Some suggest that central banks will have to issue their own digital currency – i.e. to supply central bank money more widely, via some generalised distributed ledger – to meet a “competitive threat” from private-sector rivals. I suspect a more important issue for central banks considering such a move will be what it might mean for the funding of banks and the supply of credit. Private-sector digital currencies: the distributed ledger After that rather lengthy introduction, let’s begin with a brief over-view of what a “digital currency” is. As I say, I won’t take long over this. It’s a rich topic, goodness knows there are people who know more about computers than I do, and you can find a very good and more detailed description in the autumn 2014 edition of the Bank’s Quarterly Bulletin. One thing those articles make clear is that the key innovation introduced by something like “bitcoin” is not so much that it’s “digital”, if by that we mean that balances are stored electronically. At least in developed economies the overwhelming majority of money has long been held in bank accounts, rather than as physical cash (Chart 1 plots the history of both in the UK); almost since their invention, computers have been used by banks to record transactions between, and balances on, such accounts. If a “digital” currency is one whose accounts are little more than a series of zeros and ones on some distant electronic machine, well that’s long been the case.
Famously, during the Great Depression, a group of economists at the University of Chicago recommended the end of fractional reserve banking (the so-called “Chicago Plan”). There have been similar calls since the 2008–09 financial crisis10. Proponents of narrow banking have generally argued it should be imposed by regulatory fiat, rather than via some sort of nationalisation of deposit-taking by the central bank. An exception is a 1987 essay by the economist James Tobin11. To avoid relying too heavily on deposit insurance to protect the payments system, Tobin argued, the government should create what he called “deposited currency accounts” (DCAs) at the central bank. “I think the government should make available to the public a medium with the convenience of deposits and the safety of currency, essentially currency on deposit, transferable in any amount by check or other order.” There are two interesting points about Tobin’s proposal. One is that he made it long before anything like the “distributed ledger” was conceived (he suggested that DCA branches could be housed in post offices). Another is that he fell short of suggesting the wholesale nationalisation of deposit-taking: he thought there should still be room for commercial banks to raise deposits of their own and that they should continue to be insured12. One reason is that draining deposits from commercial banks is unlikely to be costless. In particular – and this is the potential catch with too widespread a CBDC – it might threaten their lending activity.