Interview with Dr. Huber

Introduction of Professor Joseph Huber by Steven Walsh

The American Monetary Institute has the pleasure and honor to interview Professor Joseph Huber. Professor Huber in 2000 co-authored with James Robertson Creating New Money – A Monetary Reform for the Information Age (full text). In 2014 he wrote “Modern Money Theory and New Currency Theory: AComparative Discussion” (full text), including an assessment of their relevance to monetary reform. In 2017 Professor Huber wrote Sovereign Money – Beyond Reserve Banking (Amazon). In this book he lays bare the banking system by explaining its two-tier nature of how money flows between the banks and its customers, and between the banks and their central bank. In its time, Sovereign Money was a rite-of-passage for monetary reformers and included an introduction to shadow banking. With The Monetary Turning Point – From Bank Money to Central Bank Digital Currency (CBDC) (Amazon), written in 2023, we again cover the history of banking and a detailed look at our monetary system’s predicament today.

The monetary system is at a turning point. The hitherto dominant type of money – bank deposit money – is passing its zenith, while new types of money – digital currencies, especially Central Bank Digital Currency – are on the rise, competing for becoming the next dominant type of money, that is, the prevailing means of payment which determines the functioning of the monetary system.

The Monetary Turing Point, page 1.

It is in this setting that we look at the CBDC proposal as an intermediate step for banking reform. Complicating the problem is that CBDC hasn’t been totally defined and described in terms of its nature and how it will operate. However, CBDCs are far enough along in its development that Professor Huber has given us monetary reformers some clarity in how to consider CBDCs and how we might go about leveraging it toward moral and just national and international monetary systems. One CBDC question by Georg Schmerzeck was added at the end.

Beyond CBDCs, this interview ends with the interviewer asking Professor Huber about two future possibilities involving libertarian and centralized banking systems, and a question about individual privacy in this digital age. In so doing we learn more on how Professor Huber looks at money and banking today.

Professor Huber has graciously accepted our invitation to speak at the AMI ZOOM Conference (Sept 29 – Oct 1, 2023). He will discuss relevant new developments in CBDC and how they correspond to our ideas of monetary reform. Also discussed will be the political interactive dynamics between governments, central banks, commercial banks, other financial institutions, money issuers, and money users. 

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Steven Walsh:

Page 184 (section 8.6.2) begins with a description of a currency ledger. Can you explain “liabilities to a currency register, non-interest bearing and at open maturity, but callable at any time.”

Professor Huber:

The currency register (CR) is conceived of as an organizational unit separate from operational central banking and the CB balance sheet. The CR creates the money while the CB uses the money in banking operations, such as lending to financial institutions, maybe also directly lending to the government (gov), or in open market purchases of securities. 

(Btw: The board of the currency register – if in the U.S. and according to national traditions – could include Treasury representatives in addition to Fed board members; in most of Europe rather not so, due to a more clear-cut separation between monetary and fiscal powers). 

I imagined that newly created sovereign money is transferred from the CR partly to the gov as debt-free genuine seigniorage (free of interest and redemption) and partly to the CB balance sheet as a loan, representing a liability of the CB to the CR. That type of loan would not be interest-bearing and would not have a fixed maturity; but it ought to be callable, which means asking for it back upon notice if advisable for monetary policy reasons. 

Basically, I would prefer to have just one and the same board for both the CR and the CB. 

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Steven Walsh:

In your book, the entity issuing CBDC, thereby receiving the seigniorage, is open-ended. 

Professor Huber: 

The entity issuing CBDC is the CR. It issues sovereign money in the forms of (a) coins, (b) notes, (c) CB deposit reserves (all as far as still applicable) and now also (d) CBDC in the form of digital tokens, e.g. digital dollar tokens. 

Both the debt-free genuine seigniorage and the interest-borne ‘seigniorage’ from the CB’s operational banking business, using whatever form of money, go to the gov/public purse/treasury. 

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Steven Walsh:

Banks issue bank money via loans and investments. As the loaned money is spent by the borrower then that money is publicly circulating. As people earn that money, they can put it into a CBDC account at the CB. Is that correct?

