I’m referring to an article in the Financial Times by the above two entitled “On CBDCs and sorcerers.” CBDC, by the way, is short for “Central Bank Digital Currency”, an idea being actively considered by several central banks right now.
CBDC would give any citizen, and presumably any firm, the right to open an account with their central bank, unlike the present set up, where only relatively large commercial banks have accounts with the central bank.
Gross is an economist at the IMF, and Siebenbrunner is a post graduate student at Oxford.
The conclusion of Gross and Siebenbrunner’s article is that various “adverse” and “unintended consequences” might stem from introducing CBDC.
Well the first obvious flaw in that idea is that citizens of the UK (and doubtless some other countries) can in effect already open an account with their central bank / government in that they can open an account at their country’s state run savings bank. In the case of the UK, that’s “National Savings and Investments”.
UK citizens have been able to do that for decades, and no “adverse” or “unintended” consequences have arisen far as I know.
NSI invests just in UK government debt, thus it is very much a state entity, rather than a state owned bank doing much the same as existing commercial banks, e.g. granting mortgages to all and sundry.
But Gross and Siebenbrunner do not so much as mention NSI which makes me wonder whether they are aware that NSI exists, and if they are, whether they realise that accounts at NSI pretty much equal CBDC accounts.
Of course NSI doesn’t offer all the facilities of a normal bank account: e.g. cheque books and credit and debit cards are not offered. But customers can withdraw money in about 24 hours by phone and transfer it to their commercial bank accounts.
So if CBDC was introduced, perhaps by having NSI offer the normal facilities offered by commercial banks, absent, let’s say the possibility of getting a loan, would there be a mass “unintended” rush to CBDC accounts?
Well the simple answer to that, apparently unbeknown to Gross and Siebenbrunner, that the attractiveness of CBDC accounts can easily be adjusted so as to prevent any sort of mad rush.
For example, the rate of interest earned on current or checking accounts could initially be set at zero. And indeed that makes some sense in that advocates of Modern Monetary Theory advocate a zero rate of interest on state liabilities (if you can call base money a state liability, which of course is debatable).
That contrasts with normal commercial bank accounts where, while customers currently get almost no interest, the cost of running their accounts is at least defrayed to some extent by interest earned by their bank. And a further option, if the plan is to move to full blown full reserve banking, would be to not withdraw government guarantees on existing commercial bank accounts (e.g. deposit insurance) in the first instance.
The attractiveness of CBDC accounts could then be gradually increased, relative to existing accounts at commercial banks, with any undesirable consequences being dealt with as they arise.