Central Banks Liken Digital Money Push to 19th Century Cash Quarrel

(Bloomberg) – Central banks around the world are learning lessons from 19th-century history in their push toward modern payment technologies, according to the head of Sweden’s Riksbank, the world’s oldest central bank.

The use case for central bank-issued digital currencies (CBDCs) – such as the digital yuan or digital euro being explored in China and Europe – stems from a similar dilemma that monetary authorities faced in the late 1800s. Then as now, central banks needed to assert their footprint in the money supply, Riksbank Director Stefan Ingves said Tuesday during a panel moderated by Bloomberg’s Stephanie Flanders.

“About a hundred years ago, every sovereign state decided that the government should have a monopoly on the production of money. The reason was that only the government could provide a currency that trades at par no questions asked” and is not prone to bank runs, said Gary Gorton, a professor at the Yale School of Management who spoke alongside Ingves.

“The question of whether states should have a monopoly on money production has again arisen,” Gorton said.

In the past, it was common for consumers and businesses in many parts of the world to transact using numerous banknotes and coins issued by individuals, which frequently caused conversion and settlement headaches. . The monopolization of currency issuance established a division of labor between central banks and commercial institutions that is common today, with the latter focusing on lending.

Yet declining cash usage and a flood of new payment technologies mean that most of the money processed by consumers is actually no longer issued by central banks. Instead, e-money in bank accounts is a liability of commercial banks. The growing popularity of crypto-assets such as Bitcoin or stablecoins may pose another challenge to the control of means of payment by central banks.

“Before, everything was on paper. Now we are entering another world where nothing will be on paper,” Ingves said. Central banks should not abandon the structure established more than a century ago, he argued, because “if history gives us any guidance, it’s a bad idea.”

“We need to make sure that we can maintain the exchange rate between central bank currency and private sector currency,” he said. Otherwise, “you end up with serious problems in the system, and these are exactly the problems we had in the 1800s when the banks were issuing all kinds of notes and coins on their own.”

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