Professor Huber:

Possibly, Yes. According to what I know from published sources, I now assume the ‘CB account for everyone’ is not in the making. Rather than coming in the conventional form of non-cash money in a CB account, we will likely see CBDC will have the form of digital tokens, held in an individual digital wallet rather than in a CB account or bank account. In less progressive cases, as is expected with the digital euro, banks and other payment services providers (PSP) act as trustees of customer CB account balances, individually transferable online, or offline using NFC or QR codes. 

On the CB balance sheet, CBDC is likely to be booked a ‘liability’ in the same way as cash. This is certainly an outdated practice void of real sense. Anyway, those CB ‘liabilities’ do not represent individual customer balances. 

With the banks and PSP, it’s similar. Like cash, CBDC is a bank/PSP asset, and if disbursed to customers CBDC then is a customer asset off the banks’/PSP’s balance sheets.

Customers are free to put their money where they want it – including lending it to a bank, like erstwhile solid cash into, say, a true savings account, or time account, or howsoever. 

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Steven Walsh:

The other possibility is that the CB issues CBDC for the government to spend or loan money into the economy.

Professor Huber:

Sure, the government may lend money for special purposes, e.g., student and agricultural loans, but by-and-large, it simply spends the money it receives from the CR and taxpayers or from which it borrows on the bond market or even directly from the CB.

The CB, by contrast, lends its money into circulation, and the banks/PSP and other financial institutions use it for extending loans or making investments. 

For the time being – unfortunately, as I would say – all CBs envisage to issue CBDC side by side with continued bank money creation. The banks are, or at least ought to be, able to use both bank money and CBDC for extending bank credit. 

However, CBDC use is very likely going to be restricted at the beginning because banks and CBs are afraid of a landslide currency substitution, that is, customers substituting CBDC for bank money. Under conditions of business as usual such a landslide is unlikely, but it might happen in another sector-wide banking crisis. Ultimately it should be left to customer demand to what extent banks are required to convert bank deposits into CBDC or customers can still choose to use bank money. 
Bank money and CBDC should be convertible into each other in the public circuit, as much as CBDC and CB settlement reserves should be interchangeable in the interbank circuit. Banks certainly want to rule that out, but we should push for it.

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Steven Walsh:

Given the undefined way CBDCs will come into circulation, how will the shifting proportions between cash, CBDC, and conventional reserves be highly significant (page185)?

Professor Huber:

Well, from today’s perspective the most system-defining interaction will be between bank money and CB digital tokens. 

Cash hasn’t been system-defining for long. The US seems to be an exception in that about half of its M1 consists of dollar notes – not circulating in the US itself, but across the globe as a parallel currency or – still to a degree – in the worldwide underground economy.

Cryptocurrencies are not, or at least not yet, an alternative to be taken seriously because for the time being transactions in them are comparatively too energy-intensive, much too slow, too expensive, and moreover they lack political support and broad-based acceptance by the money-using public. 

A shift from bank money to CBDC in the composition of the money supply would be – and will be as I am convinced – a true game changer in that bank money has to face real competition from CBDC. In the last 100-150 years (a) CB or Treasury cash was technically unable to compete with cashless payment in bank money, while (b) non-cash CB money has never been made available to the public. Bank money was thus doubly shielded from any competition and permitted to crowding out CB cash achieving a factual non-cash money monopoly in the public circuit. Now, by contrast, CBDC has the potential to crowd out bank money. 

However, the CBs presently are still caught in a role conflict: between being the protectors and defenders of bank money versus being their nation’s guardian of monetary sovereignty and issuers of sovereign money. So CBs will try to introduce CBDC reluctantly and in a restrictive, banking-protective way. Initially, CBDC is unlikely to be something that money reformers could get excited about. Over time however, having CBDC as a kind of official parallel currency won’t work and this situation will surely change, as CBs must spread CBDC in order to regain pro-active monetary policy clout rather than re-actively having to accommodate to the facts the banks have created beforehand.

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Steven Walsh:

Page 185 Concerning CB-created CBDC being put on a separate register, you write, “This also applies to genuine seigniorage, the issuance of which through allocation of the monetary register to the treasury need not be accounted for as a liability, or as equity capital of the central bank.”

