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.
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”)?
The Federal Reserve's RecordTo 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.
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.
Digitization of CurrencyTurning 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.
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.