Article by Megan Green on CBDC in the Financial Times.

 

Title of the article is “Central banks need to go slow on digital currencies”. 

FT articles are normally behind a paywall, but this one does not seem to be: at least I looked it up on a computer which does not have a subscription to the FT, and I could see the entire article.

Anyway, an important argument for “going slow” she doesn't mention is that the ACTUAL ADMINISTRATION of accounts which are 100% backed by reserves can perfectly well be farmed out to private / commercial banks. Indeed advocates of full reserve banking have been advocating the latter for DECADES.

Under full reserve (aka “100% reserves” aka “narrow banking”) depositors have a choice between two types of account. First, as just mentioned, accounts which are 100% backed by reserves, and second, accounts which are not. The former are of course totally safe, whereas if anything goes wrong with the latter, there is no help available from taxpayers, e.g. in the form of deposit insurance or bank bail outs. The latter accounts pay a higher rate of interest to reflect the additional risk.

Of course the SPEED at which money is transferred via “farmed out” accounts might be slower than under genuine CBDC accounts, but the speed offered by traditional high street banks is good enough for a large majority of account holders. Have you ever had cause to complain about the speed at which commercial banks transfer money via debit cards? I haven't.

Examples of advocates of full reserve who also advocate the farmed out arrangement include Milton Friedman. See Ch3 of his book “A Program for Monetary Stability” (published in 1960) under the heading “How 100% reserves would work”. See also “Towards a twenty first century banking and monetary system”, p.7. See also the book “Modernising Money” by Ben Dyson (founder of Positive Money).

The big advantage of farming out is of course that commercial banks already have the staff and expertise needed to deal with millions of accounts held by households and small firms. Central banks do not.

Less intermediation.

Next, Megan Greene says, “With CBDCs, businesses and individuals could hold accounts directly with the central bank. While that could provide efficiency, it would end the role of banks in financial intermediation.”

The phrase “financial intermediation” is a bit vague, but presumably she means CBDC reduces the extent to which bank loans are funded via deposits: i.e. it it cuts down on that PARTICULAR FORM of “financial intermediation”. In contrast it does not cut down on loans funded via equity, which is what many mutual funds do – some of which are incidentally run by banks.

She then says in relation to the latter decline in lending that “Fewer loans would be made, a drag on overall growth. To make up for the lost fees, banks might charge more for payment services and accounts.”

She makes a mistake there that dozens of others have made. It is obvious that less lending means less demand and less growth ALL ELSE EQUAL. But there is a very simple and zero cost solution to that, which is to implement more stimulus. As Milton Friedman said, it costs nothing in real terms to create more money and spend it into the economy, something that central banks and governments have done on an unprecedented scale since the 2008 bank crisis.

So the net effect of less intermediation combined with more stimulus would be GDP remaining about the same, but with less debt based economic activity and more non-debt based activity. Given the weeping and wailing that comes from the great and the good about the allegedly excessive amount of private debt, it is no clear why that would be particularly bad outcome.

Moreover, it is PRECISELY funding loans via deposits (I.e fractional reserve banking) which has been responsible for hundreds of bank failures thru history and for the 2008 bank crisis, which had catastrophic economic consequences. Thus her idea that disposing of the “deposits fund loans” system would be a “drag on growth” is a joke.

In other words, Megan Green's idea that funding loans via deposits promotes growth is true AS LONG AS IT WORKS. But inevitably at some point it won't work, at which point the whole “funding loans via deposits” idea comes crashing down.

 

Running to safety.

Next, she says “Since CBDCs are backed by the central bank, they are safer. In a crisis, that might lead to a run on banks as customers switch out of cash.”

Well the first bit of evidence that that would not happen is that personal accounts at high street banks are ALREADY PROTECTED by deposit insurance. There is of course a limit to that deposit insurance cover: it's €100,000 in the EU. But a wild guess that's sufficient for 99% of households.

Secondly, in the UK (and doubtless some other countries) people have actually been free FOR DECADES to open accounts with state run savings banks. In the UK there is “National Savings and Investments”.

NSI certainly does not offer the speed and flexibility of CBDC or of a traditional high street bank. But for anyone who wants to flee to safety, NSI would be ideal. But there was no large scale dash for NSI during the 2008 crisis.

And of course there is no reason to be inconvenienced by the latter lack of flexibility of NSI: to gain the advantages NSI for the bulk of your money, while retaining the flexibility you need for day to day transactions, all you need do is keep enough for day to day transactions in a traditional high street bank account, while placing the rest with NSI.

Another attraction of the NSI is that those with accounts there are not limited to the UK £80,000 deposit insurance limit: they can deposit up to £1million in complete safety.