The Digital Pound: Convenience at the Cost of Individual Freedom.

by Mario Innecco,

Most of you have probably noticed that the use of cash has been diminishing for the last ten years or so 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. Here is how cash and coin payments have decreased in relation to cashless payments in the last decade or so. The Bank of England and the HM treasury have recently published a consultation paper on creating a digital pound and 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.

Source: UK Finance and Bank calculations

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 to your account. The second type is the Central Bank or public currency which you may opt to withdraw from your bank deposits at a branch or an ATM. These notes and coins are what we call cash and everything else is card payments and others. 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 a 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. This process of using silver and gold as money and currency in the form of coins started out in Lydia, Asia Minor around 650 B.C. or over 2500 years ago. These original silver coins were called cash and whoever held a coin owned it, coins or cash also provided anonymity and privacy.

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 insure 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 jewelry 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 is actually banknotes 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 realized 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.

In 1844 though the Bank of England was given the monopoly power to issue promissory notes and that was very significant because, in my opinion, it led to the eventual abandonment of redemption in 1914 and then in 1931 when Britain abandoned gold as money. The silver coinage, like with the Roman Empire, was stripped of all its silver by 1947 and the coinage we use today is made of cheap or base metals like copper, nickel, and even steel. The banknotes thaw use today and then we call cash are nothing but a promise to pay “nothing” and a vestige of when one could redeem them for a gold sovereign or £1. The Bank still keeps the promise on its bank notes but says it means one can exchange an old not for a new one!

So back to the digital pound. The Bank and HM treasury’s argument is that as people opt for cards 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 sounds 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 the mercy of the digital wallet provider.

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