S15 E56: Richard Werner on Bitcoin, CBDCs & the Case for Community Banks

Prof. Richard Werner is the economist who gave the world the phrase "quantitative easing." He floated it in Tokyo in the mid-1990s, back when he was a chief economist at Jardine Fleming and a visiting researcher at the Bank of Japan's monetary institute, and he later wrote Princes of the Yen, a book about how a handful of central bankers steered Japan's boom and bust. He could be wearing a nice suit in a glass tower right now. Instead he spends his time defending small local banks, cash and, to my pleasant surprise, Bitcoin.

The first time we met, we shared a panel at Mallorca Blockchain Days 2021, alongside Amir Taaki and Joshua Scigala. I admitted to him on air that my first instinct back then was suspicion. "This guy used to be a banker, why should I trust what he says?" But here was a man who wanted to decentralize central banks and do economics by looking at data instead of reciting ideology.

I had wanted this interview for a year, and in 2024 it finally happened on the sidelines of a conference where he had just debated an Austrian economist on stage. In 51 minutes we covered why banks literally create money, why CBDCs are a hostile takeover of the banking system, why I still pay for bread in cash, and his forensic (and spicy) reading of the collapse of Silicon Valley Bank.

Why a Central Banking Insider Likes Bitcoin

My opening question was simple: why does he like Bitcoin? His answer was not about number go up. Werner has spent years looking for alternatives to a system in which central bankers act as central planners, and he says that system "has created a lot of problems for a lot of people." In his words: "it's the central planners' dominance that's been the issue."

Bitcoin, for him, is intriguing because it is "seen as a way of having some more decentralization and having alternatives to the current central banking dominated system." That is a cautious endorsement, and it is worth noticing the word "alternatives." He is not a maximalist who thinks one coin fixes everything. He is a decentralist who sees Bitcoin as one tool among several, and that framing runs through the entire conversation like a watermark. A man who studied central banks from the inside does not want a new monopoly, even a digital one.

Banks Make Money Out of Nothing (and He Proved It)

I asked him what is wrong with central banks, and mentioned that he might have been the first economist to show that private banks are the ones creating new money when they issue loans. He pointed me to two papers. The first is his 2014 empirical study, "Can banks individually create money out of nothing?", and the second is "A lost century in economics" from 2016. Both are, as he put it, easy to find and free to read. In them, as he told me, he could show "that when banks give a loan they create money out of nothing."

This sounds like something every bitcoiner already "knows," but Werner insists it was controversial and disputed by mainstream economists, journals and textbooks until he tested it empirically. Even now, some still debate it. His conclusion is calm: "Banks are special, they have a special power, namely to create money." And he treats that power the way an engineer treats a tool. "Like any tool, tools can be used for good and for bad," he said. He has watched it used for bad "quite a lot," but believes small local banks can point it toward good.

The twist comes next. Once his studies were out, he says, the central planners acted surprised, as if they had just discovered this, and their conclusion was to "quickly abolish this" and "take away that power from ordinary people." Their goal, as he sees it, is to drive banks out of business so that only the central bank survives, with a central bank digital currency as the vehicle. Which brings us to the scariest three letters in this episode.

The C in CBDC

Werner's definition of a CBDC strips away the marketing. A central bank digital currency is "ultimately the offer by the central planners for you and for me and for everyone to have an account at the central bank." In other words, the regulator starts competing with the banks it regulates. That, he argues, explains 20 years of anti-bank policy: they were "already planning to compete against them." If we allow CBDCs, "ordinary banks and small banks" will be driven out of business until only the central bank remains. His verdict did not need any embellishment: it "gives totalitarian powers to technocrats over our daily lives of an extent that's unprecedented in human history."

I brought up something Ben Arc had told me at the same conference, namely that CBDCs could offer some confidentiality for small payments, say up to 100 euros. I also listed the dystopian features: programmable restrictions, helicopter money you can only spend on approved products, and the Canadian truckers who got their bank accounts frozen. Was it a paper tiger?

