In 2015, the Bank of England raised the possibility of it issuing a digital currency[1], and the Treasury announced it was spending £10 million to research opportunities[2]. The payback for the government could be many orders of magnitude greater. Besides increasing tax revenues it could inoculate the economy from financial crises[3], democratize credit[4] and increase sustainable stable prosperity[5].
Tax revenues could increase from making visible the underground “black” cash economy. The World Bank estimated that this could amount to 12.5% of GDP[6]. This indicates that the government is losing value added and profit taxes on around £200 billion of transactions. Raising the tax revenue forgone provides just one compelling reason for making all financial transactions digital.
To make the black economy visible all notes and coins would be replaced with digital swipe cards and/or mobile phones. A number of nations being led by Sweden[7] are already moving to this situation. Transactions could only then occur between digital purses or accounts with their ID registered with HM Revenues and Customs (HMRC). The idea of registering digital wallets was proposed by the chairman of the Australian Digital Currency Commerce Association in giving oral evidence [8] to the Australian Senate Committee of Inquiry into digital currency[9]. Every transaction could then become tagged. Bitcoins are already tagged to avoid their duplication. Digital money would greatly increase the convenience of money as exact payments could be made without the need to obtain change.
Digital purses in swipe cards, mobile phones and/or watches would be safer than other physical purses because accessing their contents would required a pin number and/or stored biological distinguishing characteristic of its owner. In the event of the purse being stolen or lost, any expenditure from the purse would still become registered with the HMRC. The purse owner would automatically receive at the end of the tax year a statement of all their income and expenses to allow them to nominate the tax status of each transaction. Earlier advice could be requested if the purse was lost or stolen. The obligation of the HMRC to maintain confidentiality of taxpayer transactions would be maintained. The HMRC already directly obtains from banks, the owners identity of all interest paying accounts and the value of interest paid to each taxpayer. It also obtains directly the value of dividends paid to each taxpayer.
The annual cash income and expenditure statement provided by the HMRC of each taxpayer would substantially reduce accounting and audit costs. The production of annual accounts for businesses local governments and the nation would be expedited. More importantly it would become possible to identify financial frauds, thefts, bribes, money laundering, multinational profits shifting and the funding of terrorists.
Welfare recipients could have value added to their digital purses directly by the government from the Internet or through the digital purses used in retail stores. All levels of governments could be paid their taxes, fines and fees directly from digital purses. Bank accounts and privately issued debit cards could be avoided to eliminate substantial costs.
A digital currency would allow the UK to establish a stable and sustainable unit of value[10]. One that promotes sustainable prosperity not subject to financial crises or manipulations by speculators, hedge funds and currency wars between central bankers.
It makes no sense for the government to issue money whose value it cannot control. It makes even less sense to use a currency whose value cannot be defined by any one or more goods and services. UK money like all official forms of fiat money around the world is no longer fit for purpose. One reason is that fiat money creates false prices because it is not tethered to the value of any one or more real goods or services. According to Lord Stern reporting on climate change, market prices have created “the greatest market failure the world has seen”[11].
My December 3 submission to the UK Treasury I identified fifteen reasons why modern money is not fit for purpose[12]. This was expanded to sixteen in my second “additional information” of March 2015 posted by the Australian Senate[13]. It seems that contemporary economists accept that the nature of money is a policy given rather than a policy option?
It was not the Reserve Bank of Australia who initiated the Australian Senate Inquiry into digital currency in 2014 but the Australian Tax Office. At the first public hearing it was not Treasury officials who raised concerns over the sovereignty of Australian money but Senator Heffernan[14]. Modern economists limit their concerns about monetary policy to processes, not the nature of money. Policy processes involve “3Ts” of: Transmission, Traction and Timeliness. Neglected are the 3Ts of the nature of money being: Tagged, Terminating and Tethered. Digital money makes practical the general re-introduction of 3T money issued during the Great Depression.
The 3T money privately issued during the Great Depression took many forms. Economist Irving Fisher[15] reported how a number of tethered currencies began circulating in Germany in the 1920’s inspired by the ideas of Silvio Gesell[16]. Gesell promoted cost carrying money so that it could not become a store of value competing with real investments that increased prosperity. Cost carrying money also reduces wealth inequality by denying owners of money earning interest to increase their wealth without them or their money necessarily increasing prosperity.
Many communities in Europe and the US issued cost carrying money during the Great Depression. A Bill[17] was introduced into the US Congress in February 1933 for the government to issue one trillion dollars of cost carrying paper notes described as “Stamp Scrip”. The cost or negative interest rate was collected from the sale of stamps that had to be affixed to the back of the notes each week. The notes had spaces for 52 stamps valued at two percent of the note. The stamps were to be sold by the US post office that would have received 104 cents for each dollar issued when redeemed/terminated after a year. This would have allowed the US government to make a 40 billion dollar profit from giving away one trillion dollars in welfare benefits and funding infrastructure projects that increased employment.
Besides making a profit, the proposal would have avoided the government incurring any new taxes or debts. However, it would have bypassed the privately owned Federal Reserve Central Banking System. Unsurprising such a profitable deal for the government was replaced in March 1933 by the “New Deal” that increased the powers of the Federal Reserve. It also increased government debt, interest and so taxes.
The private issue of negative interest rate paper money was re-introduced into Germany in 2006[18]. It has spread to a number of regions indicating its acceptance without a crisis by both citizens and local banks. Much wider acceptance of this money tethered to the Euro could be expected if it was issued in digital form by governments. It provides a solution for distressed economies like Greece.
In the UK, 3T money could achieve substantial increases in government revenues without introducing new taxes. The cost to business would be less than the credit card and bank fees avoided. Welfare payments and infrastructure investments become self-financing. 3T money can be used as 'lifeboat' money to support Small and Medium sized Enterprises in a financial crisis[19].
All 3T policy criteria are met. Transmission through banks is replaced with direct transmission to the digital purses of voters. Traction is immediate as cost-carrying money provides a compelling incentive to spend it rather than hoard it. Timeliness is immediate.