Here you appear to be considering CBDC as a form of social equity. Any more words on CBDC and its possible future? 

Professor Huber:

Social equity, Yes, right. In the run-up to the Swiss referendum on introducing a sovereign money system, from about 2014 to June 2018, looking for a sensible way of how to account for sovereign money on a CB balance sheet, a handful of us have developed that concept of social equity, tentatively using various terms for that booking position, such as monetary balancing item, goodwill (which however has another meaning in accountancy), monetary base stock, national monetary endowment, societal equity – in any case not as a CB liability, and separate from CB owner equity.

Still, I feel “social equity” will not to be entirely adequate in terms of accounting and financial reporting. That’s why I came back to Ricardo and the separation of operational central banking (for which reporting standards would apply unchanged) from sovereign money creation by a CR (Ricardo in his time termed it ‘note issue department’ of the CB, different from the ‘banking department’). 

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Steven Walsh:

Page 138 (section 7.6) starts with banks making loans, and the client (at that moment or after the money is earned downstream) wants CBDCs. In this case, bank money is converted into CBDCs. The seigniorage privilege goes to the bank, and all the more so since it is earning an interest rate on that seigniorage. The following two paragraphs describe the seigniorage going toward the public sector by the CB/Fed buying government bonds from private holders or the government itself.

Could you describe the process of seigniorage moving toward the banks when making loans and how, at what point during financial transactions in the marketplace, CBDCs shift the seigniorage benefit to the public sector? Also, could CBDCs make a difference in how 3rd tier markets operate regarding seigniorage?

It seems clear that if the banks are the only ones allowed to bring new money into circulation (through loans or investments as described in section 7.6, the first paragraph) and CBDCs are simply a substitute for the cash as we advance, society is no better off than today. Do you agree?

Professor Huber:

Mmh, there seems to be some misunderstanding What I wanted to say is that all current plans I know of by CBs to issue retail CBDC to the non-bank public all include the banks as transmitters. It’s analogous to cash: The CB lends the cash and CBDC to the banks, doing so by way of open-market purchases of sovereign bonds held by banks, or also by way of regular direct financing operations. The banks in turn disburse the cash and CBDC to the customers (irrespective of CBDC inflows to the banks from other sides). It doesn’t matter in this regard whether banks disburse CBDC to their customers by way of lending or in exchange for bank money. 

Current plans are not explicit about bank loans disbursed in CBDC; and banks can hardly be expected to disburse loans voluntarily in CBDC rather than bank money, forgoing a withdrawal fee, analogous to cash. In any case, the banks need to have CBDC readily available, again analogous to cash in their vault, and have to finance that CBDC, including if obtained from the CB, to 100%. The interest-borne ‘seigniorage’ earned on CBDC thus fully goes to the CB. The banks act as monetary and financial intermediaries of CBDC, as is the case with cash (whereas, when doing business in bank money, the banks aren’t financial intermediaries of bank money, but the creators of that bank money). 

The banks, of course, earn interest or other revenues on the loans and investments they make also when using CBDC. It is an open question whether the lending rate on CBDC and on bank money are, or are required to be, the same, or whether banks would charge a higher rate on CBDC. Unlike some, I expect a uniform interest rate on credit from banks, but when withdrawing or demanding transfer of funds in CBDC, the banks will probably charge an extra fee if they are allowed to.

With CBDC, however, banks no longer have the extra profit which falls to them with bank money. The seigniorage-like extra profit the banks make with bank money is in the just fractional need for having to refinance bank money in cash and reserves. Even though the banks also need to take up interbank loans in reserves, the banks nevertheless are able to avoid financing costs to an important extent, a privilege, since all other market participants have to finance their dealings to 100%. With the spread of CBDC, that bank money privilege is surely going to shrink. Not over the year, but over time.
Currently, as the banks have now understood they are on the defence, resistance to CBDC by the banking sector and its allies in politics as well as inside and outside the CBs is becoming ever more explicit and offensive. 

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Steven Walsh:

However, if CBDCs can be used to make in-direct purchases of bonds in the open market or directly from the government, there is a movement of seigniorage away from the banking sector. However, this is already occurring today, given the Bank of Canada example (page 139). Therefore, CBDCs would do little better, if anything, than maintain the status-quo system we have today. Do you agree? 

