The question as to whether the government should be allowed to issue a Central Bank Digital Currency (CBDC) really boils down to whether government should be allowed to issue a currency to begin with. Should we say “no” and go back to only allowing private banks to issue bank notes in order to preserve and enhance private bank profits? It is also the case that many online private currencies such at Bitcoin and stablecoins along with the planned introduction of Facebook’s Diem and many other stores of value and payment systems are going to disrupt the traditional private commercial banking system in any case.
However, it is still reasonable to avoid unnecessary disruption of the banking system by introducing a situation where depositors immediately sought to switch all their money from private bank deposits to a new CBDC upon its creation. Furthermore, a CBDC would offer a safer, more secure place to store wealth than that provided by any private bank. A US CBDC may be useful for international transactions as US dollars are today. Consequently, a US CBDC could charge a fee (i.e., negative interest rate) that rose as the size of the deposit increased, which would advantage those with smaller deposits. In times of inflation, it may be especially useful to provide a positive return on savings in the form of interest payments for small deposits by individuals to encourage saving by people with a high marginal propensity to consume (e.g., low- and middle-class Americans) rather than spending money when too much money was chasing too few goods.
Banks often refuse to accept small amounts of money from potential depositors. Some banks require minimum amounts for individual deposit accounts or certificates of deposit sometimes at least $1,000 or even a minimum of $5,000. It would appear rather hypocritical for banks to complain about a CBDC offering interest on small deposits when they refuse to consider working with such small amounts of money themselves. Ironically, banks may be better off with a well-functioning financial system that is able to avoid swings of inflation and recession, or, worse yet, stagflation, than trying to squeeze pennies out of the system by using their political influence to block a more effective monetary policy system that uses interest rates on small savings accounts as a return-on-savings tool to draw money away from spending when excessive demand is driving up prices and causing excessive inflation. In times of weak demand and a threatening recession, the central bank could inject money directly into these accounts for everyone with a US Social Security number.
US Treasury I-bonds already compete for deposits
Moreover, the United States government already offers already offers a high interest rate savings vehicle in the form of US Treasury Series-I bonds. Most people don’t even know about these government I-bonds because there is no secondary market for I-bonds, which must be purchased directly from the U.S. Treasury. However, no money can be withdrawn from these 30-year bonds during the first year and there is a three-month interest penalty for withdrawing money from the second through fifth year. These restrictions on early withdrawal make these I-bonds unsuitable for most Americans who need immediate access to their money in the event of an automobile accident, a medical emergency, a cut in work hours, a job loss, a sudden rent increase, or some other unexpected financial difficulty. However, the existence of U.S. Treasury I-bonds establishes government sponsored savings as a legitimate activity of the federal government in competition with private banks.
One thing about CBDC savings accounts and U.S. Treasury I-bonds needs to be made crystal clear. No matter how high the interest rate offered, if the people with the highest marginal propensities to consume don’t know about them, such accounts or bonds will be useless in stopping inflation. Just as War Bonds had to be vigorously promoted during World War II, these high interest rate accounts and bonds must be advertised in all the media accessed by those with the highest marginal propensities to consume. Ultimately over 50 percent of Americans purchased World War II War Bonds as a result of the widespread promotional activities which included celebrity performances and advertising during athletic contests in addition to billboard and media advertisements.
If we are serious about getting people to save money and cut back on their spending to reduce the inflationary pressure that is driving up prices, while at the same time avoiding a recession, we need to provide an equally vigorous promotional campaign to get especially lower-income Americans who are the ones with the highest marginal propensities to consume less and to invest money in CBDC accounts instead of using that money to increase consumer demand and further drive up prices during periods of excessive inflation. These CBDC savings accounts will not only provide individuals with a source of funds for emergencies but will also in aggregate provide the nation as a whole with greater economic stability by providing an automatic stabilizer.