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.
The MPC’s central projection in the May Inflation Report is that the pace of output growth will slow. But a slowdown in economic growth is not, in itself, sufficient to hit the inflation target. The central issue for monetary policy is whether total BIS Review 53/1998  -2nominal demand will slow sufficiently quickly to prevent retail price inflation rising when the favourable effects of a high exchange rate and lower commodity prices wear off. The extent to which domestic demand growth slows down is crucial. At present, we are relying on a sharp deterioration in the trade balance to keep output growth down to levels that do not lead to rising inflationary pressure. But in the longer-run domestic demand growth must fall from its present rate of 3½ - 4% to something closer to trend. During 1997 as a whole, consumption grew by 5%. That growth rate is already moderating. And the MPC’s central projection is for a further slowdown in domestic demand during this year. That is likely to be brought about by a combination of the fiscal and monetary tightening that has been put in place over the past year or so. But there are real uncertainties. There is a risk that consumption may prove stubbornly buoyant. Real personal disposable income increased by 4.2% last year, and the ratio of net financial wealth of households to their income reached an all-time high of over 3. Those factors will support consumption.