A simple point made to me recently at a talk on digital currencies is this. There will come a point when comprehension that offering digital accounts with the central bank is possible becomes widespread. Then, the discussion about whether it should do so may change gear somewhat.
As of now, the proposal that central banks offer digital accounts to its population is couched in purely technocratic terms, as a device to i) circumvent the zero bound to interest rates, enforced by zero interest bearing cash; ii) head off the threat from private sector crypto-currencies; iii) implement narrow banking; iv) combat illicit economic activities (as part of an elimination of cash).
In the future, the discussion may revolve around whether or not such accounts, if they can be provided at relatively low cost, should not be a right of citizens.
Our social security and Tax IT systems demonstrate that the public sector can provide digital accounts [with a few glitches]. Central bank digital accounts could look very similar, but with the functionality of individuals being able to authorise transfers from one account holder to another.
Since this can be done, people may come to what justifies excluding all but the large elite financial institutions – those who happened to have caused society so much bother recently – from enjoyng the privilege of central bank accounts.
If public debate invaded this far into the privacy of central bank technicalities, it would be then but a short step to debating whether [like banks] individuals or non bank firms should be allowed to go overdrawn, drawing the state decisively into the business of retail credit allocation.
longandvariable 
Hi Tony, interesting subject.
Don’t we already have government-provided digital accounts? In the U.S., for instance, anyone can open an FDIC-insured account, which is basically a highly marketable claim on the government. The base amount insured is US$250,000, but by spreading funds between banks and different insured products anyone can get millions of dollars worth of insured digital money should they desire. I don’t see why, given the ubiquity of insured deposits, a broad section of the (U.S.) population would care about having the right to a central bank digital account or not.
JP: Go to the south side of Chicago, or north side of St. Louis, and look for a commercial bank. You won’t find many. What you will see are pay-day loan shops, pawn shops, check-cashing outlets, places where you can get money orders. In the U.S., the commercial banking system does not work for poor people. You can look at the Fed’s Survey of Consumer Finances for hard evidence.
So is the answer to have the Fed open a local outlet on the north side of St. Louis or to allow payday lenders (and Walmart) to start offering accounts?
I mentioned the inclusion motive in passing, but thinking about it more, it’s pretty important. Whether that would be satisfied by a central bank account is another matter, since such an account would require being included in other technologies too, which might be a hurdle some can’t jump over. But it would be a start. There’s probably a motive to subsidise provision of face to face services. How that is best done, I don’t know. Perhaps we might argue that the large banks already take the public sector to the cleaners, so to speak, via the large subsidies they get on their funding due to the bail-out guarantees.
I guess there is some ambiguity in the insurance – if there were a system wide failure. Ireland sank itself by trying to make explicit large scale insurance. And also the question of costs, particularly for those at the bottom end of the income scale.
JP: Hard to see why we would want the central bank to get into lending to individuals, but on the transactions side, you could piggyback on existing public institutions. For example, many countries have post office deposit accounts. Maybe the central bank deposits could be managed by the US Postal Service, as they’re running out of stuff to do. What the post office does for me is to give me a mountain of paper every day that goes in the recycling bin. Maybe they could stop that and do something useful for a change.
“…you could piggyback on existing public institutions.”
What are the advantages of using USPS rather than private institutions? If MSBs like Western Union were allowed to set up 100%-backed deposit accounts for their customers as well a maintain accounts directly at the Fed– and same goes for non-banks like Walmart–then these businesses could provide transactions services to customers. Just like M-Pesa does in Kenya.
Something similar applies in the UK in that anyone can have an account at National Savings and Investments. NSI does not offer the full range of serves you get from a normal bank account (no cheque books, debit or credit cards for example). But money can be transferred out in 24 hours to another bank account.
Good post, Tony. I think the time has come for this. Currency, though still convenient for some people and some purposes, has drawbacks. It’s costly to maintain a physical currency, and to keep up with counterfeiting technology. And there’s the idea (Rogoff for example), that currency, particularly in large denominations, lowers the cost of nefarious activities. I think we can make an efficiency case to allow access by anyone to reserve accounts. And there are equity arguments as well. In the United States, the poor are badly-served by commercial banks – small-balance accounts are not profitable, and the banks do what they can to avoid having poor deposit-holders. They don’t have branches in low-income neighborhoods, and have service charges when balances are low.