Professor Huber:

No. CBDC for sure isn’t full sovereign money reform as envisaged by us, but CBDC possibly is the beginning of gradual monetary reform. Depends on the way it is implemented. A growing share of CBDC in the overall money supply is clearly a game changer – bringing the advantages of digital tokens to ever more people and firms, improving monetary policy effectiveness, inducing further changes towards genuine seigniorage and other monetary contributions to financing public expenditure. 

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Steven Walsh:

However, as suggested in Michael Kumhof’s paper (full text) and presentation (YouTube), if CBDCs are government issued and obtain 30% of the money based on GDP that would make a difference. Do you agree? And could you comment on this possibility?

Professor Huber:

Yes, I agree – without betting on the 30%. Every additional percentage point will be welcome. A definite system change, however, might take more than 30%. When looking back to the ratio of bank money and cash in the money supply (in Germany and Switzerland, due to the data I have had), the bank money regime became apparent with the spread of cashless payment in the public circuit and a bank money share of and over about 50% in M1.

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Steven Walsh:

In your book, Professor Huber, you go back and forth describing the need, desire, or sympathy for monetary reform where the seigniorage is returned to the public sector (pages 59, 87, 134-5, 140, 144, 151, 152, 155-156, 158, 160-1, 163, 168, 173) versus the present system where seigniorage continues to go to the bankers (page 138) and other financial players, to descriptions of side-by-side competition of where there is a choice by the depositors if seigniorage goes to the bankers or the public. (pages 138, 140, 146, 159, 161, 163, 167, 172, 184). Final comments or thoughts about the future of banking?

Professor Huber:

Did I really speak of banking ‘seigniorage’? I used to do so many years ago, but thereafter I have tended to say ‘seigniorage-like’ benefit (or competitive advantage, or privilege; because it’s not about seigniorage proper, but the privilege to finance own own dealings fractionally rather than 100% as everyone else has to. 

To the future of banking I couldn’t say more than put down in the book. If things by and large develop as can be foreseen from today, banks and other financial institutions (except for maybe insurance comp), that is, monetary and non-monetary financial institutions, will become more alike. One question here is to what extent banks and other financial institutions are allowed to create money surrogates beyond bank money such as money market fund shares, or stablecoins. 

Whether universal banks (as distinct from special-purpose banks) will disappear over time together with the bank money privilege, we cannot know; we cannot even be sure about the total disappearance of bank money in a 50-100 years perspective. 

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Here is an additional question from Georg Schmerzeck:

“How should the state guarantee the conversion of bank money into CBDC? Do you agree that, in the normal course of events, customer requests for CBDC should be settled by banks in the same way as requests for cash and that the state conversion guarantee should only be invoked for deposits at bankrupt banks (that is, once the CB’s lender of last resort function has failed to stabilize the bank)?”

Professor Huber:

The CB, not other state bodies, would guarantee to convert any liquid bankmoney into CBDC. And, yes, the procedure would be analogous to converting cash into CBDC through a bank or other payment service provider. If, however, there would be above-normal demand for CBDC, banks would not be able to make enough CBDC available in due time; that is, banks have much the same liquidity problem here as they always have had with cash.

In this context, the conversion guarantee is meant as an emergency option to prevent a more significant bank run, similar to the existing government warranty or insurance schemes to guarantee customer deposits to a large extent. 

I guess such a conversion guarantee would not be relevant anytime soon, as virtually all CBs (e.g., of the euro area, Sweden, UK) are going to limit, or already have limited (China) the amount of available CBDC concerning both holdings and transfers.

These limitations are part of the CBs’ egg dance about introducing CBDC without wanting to affect the banks and bank money. 

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Steven Walsh:

Two future monetary reform scenarios where seigniorage is returned to citizens or the public sector. Comments on these ideas on ways to go forward?

Peer-to-peer lending – the libertarian model:

Some reformers, most notably Jonathan McMillan, in his book, The End of Banking, set up an alternative lending program undoing the present bankers’ system. People put money in a universal lending pool, and this combined amount of money is used to make loans to individuals worldwide – for mortgages and other purposes. Actual seigniorage in McMillan’s model would go to citizens through a dividend payment.

