If financial systems were to fail and bailouts were required once again, could the local economy and households be shored up by alternative currencies, and how would these work?
This was the crux of a recent webinar organised by the Lord Mayor of the City of London as part of his ‘Knowledge Miles’ series of events.
The event itself – which was under Chatham House rules – featured Dr Shann Turnbull, principal of the Australia-based International Institute for Self-governance, and FT Adviser caught up with him afterwards to talk though the idea.
According to Turnbull, the idea of having a lifeboat currency outside of the purview of central banks is not new: it has been tried and tested in other countries and regions, such as in Germany and Austria in the early 1900s.
It was even touched upon in a 1999 speech by former Bank of England governor, Sir Mervyn King.
At the time, King discussed whether central banks were in themselves innovative enough to remain useful in policy making.
He suggested if central banks were not able to “face up” to the challenges, they would face “popular disillusion” – words which resonated in the great financial crisis of 2008 and more recently as they have sought to tackle rampant inflation.
He said: “Looking further ahead, the future of central banks is not entirely secure. Their numbers may decline over the next century. The enthusiasm of governments for national currencies has waned as capital flows have become liberalised and exchange rates more volatile.
“Following the example of the European Central Bank, more regional monetary unions could emerge. Short of this, the creation of currency boards, or even complete currency substitution, might also reduce the number of independent national monetary authorities.”
Digital alternatives
Of course, King’s words preceded the advent of blockchain and cryptocurrencies, which have risen in popularity as an alternative to ‘fiat currencies’, but there has not been complete currency substitution.
Similarly, digital alternatives to currencies do exist, in the form of store card loyalty points that can be exchanged for goods.
There are insurance and wellbeing apps like YuLife that reward you with digital coins for, basically, walking around. These coins can be exchanged for vouchers at a variety of places.
You could even argue that global currencies are already digital – very few people carry cash anymore, it’s all tap and go.
But none of these are – yet – a viable substitute as a means of exchange should another great, global financial crisis happen, and households and businesses (and even central banks) need to be bailed out.
David Pirrie, chairperson and founder of Industrial Thought, believes it would be good to nurture an alternative form of currency that is neither a fiat currency nor a crypto currency, but it will need “heavy oversight”.
He comments: “Non-Fungible Tokens are a well-known example of an alternative currency that is neither a fiat currency nor a cryptocurrency. As they’re digital assets stored, often, on blockchain technology, there’s great benefits when it comes to security.
“However, they are also far more susceptible to market manipulation which makes me hesitant to see their value as a ‘lifeboat’ currency without heavy oversight.”
The stamp scrip system
Turnbull would like to reopen the debates around Stamp Scrip.
Back in the 1930s, Turnbull says, the days of the Fed had looked numbered. During the Great Depression, when there were widespread cash shortages, a frequent response was to create a localised, substitute currency, known as scrip.
Turnbull quotes the economist John Maynard Keynes, who said in a 1923 paper: “The idea of stamp money is sound. Stamp Scrip is neither a store of value or unit of value. Today, official money has no defined value.
“Self-referential markets determine the value of official money on an unpredictable basis that feeds instability and doom loops.”
Scrip has been issued off and on in the US by different kinds of entities, such as:
- City governments
- Civic organisations
- Credit unions
- Coal mines
- Post offices
- Railroads
- Steelworks.
According to a paper from the Federal Bank of Cleveland, more scrip was issued during the Great Depression in the 1930s than ever before (or since), and one type which has been replicated in part more recently in places
The FBC writes: “One particular variety tried during the time, stamp scrip, was unusual in that people actually had to pay a fee to use it. In other countries, people had tried stamp scrip schemes with success, but in the US, stamp scrip proved less useful.
“The one aspect of stamp scrip that might make it seem so unworkable to many people—the fee to use it—is not the naïve idea of a quaint era but one that surfaced again very recently, when ways of conducting monetary policy in times of extremely low nominal interest rates were a pressing concern.”
Indeed, a bill to design a stamp scrip for the US government itself in the 1930s almost passed through the Senate (which would have meant an end to the Federal Reserve) but was ousted at the last minute by a New Deal bill read aloud to the house, and the rest is history.
Other ideas
Cryptocurrency has been touted as an alternative to fiat currency. Some dentists in Australia accept payment using digital currency. Some homeowners attribute their purchase to lenders who accepted bitcoin.
But it’s not regulated and it cannot hold a steady value – consider the huge volatility in prices. As a result, it cannot hold the trust that fiat currencies do.
According to Pirrie: “When bitcoin was created, it was meant to be an alternative to central banking. However, it failed as a payment solution and as it’s borderless it was easily taken advantage of.”
There is also the prospect of using FlyBuys-style cards. Turnbull cites one of Australia’s largest loyalty programmes, which has more than 9mn members. It allows members to accumulate points and then use these at a variety of stores.
According to latest statistics, 15 Flybuys are scanned every second on average in Australia.
