SHOULD THE STATE OR THE MARKET PROVIDE DIGITAL CURRENCY?

• Author: White, Lawrence H.

Some Basics of Currency Provision

Private commercial banks have been providing trusted money to the public for hundreds of years, in the form of banknotes (where allowed) and transferable deposit balances, as an integral part of their business model. (1) Economically, money balances are a private good: they are rival in consumption (you and I can't both simultaneously spend a given banknote or deposit balance) and excludable in supply (you and your bank can stop me from spending the funds in your wallet or account) (White 1999: 89). (2) Accordingly, the market does not inherently fail to provide money efficiently.

The profit motive incentivizes private issuers of payment products to include features that their customers value, including easy access, convenient transferability, and security. Banks have historically offered money that is denominated in a common nonproprietary unit of account and that serves as a commonly accepted medium of exchange for the sale of goods and services. Where governments have allowed it, a peer-to-peer circulating currency for public use has been an important banking product (Dowd 1992). Basic money, used as a medium of redemption and financial settlement, once consisted of silver or gold coins, but today is fiat money.

The fact that the historical development of payment systems has been driven by private initiative, not state action, is often overlooked. The financial historian Harold James was quite mistaken when he wrote that money "has almost always been an expression of sovereignty ..., and private currencies have been very rare" (James 2018). (3) To say, with the BIS (2020: 1) report, that "central banks have been providing trusted money to the public for hundreds of years," while omitting mention of privately issued money, and omitting mention of untrustworthy central bank monies, is a misleadingly one-sided summary of the relevant monetary and banking history.

The long history of debasements by ancient and medieval government mints, and the regrettable history of fiat money inflations by modern central banks, show us that governments have often been untrustworthy issuers. Sovereigns have frequently abused rather than rewarded trust in their currencies, culminating in the 20th-century defaults by all central banks on their obligations to redeem their liabilities in gold or silver. A key service that first attracted medieval merchants to private bankers was their more trustworthy payment alternative to the variously debased government-issued coins--namely, a ledger-based system where transferable account balances were denominated in units of unchanging silver content. Historians later called these stable private accounting units "ghost monies," because they were not embodied in any of the debased contemporary coins from the government mints. Account balances recorded as digits on the banker's ledger were the first intangible or digital money.

During the 18th and 19th centuries, in the most advanced economies, redeemable bank-issued paper currency (banknotes) became more popular than coins. The majority of paper currency in circulation in most countries consisted of privately issued banknotes. More than 60 economies have allowed competitive private note-issue (McBride and Schuler 2012). Private currencies have thus been far from a "very rare" experience. Transferable deposits at reputable commercial banks have long dominated high-value payments. Soon after the arrival of the electric telegraph--"the Victorian internet" a la Standage (1998)--banks and other payment firms began sending coded telegraphic payment messages, making long-distance money transfers instantaneously. (4) With the arrival of the internet and smartphones, banks and other payment firms have introduced new ways of holding and transferring money. As the BIS report (2020:1) notes, "Commercially provided, fast and convenient digital payments have grown enormously in volume and diversity." Examples include Paypal, Venmo, Zelle, Alipay, WeChat Pay, PayTM, M-Pesa, Transferwise, and stablecoins, not to mention bitcoin and other blockchain systems that transfer their own native crypto assets.

Central banks have lately begun to display a fear of missing out. Christine Lagarde (2020), president of the European Central Bank, has taken to Twitter to solicit the eurozone public's input on whether the ECB should issue a "digital euro." Many central banks have announced plans to study or conduct trials of retail digital payment systems, so-called central bank digital currencies (CBDCs). I say so-called because most proposed projects follow an account-balance transfer model, not a peer-to-peer currency model. The difference is simple: a proper currency can be used without having an account.

Is there any good reason to think that central bank digital currencies will improve consumer welfare over private alternatives?

The Myth of the Entrepreneurial State

Proposals for central bank expansion from wholesale into retail payments often appear to subscribe to what Dierdre McCloskey and Alberto Mingardi (2020) call "the myth of the entrepreneurial state." McCloskey and Mingardi conclude from economic history that dynamic economic growth--during and since the Industrial Revolution--is disproportionately founded on bottom-up innovation and competition. Top-down direction and state-owned enterprises, 1 because they need not make profits to continue, more often do harm than good. Even cherry-picked examples of state entrepreneurship can hill apart on inspection. It is a myth that Al Gore invented the internet. It is likewise a myth that DARPA (the Defense Advanced Research Projects Agency) invented the internet: it funded data lines...