Not at all. "We should definitely be worried about it," he said, and then went further than most economists I know would dare: "we need to stage demonstrations in front of central banks against central bank digital currencies." Peacefully, he stressed, but strongly and clearly. As for the privacy promise, "I got to laugh when I heard that," he told me, recalling Christine Lagarde's sales pitch. Cash will always be more private, and privacy up to 100 euros is, in his sarcastic phrasing, "very generous." Even a 100% privacy setting would be a mirage: "That's a joke, right? They're in control. They can press the button and from tomorrow it's suddenly not private anymore."

He also dismantled the claim that CBDCs are a response to Bitcoin. We have been using digital money for decades through bank transfers, cards and PayPal. Bank digital currencies are old news. "What's new is the C," he said, "the centralized aspect, which is only good for the central planners." So he proposed a simple test. Before central bankers even study a CBDC, their own daily transactions should become visible to all of us, and we should get to vote on what they are allowed to buy. "You do it first, guys." His prediction for how popular that would be: "I think it would be quickly off the table." I would buy a ticket to that vote.

RFK, Blockchain Budgets and the Red Lines

At the time of our conversation, Robert F. Kennedy Jr. was running for president and kept talking about putting the US budget on a blockchain so every transaction could be audited. I told Werner that this sounded to me like a Trojan horse. What currency would run on that chain? Something issued by the government or the Federal Reserve, not private money. It felt like a way to open "the gates of hell for making CBDCs more acceptable."

He agreed, and he did so with some regret. "I like him as a person," he said, and he found most of Kennedy's policy ideas sensible, but this was "definitely one of them," the areas where he disagrees.

He wondered aloud whether Kennedy's running mate, whom he described as "somewhat connected to Google in some ways," had anything to do with it, and then floated a darker hypothesis: maybe "you can only be a candidate if you conform on some key red line issues, red line for the establishment." That is speculation, and he presented it as such. But it is the kind of question a decentralist should keep asking whenever a populist candidate starts sounding like a central bank brochure.

Cash Is Freedom

Here I made a confession. In Romania, more than half of my daily transactions are settled in cash. I keep the bare minimum in my bank account, withdraw whenever I can and happily carry coins in my pockets. My girlfriend once asked me if I carry cash because I want to commit crimes. My answer was that one day the government may become abusive enough that it is morally imperative to break the rules, and if I don't create demand for cash, it will disappear before then.

Werner did not laugh at me, which I appreciated. "Cash is a basic right, it's a human right," he said, meaning the right to settle transactions with a means of payment that is "under our control" and visible to no one else. The reason central planners dislike cash is precisely that "they don't know who's spending what, when and where," and they cannot stop a transaction once the notes are circulating. The association with money laundering and tax evasion is, in his phrasing, a technique of "blackwashing." Crime remains crime, he added, but cash is simply the payment method "where we have more freedom and we're less controlled and less monitored."

His advice matches my habit: use more cash, "even if sometimes it's inconvenient," because the statisticians are watching. One day, he warned, they will announce that nobody uses cash anymore and quietly dispense with it, "and of course that's the moment when people will regret it." His summary deserves a T-shirt: "cash is freedom and the central bank digital currency is the entire opposite of that."

Then he raised the stakes. Cash is a liability of the central bank, and the European Central Bank is not accountable to any government or elected assembly. "It's above them, it's outside the law," he said, noting that even central bankers privately worry about the ECB's "democratic deficit." If the ECB wants to reconsider cash, then citizens should reconsider the ECB. "We want only democratic money, which is money issued by democratically elected governments." I am not sure the bitcoiners in my audience will love the idea of government money, but it is a consistent position from a man who cares about accountability above all else.

Gurus, Logic and the Scientific Method

The conference panel he had just finished put him next to an Austrian economist, and watching it, I realized that many bitcoiners are as puritan about ideology as any Marxist. They have a utopian, very logical system, and they believe it has simply never been tried properly. So I asked him what he would tell someone convinced that praxeology is the only valid way to look at economics.