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That won’t happen in my lifetime, nor in anyone else’s.
Turnbull says these sort of digital credit cards could be issued by “supermarkets, city and regional councils” and used by customers for future purchases, taking the idea of store loyalty cards that one step further and widening the potential scope.
Andy Haldane, former chief executive of the Bank of England and now chief executive of the Royal Society of Arts, told FT Adviser: “We can of course create private sector alternatives to central bank money.
“In essence, some of the cryptocurrencies that are proliferating are seen to do some of those things. But ultimately what matters most about any kind of money is trust in that money.
“The benefit, what is impossible to replicate in the private sector, is that central bank money is backed by the government, by future taxpayers.
“So of course we might use central bank money more sparingly, but do we think it can be replicated in its functions by something private sector in origin? I would say ‘not on your Nelly’. That won’t happen in my lifetime, nor in anyone else’s.”
Who could create such a currency?
Turnbull points to the wider business world for possible solutions as to who could create a lifeboat currency.
Building societies and mutuals could take some note of the US credit union model, which was given the green light to partner with cryptocurrency providers. But the regulatory hurdles might prove too high to overcome in other countries, such as the UK, which is barely showing amber lights to crypto.
Turnbull says: “The most likely organisations to introduce digital lifeboats are large retail store and digital businesses that provide digital loyalty points to promoted sales.
“They could create an option for customers to make their digital promotional credits redeemable at any other businesses. This would include The City of London rates, and so on.
“Also it could also replace Transport for London’s Oyster cards that people could use each day to amortise its negative interest rate. This option would require the card to lose, say 2 per cent of its value each week while the card remained in circulation, until it was redeemed for cash after 52 weeks by the issuer.
“The issuer would earn 4 per cent more than the initial value of the credit provided. Such a card could be used as cash money at any shop with a card reader to confirm its residual value.”
He adds: “Because it is store credit system it may well not attract the concern of any regulators” – but again, herein lies the rub: regulation.
Regulation and central banks
Although store credit itself might sit outside of the purview of the FCA, PRA and the Bank of England, as one is introducing a competitive medium of exchange, there would have to be some oversight.
Turnbull recommends the government/FCA setting up a currency sandbox to test ideas. “It is essential”, he says.
Pirrie agrees that a sandbox is a great idea for testing the idea.
He says: “Regulators need to strike the right balance with their regulation. Perhaps a regulatory sandbox that could oversee experimentation, adaptive frameworks and, of course, full transparency.
“Like any phenomenon, usually there are risks. Where there are risk, the general public will need protecting and that means regulation and rules start to appear.”
Such a card could be used as cash money at any shop with a card reader to confirm its residual value.
Perhaps unsurprisingly, the former chief executive of the Bank of England advocates the function and form of central banks as the best possible solution for regulation and trust.
Haldane says: “When it comes to issuing ultimate means of settlement, the ultimate means of payment, of course there are alternatives to central bank money.
“We have had them in the past before central banks and central bank money – trading beads or gold or furs or yap stones – but these were found to be fairly ineffective means of exchanging claims.”
Haldane adds: “It depends what it is that you want an alternative to do. You think of the functions of central banks. One of these is to keep the financial system safe and sound – and the financial system has shown itself not able to do that of its own volition.”
The great financial crisis, he says, shows that allowing the system to govern itself was a “ridiculous proposition”. Regulation, he says, is a “dirty business but someone has to do it. It does not have to be a central bank – in some places it is not – but someone has to regulate the financial system”.
In other words, central banks facilitate the basics of economics.
Pirrie agrees that regulation is key, and that regulation and trust comes largely from the existing system of central bank governance.
He explains: “They offer a payment mechanism that supports global trade and that is backed by a huge industry – that would be very hard to replace overnight, or even over a decade. Do we need central banks? Currently yes.
“Is there an alternative? Probably. However, we have to consider time, politics and regulation which could prevent an alternative from ever meaningfully emerging.”
Future of all things fiscal
Given the rise in digital currencies and forms of exchange, are we already almost there in terms of having a form of exchange that is not yoked to sterling-denominated currency values?
Pirrie says: “You could even argue that global currencies are already digital – very few people carry cash anymore, it’s all tap and go.
“There is not enough notes and coins in circulation for everyone to withdraw their money from the financial system; it’s simply numbers on ledgers now.”
But Haldane points back to the importance of the trust factor of central bank money, of fiat currency. “If you are in a currency where there is no trust in government and governmental agencies, then perhaps having an alternative is good.
We have to consider time, politics and regulation.
“To be clear, us having a spectrum of private sector payments mediums – prepay cards, Oyster cards, debit or credit cards – these are good. Alternative payment rails are good.
“But at times of acute uncertainty, such as Covid, people value more than ever the certainty and security that comes from government-backed money.”
He adds: “Even if private sector alternatives are used for everyday transactions, it will not get away from the central importance of anything you can trust, rain or shine. That is what central bank money is, and always has been.”
