital world. We may not be there yet. But it looks probable in the UK that if we want to retain public money capable of general use and available to citizens, the state will need to issue public digital money that can meet the needs of modern day life. Does it matter? The question and it is not just a question for central banks -is: does it matter if the public cannot access public money they can use in their everyday lives? The current mix of public and private money in the UK is the result of history rather than some informed policy decision and some might argue, generally available public money is becoming an anachronism. Given we have the credible public authority framework for private money I described earlier, why should the state need to be involved in the issue of money to the public in competition with the private sector? The state does not directly provide electricity or water to the public in the UK anymore? Why should it provide money? These are important questions that should not be brushed aside. Any decision that the state should issue a new form of digital money to its citizens cannot rest simply on the fact that the role in society of public money is declining. It must rest on an assessment of the benefits of ensuring available and useable public money and the costs and risks of letting it disappear. Such an assessment has not yet been done in the UK and no decision has been taken to introduce a public digital money or to use its technical name, a Central Bank Digital Currency or CBDC. Introduction of a CBDC would be a very major public project which would have material implications for the financial sector, many parts of the economy and for society more broadly. The Bank of England, like many other central banks, has been exploring these issues in recent years. We published a discussion paper last year with an illustrative model of a general purpose public digital currency. We will shortly publish another discussion paper on some of the public policy issues generated by new forms of digital money. At this years UK Fintech Week, the Chancellor announced the establishment of a Task Force, led by the Treasury and the Bank of England to ensure a strategic approach is adopted between the UK authorities, as we collectively explore the issues posed by CBDC14. I do not want to, anticipate the outcome of this work. But on the basis of the work the Bank has done so far, I can perhaps set out some preliminary views on where some of the benefits might lie and where, conversely, there might be risks in allowing publicly available state money to disappear. In doing so, I will look to the future as well as to the present and to the possible entrance of non-bank issuers of private money such as the Big Tech platforms. Given the speed of technological development in payments and of the changes we are seeing in the way we transact, any assessment that is not forward looking is very likely to be overtaken by events. Financial Stability First and foremost are the financial stability implications of the absence of public money for use by the general public. Ensuring confidence in money as a means of payment and store of value is fundamental to financial stability. Does the presence of public money in the hands of citizens play any part in this? The answers here, I think, lie in two related areas. First, the role that generally available public money plays in ensuring both the perception of uniformity of money in the UK and the reality of the substitutability, of all of the monies used in the economy. The fact that holders of any private money issued by a commercial bank have the right to convert it into public money i.e. cash - on demand is in my view one key element in the framework that guarantees to users that one form of money in the UK, say claims issued by Bank A can be exchanged for claims on the state or claims on Bank B without any change in value15. From the users point of view, it is all just the same money, pounds sterling. The requirement on banks to be able to exchange, on demand, the money they issue through deposit accounts for Bank of England money also anchors the regulatory framework for banks. The second area is the role that access to public money may play during times of stress when confidence in the issuers of private money comes under threat. This is a complex issue. On the one hand during such episodes, easy access to safer, public money may stimulate runs out of private money amplifying the stress. On the other hand, the knowledge that under stress depositors have the option to switch into state money may be important in preventing a more general loss of confidence in money. Absent access to public money the general public is effectively locked into private money. Deposit protection, in such a world, only enables depositors to exchange the claims on one bank for claims on another. In a systemic stress, when the robustness of the banking system as a whole is under threat, the perception that there is no route out of private money, that there is no access to safe liquid assets backed by the state, could undermine confidence. This perhaps hints at something more elusive and yet more fundamental about the role of public money in citizens perception of money itself: that whatever its form or issuer,
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