Addressing the Chair of the United States Federal Reserve — Jerome Powell: Economic Externalities of the Central Bank Digital Currency (CBDC)
I propose to Federal Reserve Chairman Jerome Powell that the Central Bank Digital Currency (CBDC) is a poor decision. Though some economists argue that accepting digital currency as a form of payment will provide financial inclusion for consumers and increase competition amongst private banks, however, the CBDC will create far worse issues than the ones in the United States financial system. The trade-offs are not optimal.
A current mechanical flaw in the banking system today is that monetary policies do not directly impact individuals or businesses. There are intermediaries: the private banks. The central banks hope that the implications of their monetary tools will result in actions from private banks (i.e., lowering nominal interest rates) which will be passed onto individuals and businesses and increase the incentive to take on loans and increase large purchases.
The creation of the CBDC will eliminate competition amongst the private banks and even the banks themselves. Additionally, during times of economic downturn, the CBDC may increase the money supply by directly depositing money into individual accounts. This transfer of funds may resolve some of the issues we have today; however, this will create a dependency from individuals and businesses and increase the practice of ‘helicopter money.’ The term helicopter money is a monetary practice where the Central Bank prints money and “unexpectedly dumps money onto a struggling economy to shock it out of a deep slump” (Friedman, 1969). Manipulations of the money supply will lead to lower interest rates, which would incentivize investments. Central Banks would like to increase consumer spending. This will expand the economy during an economic crisis.
If the CBDC was introduced, the Central Banks will now have access and direct impact on individuals and businesses. The Central bank can provide direct cash (cryptocurrencies or a form of digital currencies) and credit which will bypass the private banks. This would lead to problems. One would be the destruction of private banks. Competition among private banks is economically sound because it prevents a monopoly of centralized funds. The benefits of a private bank for individuals are the accessibility to order checks, wire transfer, or make deposits, which will be challenging to do with the CBDC. Plus, individuals and businesses will solely be dependent on the Central Banks in times of economic downturn. With every next Recession, the Central Bank will have to slightly increase the magnitude of their monetary tools to reach individuals’ new utility curve. Though I do not believe that the United States will get to a point like Venezuela, Zimbabwe, or Yugoslavia with hyperinflation, the CBDC should not be introduced without conducting more research and case studying other countries that have implemented a form of a centralized digital currency.