Another thought. An argument for narrow banking is that this would eliminate the need for deposit insurance, as all transactions accounts would be as safe as government liabilities. The problem is that private intermediaries then have an incentive to design liabilities that are as close as possible to transaction deposits – without legally being transaction deposits. If the central bank offers the transactions accounts, then maybe you can eliminate deposit insurance. Of course, that’s probably too hopeful, as there is always an incentive for financial bailouts.
There’s a simple solution to that problem: force all creators of quasi transaction deposits to make it abundantly clear on relevant literature, web sites etc that quasi deposits are not government backed. That in turn means such “deposits” are in effect equity.
Moreover, there’d be nothing wrong with people actually using quasi deposits as money, long as taxpayers are not on the hook when that wheeze goes wrong.
But your last sentence is correct: there is always “an incentive for financial bailouts”. To put it more bluntly, banks and quasi banks only have to tell politicians and regulators that “growth” will be hit if they aren’t bailed out, and politicians and regulators fall for it every single time. Paul Volker put it even more bluntly: “You know, just about whatever anyone proposes, no matter what it is, the banks will come out and claim that it will restrict credit and harm the economy…It’s all bullshit.”
Another excellent post Tony…I agree with Steve on deposit insurance – and the points on transaction accounts. Indeed, I believe the general public should have a right to choose whether to hold current accounts at commercial banks or the CB. Primarily because deposits at commercial banks do not represent money that the depositor actually owns, rather a claim. Meaning, as you know, those of us who hold deposits are actually commercial banks’ creditors. In the UK if you want a legal job you have to have a bank account – (try pay income tax without a bank account). This legally means that if you want a job, you have to become a bank’s creditor. Should we be forced to be banks’ creditors? At least we should have the option be paid in cash, (could be a work around I guess). But similarly, why should commercial banks have access to safe government liabilities (CB reserves) and not the general public?
Some other interesting points, digital cash could; increase competition and promote innovation in the payment system, reduce concentration of liquidity risk and credit risk in payment system, and potentially allow for recapture of profits from seigniorage, in developing countries and even advanced economies it could help increase financial inclusion.
Nice article by Tony Yates, but his suggestion in the last paragraph that having set up CB accounts for all, it would then be a small step to the CB offering loans will not make sense to advocates of narrow banking.
As explained by the advocates of narrow banking (Milton Friedman, Lawrence Kotlikoff, etc) narrow banking basically splits the bank industry in two. One half simply looks after deposits and transfers money when asked to do so by depositors. The other half offers loans, but that is funded entirely by equity, not deposits. Thus the above “step” is actually big one, not a small one.
Plus even under the existing system, there is division of labour which has widespread support, namely that private firms do commercial stuff, while governments and CBs do not enter the commercial arena except where specifically authorised to do so by the democratic process, as is the case when an industry is nationalised, for example.
So loans by CB which offers digital accounts for all would be strongly resisted by advocates of narrow banking. Plus that sort of thing is not approved of under the existing system: for example the UK’s government owned National Savings and Investments does not offer loans.
The way I see the issue of CB loans is this: The current payments system relies very heavily on unlimited lines of credit extended by the Fed to banks (“daylight overdrafts” in this document https://www.federalreserve.gov/paymentsystems/files/fedfunds_coreprinciples.pdf ). This credit is necessary to prevent liquidity crises in the private sector or equivalently to make sure that the RTGS system operates smoothly.
If one extends such accounts to private individual the question immediately arises, do they also receive “daylight overdraft” privileges. If not, then the Fed must draw a line somewhere between who qualifies for “daylight overdrafts” and who doesn’t. That is, the simple fact that the Fed sits at the heart of the payments system means that it must decide not whether to extend credit, but to whom to extend credit. Currently the dividing lines is between banks and non-banks. Certainly the line can be moved elsewhere, but the job of allocating credit is a fundamental and inevitable function of central banking — at least as long as central banking is associated with smooth operation of the payments system.
I set out a model of a central bank payments system including a proposal on lending against super-collateralised assets here
http://www.nesta.org.uk/publications/central-banking-all-modest-case-radical-reform
Condensed here
http://evonomics.com/central-banks-for-everyone-nicholas-gruen/