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Thinking about public and private money

Summary:
Jon Cunliffe of Bank of England in this speech takes one through some foundational issues about money: In the UK, the Bank of England – a public institution– 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 transactions. 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

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Jon Cunliffe of Bank of England in this speech takes one through some foundational issues about money:

In the UK, the Bank of England – a public institution– 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 transactions.

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 digital 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 earlier.

his 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 shouldn’t 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.

So should it matter if the Bank of England issues digital public money?

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.

Hmm

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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