Max Raskin is an adjunct professor of law at New York University.
A bipartisan group of U.S. congressmen wrote Treasury Secretary Steven Mnuchin last week, urging him to consider the use of blockchain technology in administering the federal government’s coronavirus response.
This comes just a month after Democrats in the House and Senate proposed bills that would allow individuals to hold checking accounts directly with Federal Reserve banks. Such accounts have been referred to as “digital dollars,” and such plans aim to both stimulate the economy with direct cash injections and bank the unbanked.
Although this may seem like a sleek new idea riding the crest of enthusiasm over blockchains, digital currency and financial inclusion, a similar proposal, dubbed the “Chicago Plan,” was considered by President Franklin Roosevelt during the Great Depression of the 1930s and ultimately rejected.
Then, like now, the plan is not without benefits. But then, like now, it should be rejected because it would be one of the biggest power grabs in American history, politicizing our system of finance irrevocably.
It is important to acknowledge that there is a kernel of truth to the digital dollar plan. Right now private banks act as middlemen between depositors and the government. These middlemen take fees for this role. And it is true some individuals do not have enough savings to participate in, or have confidence in, the private banking system. A digital dollar system would allow the government to subsidize the unbanked as well as directly target countercyclical monetary stimulus and even enact non-discretionary monetary rules. But the temptation and fraught incentives created are simply too great to justify such marginal benefits.
In cutting out the middlemen, this plan cuts out all that stands between our bank accounts and the Washington Leviathan. It sounds nice to be able to directly target cash injections into, let’s say, all small restaurant owners’ accounts. But a government that gives can also take.
What if an administration decided to inject money directly and seamlessly into your competitor’s bank account? Imagine Republicans targeting clean energy companies and abortion clinics or Democrats targeting gun manufacturers. Every credit or debit on your account would be subject to the ballot box or, worse, the bureaucrat. Checks on this power could certainly exist, but given our hyperpartisan environment, it is entirely possible these checks could be skirted.
Such a system also completely unshackles the government printing press from any reserve requirements – perhaps to effect negative interest rates. That would allow the government to impose, say, negative rates only in certain politically disfavored geographies.
It is true that digital dollar accounts, like private checking accounts, would be insured by the FDIC. But this should be cold comfort to Americans facing the specter of hyperinflation if such insurance was ever actually needed. It is true that, as a lender-of-last-resort, the Fed cannot, by definition, default. But neither can private banks if the Fed provides them with liquidity. Either way, if the economy is getting to a point where such a scenario is possible, people would just lose confidence in the Fed rather than individual banks – another problem of centralization.
The United States was founded with a deep skepticism, both principled and practical, of centralized authority. In crafting our system of federalism, our Founders knew it was better to have competition even if it meant forgoing the possibility of Nirvana. We now have financial federalism where banks are able to compete with one another to provide the best services. A national bank with virtually limitless power and resources is a huge deterrent to the free market and an even larger temptation to autocrats.
Power is tempting. The thought of a “Crypto Czar” with a bevy of new bureaus and fancy titles is sure to appeal to both Republicans and Democrats wanting to enact their own visions of the digital dollar. But power should never be an end in itself. Although it may seem messy, the market economy produces a robust, ordered system capable of reacting to even the deadliest of viruses in a way that efficiently allocates society’s scarce resources.