Some reckon that central-bank digital currencies will be needed to anchor the value of money in a cashless financial system. But does the argument withstand scrutiny?
The logic has recently been set out by the Bank of England, whose public consultation concernings closes on June 30th. It goes as follows. People have the confidence to hold bank deposits in part because they know that they can at any time withdraw it as notes and coins . But physical cash is declining in both use and usefulness. You cannot spend it on the internet; a growing number of shops insist on digital payment.
The evidence that physical cash underpins confidence in banks is flimsy. Depositors in most rich countries are able to take comfort from deposit insurance, which pays out up to a certain limit if banks fail; the knowledge that central banks will lend freely in emergencies; and the ability to transfer funds to other banks.
The paranoid will continue to crave cold, hard cash. Fortunately notes and coins might continue to reassure them even as their use in transactions declines. “All the central bank needs to do is promise to provide the currency if requested,” according to Mr Waller. “Eliminating currency is a policy choice…not an economic outcome.” It is true that physical cash has less utility as it becomes more difficult to spend.
Over the years plenty of people have argued that the monetary system could not function well without certain anchors, such as to gold or the dollar, only to be proved wrong. The idea that the system needs government-issued money to be in widespread use is likely to suffer the same fate.
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