State Issued Digital Currencies

A risky social experiment or a path to a thriving economy?

Should the state issue its own money in competition with private banks? Some big banks, state inquiries and orthodox economists have argued that a Central Bank issued Currency (a CBDC) would be a "risky social experiment" that causes disintermediation of the banks, leading to economic stagnation. But is this really true?

Kumhof et. al (2023) argue that these worries stem from the false belief that banks are intermediaries, which "will bias the results towards finding that CBDC leads to bank disintermediation". Kumhof et. al (2023) show that if you instead start from the correct assumption that banks create money ex-nihilo, you get the result that introducing a CBDC would be highly beneficial, increasing financial stability and prosperity for all.

Watch this webinar now that was held 31 of May 2023 with Dr. Kumhof from the Bank of England and learn more about his latest research about state issued digital money. Register now to watch the video:

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Should the state issue its own money?

The private banks' monopoly to create the digital money we use on a daily bases may be challenged in the coming years. Central banks all over the world are investigating if they should issue Central Bank Digital Currencies (CBDCs) in competition with the private banks' means of payments (bank deposits) and in competition with new private cryptocurrencies trying to gain ascendance. As always when money and power are at stake, this has led to a heated debate between defenders and challengers of the existing banking regime. This debate includes bankers, neoliberal economists, central bankers, independent researchers and activists who are all either trying to salvage or supersede the status quo.

A risky social experiment?

Big banks together with orthodox economists, state inquiries and some central bankers have argued that a CBDC would:

  • Be a risky social experiment.
  • Threaten the banks.
  • Cause bank runs.
  • Crowd out bank deposits. 
  • Cause disintermediation of the banks.
  • Lead to shortage of credit and a stagnating economy.
  • Lead to an Orwellian "big brother dystopia".

Newspapers have written that "bankers fear for their deposit base", "bankers face identity crises over digital currency plans" and that a CBDC would "threaten banks' monopoly profits". What is true? Would a CBDC lead to a stagnating economy, or is this just propaganda from bank lobbyists?

A path to a thriving economy? 

Other central banks, states, economists and independent researchers have the opposite opinion, that a CBDC would:

  • Dampen boom-bust cycles.
  • Eliminate the risk of bank runs.
  • Increase competition in payment markets.
  • Improve monetary policy.
  • Create a more safe and efficient payment system.
  • Solve privacy issues of current money system.
  • Increase productivity.

Moreover, a CBDC or a TDDC (Treasury Direct Digital Currency) is seen by the monetary reform movement as a first step towards creating a fair and just monetary system serving the many instead of only benefitting a few. These positive effects would be more than conclusive reasons for implementing a CBDC or TDDC as soon as possible.

Why are central banks, states and economists divided? How can prominent researchers reach so fundamentally different conclusions? Register for the webinar now to learn more:

Why fundamentally different conclusions? 

Kumhof et. al (2023) argue that many worries about negative consequences of a CBDC stem form the false belief that banks are intermediaries, receiving deposits from savers and lending them on to borrowers. While monetary reformers believe this should be the case, we agree with Kumhof et. al (2018) in their article "Banks are not intermediaries of loanable funds - facts, theory and evidence" that it is currently not the case, and that it is a dangerous if not deceitful myth to assert that it is.

With bad models, you make bad predictions and decision. A recent example is the debate about the consequences of a CBDC. If you start from the assumption that banks are intermediaries, this "will bias the results towards finding that CBDC leads to bank disintermediation", which is supposed to imply a credit crunch and stagnation.

If you instead start from the correct assumption that banks create money ex-nihilo when they make a loan, and you assume or ensure that states are smart enough not to go for the worst possible CBDC policy, you get the opposite results. Kumhof et. al (2023) find that introducing a CBDC in the amount of 30% of GDP would have "unambiguously positive effects, yielding long run output gains of just under 6% and long run welfare gains of just over 2%".

A CBDC would increase productivity and financial stability, decrease the government debt, lower the real interest rates without causing inflation, and overall lead to a more thriving economy. These would be highly beneficial for everyone and are heavy arguments for implementing a CBDC as soon as possible. 

Dr. Michael Kumhof

Dr. Michael Kumhof is Senior Research Advisor in the Research Hub of the Bank of England. Before that, he was Deputy Division Chief, at the Modeling Division in the Research Department at the International Monetary Fund (IMF) (2004 to 2015). Kumhof was responsible for developing the Global Integrated Monetary and Fiscal Model of the IMF which is used at several central banks, for IMF policy and scenario analyses, for the World Economic Outlook, and for G20 work. Before that, he was Assistant Professor at Stanford University (1998 to 2004). His research focuses on the role of banks in the economy and on different monetary systems.

Lobbyism by the banks?

In addition to the Kumhof et. al (2023) explanation of the radically different opinions, we (the organizers) also think that power interests and lobbyism are important explanations. Though smaller banks may be more open, the big banks are not happy with the plans for CBDCs (or TDDCs) and some have already lobbied hard against it. In Sweden they have succeeded pretty well, and they have very probably been part of:

  • Delaying the launch of the state investigations into the role of the state in the payments market several times. The primary goal of the inquiry was to answer the questions if Sweden should issue a CBDC. 
  • Influencing the state inquiry to give a negative answer to the question whether Sweden should implement a CBDC. The inquiry has cherry picked negative studies and written their report in line with the Swedish Bankers' association's arguments.  
  • Launching a strategic "Nobel Prize" in Economics for the false theory that banks are intermediaries of loanable funds, which has been used to argue against the introduction of CBDCs. The prize has been heavily critized by professors of ecnomics all over the world, for example, professor Peter Bofinger writes: "To extol with the Nobel prize for economics the intermediation approach to banking is akin to posthumously offering Ptolemy the prize for physics—because he discovered that the sun revolved around the earth".

Historic opportunity

Central bankers and politicians all around the world are right now investigating the possibilities and risks with new types of digital money. We now have a historic opportunity to influence and ensure that money creation is organized in a fair and sustainable way. Therefore, Positiva Pengar, Alliance For Just Money, Monetative, Gode Peng, ProVollgeld Austria, Forum Geldpolitik and Talousdemokratia, members of the International Movement for Monetary Reform, are organizing courses and webinars on the topic. We are happy to offer this one together. Sign up and feel free to invite friends and acquaintances.

Never doubt that a small group of thoughtful, committed, citizens can change the world. Indeed, it is the only thing that ever has.

Margaret Mead

When? Where? How?

  • 31 May 2023, In the EU 7 pm CEST, in the US 1 pm ET
  • Duration: 60 min talk, 20 min interview, 40 min Q/A


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