Writing in NRODT earlier this year, I argued that:
Government gathers power sometimes in great swoops, sometimes by stealth, and sometimes in slow, sly increments, foreshadowed by position papers, op-eds, and regulatory tweaks designed to address an “issue” that a careless citizenry has overlooked. It’s this slower, slyer approach that is now in motion as Big Brother’s smaller brethren take aim at cash….
In this connection, I was interested to see yet another article, this time in the Wall Street Journal last week, talking up digital cash.
Here’s an extract (my emphasis added):
Central bankers throughout the world, from Canada to Ireland, have recently indicated that they might issue digital currency in the future. Yet the U.S. has been absent from the debate. As the world’s central monetary power, America should play a leading role in studying the benefits and pitfalls of a digital-currency future. While plenty of risks would come with such a conversion, the potential perks are so great that it merits serious consideration.
What would a government-backed digital currency look like? A country’s central bank would need to become a deposit-taking institution and hold accounts on behalf of citizens and businesses. All of their debits would be tracked on the central bank’s blockchain, a digital ledger resistant to tampering. The central bank would pay interest electronically by adjusting the balances of depositor accounts. While the current system of physical notes and bills could be continued in parallel, it would likely wind down over time.
There are plenty of advantages. The government would save nearly $1 billion annually by not having to print, store, transport and safeguard physical currency. Tax collection would become much simpler, and tax evasion and money laundering could become prohibitively difficult. Depositors would no longer have to rely on commercial banks to hold their checking accounts, and the government could get out of the risky deposit-insurance business. Commercial banks that wished to keep making loans would raise long-term capital in the debt and equity markets, ending the mismatch between demand deposits and long-term loans that can cause liquidity problems.
Central banks would be able to expand credit and control the monetary system without the need for commercial banks to intermediate. The central bank could more easily adjust its monetary policy, because it would have the ability to target specific accounts. For example, the Fed could loosen monetary policy only in economically depressed regions of the country, or for certain depositors, such as senior citizens.
Yet the centralization of banking under this system would also create a Leviathan with the power to monitor and control the personal finances of every citizen in the country. This is one of the chief reasons why many are loath to give up on hard currency. With digital money, the government could view any financial transaction and obtain a flow of information about personal spending that could be used against an individual in a whole host of scenarios. In other words, it would be virtually impossible to hide money under your mattress. But creating and respecting privacy firewalls and rethinking legal-tender laws could mitigate the dangers of monopoly and stifled competition in currency markets….
What could go wrong?
Another ‘advantage’ of digital cash is that it will make it easier to push interest rates into negative territory (certain key interest rates have already already turned negative abroad).
Enterprising Investor has a report on some remarks recently made by James Grant, the founder of Grant’s Interest Rate Observer,
Bonds with negative yields are worse investments than cash. That has always been the reason for zero lower bound in monetary policy. So far, investors have been willing to pay for the convenience and security of storing wealth in banks and bonds, but if yields become sharply negative, some savers will no longer be able to accept guaranteed compounded losses. Then, conventional wisdom says, they will hoard cash, which returns 0%.
To maintain increasingly lower interest rates would require a “war on cash,” Grant said. He envisions a means by which the Fed would discourage and stigmatize using cash, and ultimately implement an unfavorable exchange rate on physical currency.
In the course of my NRODT piece, I noted this:
In a speech last September, Andrew Haldane, the Bank of England’s chief economist, grumbled about the “constraint physical currency imposes” on setting negative interest rates. After considering various ways of dealing with this nuisance, he concluded that an “interesting solution” would be to “maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form.” This “would allow negative interest rates to be levied on currency easily and speedily.” Translation: Make people hold their cash in electronic form (and thus in banks); they will then have no means of escaping the levy on savings that negative interest rates effectively represent.
Just another reason why forcing people into digital cash is a very, very bad idea.
Cash Under Attack (Again)