Question: aren’t notes and coins rather old fashioned? Why not just abolish them altogether? And lean in close, this is all rather hush hush, but if cash was abolished, there would be another benefit to central bankers, they could cut interest rates as low as they like – all the way down to minus 10%, minus 50%, or even lower, if they so choose.

A distributed ledger

A new report from the Bank of England has been looking into this very idea. But in this case, it is looking at introducing a so-called distributed ledger – or to use its more commonly used title, the blockchain, the technology behind bitcoins. To begin with, this newly envisaged system won’t replace cash, but will provide an alternative.

The authors of the Bank of England report, John Barrdear and Michael Kumhof, say that a distributed ledger will compete with bank deposits as a medium of exchange. Or in other words, they are suggesting that the Bank of England introduces a blockchain type technology, and competes with the retail banks.

The threat to banks 

Would the banks be able to compete? Let’s put it this way, if your local school put a football team together and played against the rest of the world eleven, would it be able to compete? The answer is yes, of course, every time the school team concedes a goal, it would regain possession from the centre – but that is likely to be about it.

To explain further, blockchain uses multiple ledgers to make the system almost impossible to hack into. A record of every transaction that is ever made using the blockchain technology is stored on every computer that is used to participate in the system. To hack into such a system, you would need to hack into millions of computers, simultaneously.

So that’s the advantage of the blockchain, incredibly safe.

In the Barrdear and Kumhof plan, a central bank digital currency would be created to the tune of around 30% of GDP and would be backed by an equivalent amount of government debt. (It came up with the 30% figure as this is roughly the value of quantitative easing so far, and the mechanics of achieving this may be more simple.)

Can a distributed ledger boost GDP?

They say that say “Our simulations suggest that this policy has a number of beneficial effects. First, it leads to an increase in the steady-state level of GDP of almost 3%, due to reductions in real interest rates, in distortionary tax rates, and in monetary transaction costs that are analogous to distortionary tax rates. Second, a central bank digital currency (CBDC) regime can contribute to the stabilisation of the business cycle, by giving policymakers access to a second policy instrument that controls either the quantity or the price of CBDC in a countercyclical fashion.”

Or to put it in a nutshell, greater efficiencies in the way money is distributed boosts GDP by 3%, and it will be much easier for central bankers to control the money supply and thus smooth out the economic cycle, and in extreme times, such as those we are experiencing today, cut interest rates to a level which is way below zero.

But those greater efficiencies may come at the expense of banks.

If the Bank of England hopes to reduce monetary transaction costs, does that not inroad on the role of banks? It is not being suggested that this would necessarily be a bad thing, but it would be a thing. So in this model, we may bank with our central bank, and all the complicated stuff that retail banks used to do is handled by the algorithm.

The end of a libertarian dream?

There is an irony in all this. Bitcoin was envisaged as a libertarian dream, a type of money totally out of the control of central bankers, and one that is limited in supply too, a bit like an electronic equivalent of a gold standard.

Central bankers seem to have taken the bitcoin ideal, worked out how to use the technology, but then removed the ideology.

Are they right?

Frankly, the ideology behind bitcoins was always dangerous. A growing economy needs a growing money supply, and an economy that is seeing a revolution in innovation, and has the potential to greatly increase production capacity, needs a rapidly growing money supply. Bitcoins, just like the old gold standard, were never going to facilitate this, but a blockchain currency controlled by central banks might.

PS: If a gold standard can hold back growth, how did growth happen in the Victorian era? Answer: maybe new gold finds in the New World made it possible.