Professor Huber:

Regarding peer-to-peer lending, that is already taking place today, for example, by way of crowdfunding. I would expect the internet and online finance to bring more novel arrangements. However, such transactions use already existing money (usually bankmoney, now, a few use cryptos) and do not themselves involve money creation. Thus, there are no seigniorage or seigniorage-like benefits, just interest payments or value gains.

Concerning a ‘Universal lending pool’ – why and how so? Someone will have to be in charge and be liable…

A ‘citizens dividend,’ aka ‘helicopter money,’ is a well-known concept since the times of Silvio Gesell and C.H. Douglas a hundred years ago. There are quite-a-few people, even beyond the monetary reform movement, who have agreed to that since then, including B. Bernanke when in office as Fed chairman.

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Steven Walsh:

2) This second scenario also centers around a sovereign money system but moves from a libertarian perspective to a centralized government-oriented mortgage lending program. The goal is for the government to obtain the seigniorage through interest to help replace taxes and fund government programs.

I ask because I have not feared national governments having proper authority and was impressed by how Quakers in Colonial Pennsylvania ran their government. They first issued paper money in 1723 not for “the King’s use” to go to war but for “the poor and industrious” in the counties around Philadelphia. They loaned 80% for mortgages on homes or land and spent 20% into circulation from 1723 to 1756 and the start of the French-Indian War, and with a minor hiccup in 1745 when a relatively small amount had to go to the King’s use in going to war. The interest income earned on the mortgage money allowed the Pennsylvania Assembly – the local government – to eliminate the head tax or poll tax.

The analogy for today is to have government loans for mortgages. What if, for example, in the United States, a repurposed Federal Housing Finance Agency (FHFA) took over the primary mortgage market modeled more closely with the Social Security Administration? At this point, Fannie Mae, Freddie Mac, and HUD’s FHA – used for insurance – would not be necessary. Also, the banks and their customers could invest in the real economy. The FHFA would use government-created money for the mortgages. The government could earn the seigniorage as an ongoing interest rate bringing in regular revenue. Also, if there was a pandemic or other economic crisis, the FHFA could have a moratorium on repayment or make payment adjustments based on a sliding scale.

Professor Huber:

I don’t have enough knowledge in this field. In most cases, it is good to have one or several public competitors alongside private ones, for example, State and municipal banks, as a corrective element within the otherwise purely private banking sector. Of course, public and private entities, financial and real-economic actors, can and ought to use CBDC.

I am generally skeptical about central planning and provision by state agencies. I am convinced of the appropriateness of having a sovereign money monopoly, much like having the state monopolies on lawmaking, territorial administration, judiciary, taxation, and the use of force, even though, of course, in an institutional arrangement of division of powers. However, in finance and the real economy, monopolies and all too mighty oligopolies are typically avoided for good reasons, including state monopolies (if it’s not about so-called ‘natural monopolies’).

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Steven Walsh:

Our last question for this interview concerns “Big Brother.” Does not the centralized control of CBDC play into the hands of the power elite to further dominate our lives?

Professor Huber:

Financial privacy and confidentiality must be taken seriously as civil rights and liberty. Of course, the problem did not just arise with the advent of digital payments. All cashless payments in today’s bankmoney regime can, basically, be totally monitored or traced, including cash withdrawals and re-deposits. From this point of view, defending bankmoney and small change cash seems grotesque while portraying CBDC as the conspiracy of an alleged Big Brother. Direct payer-to-payee payments with certain CB digital payment tokens are actually more private or identity-protecting than current bank transfers.

Financial privacy is less a question of technology than politics and circumstances. The important thing is to have a reliable rule of law, constitutionally based on and defending civil rights and liberties and governed by democracy. What one really has to fear are circumstances to the contrary.

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Thank you, Professor Huber, for your attention and dedication to this interview. Your book and this interview continue to shine a light into the pandora’s box of banking. I hope everyone gets something special out of it, as I have. CBDCs are a big, daring step towards a moral monetary system that we will fully achieve someday.