He started with the common ground. Austrians are critical of mainstream economics, and he likes that. The problem is that every school eventually acquires gurus. For Keynesians it is John Maynard Keynes, who said so many contradictory things that "you can get a quote from Keynes on almost anything." Austrians have their own idols, and contradicting them makes people "quite upset." His position: "we shouldn't really have gurus." Theories should be derived from the facts and then tested against the facts.

His sharpest point was about how seductive logic can be. Physics, chemistry and biology have made enormous progress in 200 years, but "in economics there has been no progress for 200 years in the mainstream economics," because economists switched early to a deductive, axiomatic approach. A logically consistent system can still have "no relationship to the planet we live on." In his words, "whether a theory is logical doesn't tell you anything about whether it's true." Ideologists love deduction because it makes their ideas resistant to testing.

He closed this thread with a jab at the slogans of 2020. "Follow the science" was really an instruction not to test and not to check, which is a contradiction. "You don't follow the science, you do the science." That line could hang in any Bitcoin dev chat, frankly. Don't trust, verify, but for economists.

The Strange Death of Silicon Valley Bank

I had wanted to interview him in 2023 because the year handed us a lot of data. Silicon Valley Bank collapsed in March, and in Switzerland, Credit Suisse was swallowed by UBS (I first said HSBC and corrected myself mid-sentence) in a government-arranged deal that took less than a week. Is there even such a thing as private banking anymore?

Werner took Silicon Valley Bank as his case study and walked me through it like a prosecutor. Step one: the bank lost deposits, gradually, in the low billions. Step two was the strange part. Any normal banker would advertise a better savings rate and raise deposits. "Any experienced banker would not do this," he said of what they actually did, which was to sell their US Treasuries and realize losses they never had to realize. They could have borrowed on the interbank market or taken a repo loan from the central bank against those same bonds. Instead, "they essentially were acting dumb."

He also had harsh words for the narrative around it. When interest rates rise, the book value of long-term bonds falls on paper. That happens every time rates go up, and banks are actually required to hold such bonds under Basel III liquidity rules. Yet the FDIC, since late 2022, had been publicly fretting about unrealized losses in the US banking system, which he found suspicious coming from a regulator. He added that the FDIC has a habit of closing small banks, and that America went from tens of thousands of banks to around 5,000.

Step three: the bank tried to raise new equity, which forced every analyst in the country to scrutinize its behavior. They all recommended against buying, the share issue flopped and the whole world learned how badly the bank was run. Step four: big depositors pulled out. Werner named Peter Thiel as one of the biggest, saying he withdrew his money and the money of his portfolio companies and then publicly told others to do the same. "That's how you start a stampede." By his recollection, about $41 billion left in a single day, which he called the largest one-day withdrawal from a single bank in world history.

Then came a claim I have to flag. Werner said Silicon Valley Bank had joined a Federal Reserve pilot called FedNow, which supposedly meant it could not stop the outflows. "Oh, isn't that a coincidence," he said. I let it pass on air, but for the record, FedNow did not launch publicly until July 2023, a few months after the collapse, so I would treat that detail with caution until someone shows the paperwork.

His bigger point stands on firmer ground. The Federal Reserve was sold to Americans as a lender of last resort, there precisely to stop healthy banks from dying in a panic. Where was it? "It sat on its hands until the bank was bust," he said, and only after the FDIC closed it did the liquidity suddenly appear. He called the whole episode "an orchestrated takedown of a bank," and argued that it has been unfairly used as an argument against small banks, when it is really "an argument against central planners."

To explain why he does not trust the Fed's instincts, Werner went back to its origin story. America was a free country that disliked central planners, so how did it end up with a central bank? He reminded me that a central bank is one of the top demands in The Communist Manifesto, which calls for the centralization of credit in a national bank. "Look it up," he said. The most convincing argument for the Fed was that banks are inherently fragile and need a backstop against runs, sometimes runs organized by competitors.

Its track record, he says, says otherwise. In the 1930s, "more than 10,000 American banks died" under the Fed's watch, with no deposit insurance. Local families and small farmers lost their savings, while their loans survived because bigger banks took them over and demanded repayment. "That is outrageous," he said.

