14 Mar 2023

The Monetary Turning Point

by Joseph Huber

Palgrave macmillan, March 2023, 192 p.
The Monetary Turning Point: From Bank Money to Central Bank Digital Currency (CBDC) |

The monetary system is at a turning point. The hitherto dominant type of money, bank deposit money, has past its zenith, while new types of digital money are on the rise, competing for becoming the next dominant type of money, that is, the means of payment that determines the functioning of the monetary system.

Digital money is superior to previous book money, technologically as well as economically. Rising digital- token monies include central bank digital currency (CBDC) and unbacked as well as covered cryptocurrencies, so-called stablecoins. The latter can put additional pressure on bank deposit money, not however on CBDC. CBDC is likely to emerge as the winner because it is superior to private digital tokens by virtue of being legal tender and safe-stock base money, and also because of the constitutional need to re-establish monetary sovereignty and effectual monetary policy. Bankmoney may well persist for a longer period of time, albeit gradually declining in importance. Due to cashless payment in bankmoney, sovereign cash had lost its system-defining position in the course of the 20th century. But CBDC tokens can now in some ways be seen as a modern form of cash (direct payer-to-payee transfer without involving interbank payments). Moreover, CBDC tokens offer far-reaching potentials in terms of usability, including future programmability.

Financial privacy is a problem with today’s electronically processed book money and will remain so with the databases of digital money. Basically, ensuring financial privacy is not so much a question of technology as of political circumstances. Favourable conditions exist where there is democracy and the power-separated rule of law protecting civil rights and liberties. It is illiberal repressive autocracies of every kind where Big Brother really looms.

Historical turning points in the composition of the money supply
The modern money supply has experienced several turning points. Broadly speaking, the 18 th century saw the rise of unregulated paper money, issued by both banks and governments. In the 19 th century this was followed by the note monopoly of national central banks in Europe, while in America U.S. Treasury notes were of importance. The 20th century was marked by the rising tide of the banking sector’s book money. The 21st century is now on its way to becoming the age of digital money, led by CBDC.

Monetary turning points of that kind occur when, firstly, the dominant money of the time poses problems that cannot be solved within the given framework (as is the case today with the inherently unstable and crisis-prone bankmoney regime), while, secondly, a new type of money emerges that offers some solution or increased efficiency such as lower costs of provision and handling, improved ease of use, and faster transferability (as is the case with the rise of digital tokens).

The incipient recomposition of the money supply and restructuring of the monetary system
Since CBDC is issued by the central bank of a nation, or community of nations such as the eurosystem, subject to constitutional law, CBDC is the modern form of sovereign money. With CBDC becoming the major and dominant type of money over time, the monetary system and monetary policy is bound to undergo fundamental changes. These are related to monetary CBDC credit outpacing monetary bankmoney credit, which in turn results in a preponderance of intermediary credit based on CBDC by banks and non-bank financial institutions alike. Banks and non-bank institutions would become more similar, today’s overly tight bonds between central bank and banks would loosen, and the false identity of money and bank credit would crumble. With predominant intermediary CBDC credit, options for monetary quantity policy would again be available, and the transmission of central-bank interest-rate policy, as far as necessary at all, would be strong across the entire spectrum of interest rates. The horizon of variables relevant to monetary policy is broadening, e.g. in terms of non-GDP finance and asset inflation.

More clearly than before, central banks are becoming national monetary authorities, the monetary power of the state, complementing the executive, legislative and judicial branches. In this function, monetary policy must be independent, comparable to the independence of the judiciary, that is, independent from government directives as well as from the immediate requests of banks and financial markets – which is completely illusory in today’s bankmoney regime based on the predominance of monetary bank credit. Monetary, fiscal und private-creditary responsibilities must not be blurred, while responsive cross-domain cooperation remains indispensable.

From such a position, a central bank will not only contribute to (re-)financing the banking sector, but can – within the scope of always limited potentials – also contribute to the monetary financing of government expenditure, for example by routinely purchasing sovereign bonds on the open market (which is already common practice), moreover by subsequently consolidating the bonds into zero-coupon consols, that is, zero-interest perpetual bonds. Other channels, where not already practiced, include granting the government a standing credit line with the central bank as well as directly absorbing a certain percentage of newly emitted sovereign bonds on the central-bank balance sheet. The creation of CBDC as a monetary asset and sovereign base money suggests a modified monetary accounting procedure. This will make it possible for CBDC not only to be loaned, but also to be spent into circulation as genuine seigniorage free of debt, be it by way of helicopter money to the citizenry, or by transfer to the public purse.

However, even though CBDC represents sovereign money, the emerging system cannot be expected to be a full sovereign money system, given the continued existence of lesser quantities of private second- and third-tier money surrogates such as bankmoney, mobile e-monies, money market fund shares, and stablecoins. Unbacked private cryptos may continue to serve as a special-purpose means of payment without achieving the status of widely used money.

CBDC system design principles
To what extent and how soon expectations for CBDC are met largely depends on the design principles for implementing CBDC. The book discusses the Top Ten of these, such as, for example, unrestricted access to CBDC and its quantitative availability according to wholesale and retail market demand; the convertibility of CBDC and other types of money; whether central-bank support and government guarantees for private commercial bankmoney are to be continued or reduced; or the channels by which CBDC is circulated.