Central Bank Digital Currency: A Primer

Central bank control: since physical cash is supplied entirely by the central bank, it might be thought that it has effective control over the supply. This is not so, however. It is true that the central bank can increase the supply at will, but it is much harder for it to control the distribution and ownership of physical cash. It also cannot easily decrease the supply of physical cash. People can, therefore, should they so desire, hold a large proportion of their wealth in the form of cash and there is essentially nothing the central bank could do about it. Or rather, whatever measures it can take are both very costly and blind; i.e., it cannot target those individuals whose cash balance is deemed excessive. With a digital currency, on the other hand, the central bank would have both the power and the knowledge needed to control how much each and every person and company holds. Since it is the avowed aim of central banks to increase nominal spending, they want digital currency in order to impose all sorts of restrictions on the holding of money in pursuit of this end. The ECB, for instance, openly speaks about capping the amount a person can hold, limiting the time a person can hold an amount of money, and imposing negative interest rates on amounts that the bank deems excessive. All this would be virtually impossible if people used physical cash instead of digital currency.

CBDC vs. Bank-Created Money (Demand Deposits)

It is also important to distinguish clearly between CBDCs and money substitutes issued by commercial banks. Unlike digital currency, these fiduciary media are true liabilities, i.e., the owner of a demand deposit can demand that it be paid out in money. We need not go into the theory of banking here; it is sufficient to note that the possibility of redemption in physical cash imposes a limit on the issue of fiduciary media that is not present with central bank production of fiat money.

Banks are usually willing to pay interest on demand deposits since they invest the major part of the money people have on account with them through the process of credit expansion or credit creation. A CBDC held in one’s digital wallet, on the other hand, cannot serve as the basis for credit expansion any more than physical cash held outside of banks can. In our current environment of low, no, or even negative interest rates on demand deposits, the fear among central bankers is that a CBDC carrying no interest rate would lead to people simply redeeming their demand deposits in digital currency. Since central bankers only know one policy—“boosting” the economy by lowering interest rates, which they do by flooding credit markets with cheap money—this possibility is obviously a great concern to them. Hence, it is an absolute necessity for them to be able to impose negative interest rates on people’s digital wallets in order to support the credit system. Not so much out of love for private banks and investors (although considering the post-Fed careers of Greenspan and Bernanke this might be an important consideration for some), but simply so that they can continue implementing policies that align with their inflationist dogmas (and the interests of their political masters).

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