​​Is There a CBDC in Our Future?

While it’s becoming increasingly clear that we will need some sort of monetary reform in the years ahead, a CBDC isn’t the way to go.

Abstract of central bank digital currency (CBDC). Comdas/Shutterstock

Commentary

If the old saying “where there’s smoke, there’s fire” holds true, sometime this decade we in the United States are likely to see the unveiling of a CBDC—a central bank digital currency.

Talk about a possible CBDC has become increasingly common in the past two or three years. The Bank for International Settlements started to talk about CBDCs as if they were a foregone conclusion at least as far back as June 2021. The U.S. Federal Reserve System announced in January 2022 that it would be examining “the pros and cons of a potential U.S. central bank digital currency.”

It’s starting to feel as if an eventual introduction of a CBDC in the United States is inevitable, with the biggest uncertainty (other than the structure and governance of the CBDC itself) being, when will it be introduced (or should I say “imposed”)?

Let’s ask the normative question: Should there be a CBDC in the United States? Actually, this should be broken down into two questions: Should there be a digital currency, and should the central bank—the Federal Reserve—be in charge of it? In short: Yes (partially), and no, definitely not! Let’s address the question about central bank control first.

The Federal Reserve’s Record

To be blunt, the Fed doesn’t deserve to be in charge of a new currency. Its historical record is too dismal. The Fed was created by an act of Congress in December 1913 for the purpose of smoothing out the ups and downs of the business cycle. It has failed spectacularly to fulfill that mandate.

The Fed was one of the major causes of the Great Depression (details available in Murray Rothbard’s book “America’s Great Depression”), the prolonged stagflation of the 1970s and early ’80s, and, of course, the Great Recession of 2007–09 with its prolonged aftermath with numerous lesser recessions along the way.

While failing to accomplish its prime purpose, the Fed has also devastated the purchasing power of the U.S. dollar. In the 11 decades of Fed mismanagement, the dollar has lost approximately 97 percent of its purchasing power. Here’s a vivid illustration of the insidious effects of the dollar’s debasement: The average price of a new automobile today is more than $48,000. If you had $48,000 in 1960, you could have paid cash for four average U.S. houses (average price $11,900) and still had $400 left over.

Much of the dollar’s depreciation has been intentional. In fact, for the past decade or so, the Fed’s stated goal has been to reduce the dollar’s purchasing power by 2 percent per year. Why would the Fed deliberately whittle away at the purchasing power of Americans’ savings? This is when we ask the perennial political question, “Cui bono?” And the answer is debtors. Debtors benefit because they get to pay off their debts with cheaper dollars. And who’s the largest debtor in the country by far? None other than our friendly federal government.

Indeed, the Fed has repeatedly inflated the currency to bail out an otherwise bankrupt Uncle Sam. The Fed has been the great enabler of federal deficit spending—and never more than during the years of ZIRP (zero interest rate policy) when average citizens earned microscopic interest rates on their savings at the same time the Fed was deliberately pursuing its 2 percent per year dollar depreciation policy. So here we are today, saddled with $33 trillion of federal debt.

Clearly, the last thing Americans should want is to entrust the Fed with the management of a new currency. Unfortunately, the last thing the spendthrifts in Washington will want is anything that lessens the Fed’s ability to accommodate the government’s chronic fiscal incontinence.

Here’s a vignette from more than 40 years ago. I was attending a monetary conference attended by many political VIPs. Three of eight people at my dinner table vied for the Republican nomination for the presidency. My roommate was the secretary of energy. After a speech by a young, ambitious congressman in which he complained about how helpless Congress was before the Fed, I privately asked him an unusual question: Does the creator control the creation? I then reminded him that the Fed had been created by an act of Congress and that Congress therefore had the power to reform or abolish the Fed. The congressman could only stammer incoherently. Despite his tough talk, there was no way he would be willing to challenge the Fed. He knew that Congress was hugely dependent on (addicted to?) the Fed, and he wasn’t about to take any meaningful action to curb the Fed. The moral of this incident for today is that politicians will criticize the Fed if it makes them look good to voters, but don’t expect Congress to dilute the Fed’s monetary hegemony.

Digitization of Currency

Turning now to the question of a digital currency, a certain amount of digitalization is inevitable in this digital age. In fact, digital technology is already widely used in banking today. Many of us enjoy the conveniences of direct deposits and paying bills with a few keystrokes on our computers. But, you protest, wouldn’t digitalization make it easier for the government to spy on our economic activity? Well, yes, but that horse is already out of the barn.

And wouldn’t a digital currency enable the government to block a person’s or a company’s ability to buy or sell? Yes, but again, as Canadian Prime Minister Justin Trudeau has already demonstrated, currencies don’t need to be digital for an oppressive government to block a citizen’s access to his or her own bank accounts. There are already laws in place in this country that empower banks to “bail in” their customers’ deposits under extenuating circumstances.

Partial digitalization of the dollar is already here and will remain. Should we go all the way to a digital currency? No. Picture a future scenario in which the electric grid, having been burdened and destabilized by the pell-mell rush into intermittent power-generating sources, breaks down for a day or two. (There are grimmer scenarios in which power could be lost for longer periods of time, but let’s not torment ourselves with those possibilities today.) If the power is off, how could a digital transaction take place? In such circumstances, having some good old-fashioned physical cash would be immensely helpful.

In sum, while it’s becoming increasingly clear that we'll need some sort of monetary reform in the years ahead, a CBDC isn’t the way to go.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.