America will have digital dollars accessible through smartphones and computers within a few years.
Treasury Secretary Janet Yellen and Federal Reserve Governor Lael Brainard, who could be the next Fed chairman or vice chairman for oversight, have expressed keen interest in a digital currency. The advantages are compelling.
Most Americans receive paychecks, Social Security benefits, and other payments digitally through direct deposit. They can exchange those funds for paper money or write checks, but nowadays most payments are made by credit and debit cards and wire transfers. Usually, payers and recipients of households and businesses have accounts at different commercial banks, and banks have their accounts at the Federal Reserve.
Consumers and businesses pay first through their bank’s internal and sponsored credit card systems. Then, various Federal Reserve systems distribute funds to banks where owners, traders, and vendors have their accounts.
The system is multi-layered, expensive and with many links offers many opportunities for hacking and fraud.
Bank-sponsored credit cards and payment processors charge merchants 1.5-3.5% fees to process payments to cover theft, consumer defaults while making a good profit. The fees are lower but still substantial for debit cards and other direct electronic payments, mainly due to the lack of credit and regulatory risk.
The essence of a digital currency is that anyone could have an account directly in regional Federal Reserve banks. We could pay merchants and monthly bills directly through Fed payment systems with less fees.
Eliminating all those layers and most of the fees could save consumers billions of dollars and cut payment time from days to hours. With proper encryption and the elimination of multiple layers of transactions, it would be more secure.
The central bank is already considering deploying a FedNow service that would allow instant transfers between commercial bank accounts. All it takes is a framework for ordinary people to set up similar accounts, and the digital dollar would be with us.
Households and businesses would not have to keep their money in banks. The same is true for federal, state and local governments that have bank accounts to process tax collections and payment of benefits and for goods and services. This has stirred up banks enough to raise distracting questions about the legality of digital currencies.
However, the essential role of banks would not change. People who want to keep credit card balances or borrow for homes, cars and businesses could still count on them, but banks would have to pay more interest than the paltry sums for the checking accounts they now offer. to encourage us to transfer money. Fed wallets on accounts with them.
The Constitution authorizes the federal government to issue paper money, or the people who work in the engraving office have been criminals for over 150 years. If individual accounts at the Federal Reserve are illegal, so too must bank accounts with the central bank and the entire banking system.
Digital dollars, which are nothing more than individual accounts at the Federal Reserve, could render most basic financial services – accounts for receiving paychecks, making regular payments, and accessing cash through ATMs everywhere – much more accessible to the poorest and underserved Americans.
La Poste is once again experimenting with the range of banking services. Local post offices could provide teller services in places where banks will not go. However, less counter services will be needed other than access to paper money, and paper checks would be virtually obsolete.
If every American had a Federal Reserve account, then the distribution of government profits would be much easier. Especially in times of crisis like the pandemic, stimulus checks could come out much faster.
International money transfers often impose even higher costs than credit and debit card schemes. Suppose the central bank digital currency protocols are harmonized. In this case, the working poor could send money to relatives abroad – and the local hardware store to foreign suppliers for imported items – at a much lower cost.
China has already conducted pilot studies for its digital currency, as have several other countries. The United States is risking the dollar’s status as the primary reserve currency if it lets China or the European Central Bank pioneer a secure, internationally convertible digital currency.
President Jerome Powell has dragged his feet, saying it’s better to do it right than to be the first. It seems they don’t read about “first-mover advantage” in law school.
Digital dollars are an imperative, not a choice. The best reason I know of for replacing Mr. Powell with Ms. Brainard is that she gets it; he doesn’t.
â¢ Peter Morici is an economist and professor emeritus of commerce at the University of Maryland and a national columnist.