He contrasted the decentralized America of small independent farmers he knew from Western movies growing up in Europe with what came after, and drew a parallel with the Soviet collectivization of agriculture happening at the same time: "the same thing was actually orchestrated in America by the Federal Reserve." His claimed result is the rise of giant agribusiness and the end of a farming system built on local communities. It is a provocative thesis, and he delivers it with the confidence of a man who has read the archives.

Small Banks, German Lessons and a Limit on Money

Werner's practical program is not complicated. Small banks are locally accountable in a way that Deutsche Bank, which he says "is not accountable to anyone really," will never be. They are not systemically relevant, so there is no excuse for over-regulating them. Creating them should be deregulated, investors should help fund them, and they should be protected from being merged away. He has numbers on his side: "6,000 banks have disappeared under the watch of the ECB." That is one of the things he works on, and he asked my listeners directly: "I hope your audience is going to support me." You can follow his work on his official website.

I told him the odds looked stacked against small banks, and offered a Bitcoin parallel: Chaumian ecash mints, which work like community banks run by trusted members, with some confidentiality about who pays whom. I also admitted my reservation, namely that they "sort of defeat the purpose of Bitcoin," which was created to eliminate trust in central entities. What model of community bank does he think can survive?

His answer was the German community banking system, which he described as "very resilient" for about 200 years. It is under pressure too. The ECB's regulations and interest rate policy pushed even small German banks into real estate lending, which created a bubble that has already burst, and he expects falling prices to keep squeezing them. "I think there will be even a banking crisis in Germany," he said. And still, he believes they are the future, "because they're our banks." People forget that we want our own money creation.

And then, in the final seconds before the outro, he gave me his one real critique of Bitcoin. "With Bitcoin we can still mine money but there is a limit," he said, and that is why he would argue "it's not an ideal system." It is good that there are controls on money creation, he began to explain, and then the recording ends. For a bitcoiner, that cliffhanger is almost poetic. The man who coined quantitative easing and the man who believes in 21 million coins agree on nearly everything about who should not control money, and disagree about whether new money should exist at all.

Werner has since come back to my show twice, for S16 E34 and for the live crossover panel with Amir Taaki in S17 E40, where he kept hammering on community banks and CBDCs. If you want the opposite angle on the same fear, my conversation with Aaron Day on CBDCs vs Bitcoin pairs well with this one. Both men see the same cage being built. They just disagree about which key opens it.

Listen to Richard Werner on Spotify, Apple Podcasts, YouTube, and More

Time stamps:

00:00:51 – Introducing Prof. Richard Werner
00:02:01 – Richard Werner's View on Bitcoin
00:02:45 – Problems with Central Banks
00:03:01 – Empirical Studies on Money Creation
00:04:16 – Decentralization and Local Banking
00:05:23 – Concerns About CBDCs
00:06:38 – Ideological Conflicts
00:07:30 – Importance of Empirical Data
00:09:51 – Critique of Theoretical Economics
00:11:07 – Scientific Method in Economics
00:13:50 – Concerns About CBDCs and Privacy
00:14:35 – Opposition to CBDCs
00:16:10 – Privacy Claims of CBDCs
00:17:16 – Misunderstanding of CBDCs
00:18:29 – Arguments Against CBDCs
00:19:42 – Transparency in Central Banking
00:20:31 – RFK's Blockchain Proposal
00:21:43 – Personal Experience with Cash Transactions
00:21:56 – Cash Transactions and Personal Choice
00:22:53 – The Human Right to Cash
00:24:06 – The Importance of Demand for Cash
00:25:08 – Accountability of Central Banks
00:26:18 – Support for Local Banks
00:28:40 – Recent Banking Crises
00:29:49 – Analysis of Silicon Valley Bank's Collapse
00:40:46 – Federal Reserve's Role in Banking
00:43:11 – The Federal Reserve's Inaction
00:44:21 – Impact on Farmers in the 1930s
00:45:34 – Centralization of Agriculture
00:46:53 – Critique of Central Planning
00:47:09 – Solutions for Small Local Banks
00:48:50 – Lessons from German Community Banks