With e-cash, any degree of privacy is an option, with any percentage of the system being allowed to operate with cash-like privacy an option, run by any degree of public/private mix. Maintaining physical notes and coins is an option.
Public access to reserves combined with peer-to-peer giro payments, regardless of the privacy aspect, makes the payments function of banks redundant.
Direct access to reserve accounts makes the savings function of banks and 100% safe treasury securities redundant. Holding reserve accounts with banks is a design option. Calling bank-loans “reserves” is an option. (A good overview of some issues: The Case for Digital Legal Tender 2017.)
The only thing banks do that is not made redundant with CBDC and that the government generally does not do is underwrite private loans. (“Government Sponsored Enterprise” being a large exception; the “quasi” status of GSEs, as we will see, is problematic.)
The payments system is merely a technical and bookkeeping question, mundane in the end. The idea of operating it with only reserves puts in stark relief a far more important question: What is the point of banks at all?
To answer this question we have to think more broadly about why we have government at all, and why we have private (or at least arms-length licensed/incorporated) banks/companies at all. What good do either do for us?
Government ultimately is about organizing desired public goods (Re-thinking the Definition of “Public Goods” 2014; 1000 Castaways 2019). Private companies are about profit, hopefully arising from competition-induced technological/organizational changes that lead to gains in productivity/efficiency (quantity, price), and/or quality.
Both public goods and private productivity aid wellbeing. And both aid each other.
Non-government production allows for an abundance of goods, including those with which the people provision their government.
Government not only organizes goods and services that the private sector would not; it increases the productivity of the private sector through healthcare, pure research, infrastructure, education etc. (See also The Entrepreneurial State: Debunking Public vs. Private Sector Myths 2013).
Either one (profit-seekers or government) without the other would lead to a society with less than its potential for wellbeing (abundant and varied material goods, safety, health, education, a healthy environment). Together, they each raise what might be considered a “wellbeing possibility frontier” to modify a mainstream concept, shifting it outward.
These two spheres, government and profit-seeking, are so different they can be said to have fundamentally different moral bases (Systems of Survival: A Dialogue on the Moral Foundations of Commerce and Politics 1993). Indeed the differing moral codes of each is the reason there is such an (unfortunate) ideological clash between “supporters” of each. Because their inherent moral divide is not usually explicitly recognized or understood, debate becomes hardened around those exposed more to one or the other of these important belief systems, rather than understanding that they are both beneficial and reinforce each other. They must not be mixed, however; when government attempts to emulate the private sector (privatization, outsourcing), or when the private sector takes on the “guardian” morals of government, they not only fail, they become in essence evil (see Systems of Survival; the for-profit “colleges” fiasco is a good example; also Why Privatization is Wrong 2020; Jane Jacobs and the Problem of Monstrous Hybrids 2012).
Bank lending, when done correctly, is about—and supports—what profit seeking companies do well, in the same way that government spending, when done well, organizes public goods. The government does not have the correct moral system to carry out what proper bank-lending to profit-seeking companies achieves. Banks should be licensed to underwrite loans at arms-length from government. But with common-sense, easy to enforce limits (Proposals for the Banking System 2009).
And it makes no difference that they do so with a CBDC—the credit they create is better understood by the public if it is on the same balance sheet as the entire system; under the current system, despite appearances, it may as well be. (Loans are either repaid or often insured if not; in neither case does counting them as reserves make a difference; the only thing that makes them special is the purpose for which they were originated).
Originating loans is second only to the sovereign ability to create a currency system through the imposition of liabilities, itself directly stemming from the monopoly on force that defines sovereignty. Thus the responsibility is immense, and oversight must be wise, unambiguous, and uncompromising. Poor loan provision engenders inequality, decreasing the wellbeing even of the wealthy (Top Incomes and Human Well-Being Around the World 2016) and ultimately destabilizes the entire economy (Keen 2012) and society (…and forgive them their debts 2018).
The benefit of a peer-to-peer giro system and disintermediation of banks (which is not the big deal some seem to think; giro systems have been the norm in continental Europe for a century with no harmful social effects from widespread disintermediation; see, for example, A Note on the Giro System 1959, see also 2016; I find it odd in discussions of banking, bank reform, crypto/e-cash etc. how seldom the widespread and long existing use of giro systems receives attention) from all but lending—streamlining and making the finance system more understandable to the public, is it puts into stark relief what banks are currently doing wrong (Those Who Forget the Regulatory Successes of the Past are Condemned to Failure 2009). If the public understands—and can see—what banks should and shouldn’t do, then the clear, common sense, and easy to implement/enforce regulations that would allow for a healthy, wellbeing-enhancing bank system to operate would be obvious (Proposals for the Banking System 2009). Banks, properly regulated, can enhance wellbeing rather than being Roving Cavaliers of Credit (Keen 2009) and private debt a prime source of social distress at the micro and macro levels (The High Price of Debt: Household financial debt and its impact on mental and physical health 2013). The rules surrounding profit-seeking more generally are crucial to society (The Code of Capital: How the Law Creates Wealth and Inequality 2019.)
The Power (sovereign spending)
As crucial as it is to have a healthy banking system underwriting useful profit seeking, that is understood and regulated properly by the public, there is perhaps an even more pressing question that direct access to reserves via a CBDC makes clear.
The fundamental accounting of government spending is that spending equals taxes (extinguished public liability) plus savings (credits against unextinguished [future] liabilities).
Yet we have an extraordinarily complicated system that not only hides the fundamentals from the public by forcing 100% safe savings to be with a different government unit at a different agency with different perceived accounting. Worse, it gives the appearance that spending beyond taxes is borrowing. This is the exact opposite of the truth that spending beyond taxes is what allows for savings of the government credit.
The simple fact that the majority of the public believe the currency-issuing government borrows from savers is the single most important factor in maintaining wellbeing below its real resource potential. (Or its twin belief, that spending more than taxes—necessary for saving government units—necessarily, or even commonly, leads to inflation). It stops the public from organizing for itself the full amount of public goods that real resources allow, with an irretrievable shrinking of the “wellbeing possibility frontier.”
As noted, government has a special role in organizing public goods that both directly increase wellbeing and amplify future wellbeing, as well as increasing the efficiency of the private sector and its role in production.
Doing less now than could be done irretrievably diminishes the potential level of future wellbeing. The loss is irrecoverable as children end up with less education, develop in worse living conditions, with less infrastructure, in a current population that is less secure, educated, efficient and healthy than it could be. Once this potential is not reached now, then that potential trajectory cannot be reached in the future. Lack of investment now condemns both the present and posterity to a permanent loss.
The primary confusing factor is the seemingly innocuous custom of not allowing savers to save directly in the tax credit. By allowing direct access to the tax credit, a CBDC, regardless of its other features, would allow for 100% safe savings without the misleading accounting of the current system. The (already existing) pointlessness of treasuries would be made apparent.
Thus a CBDC can be important because of its transparency-increasing effects on both banking and on government spending/public saving. The savings aspect may seem trivial. Yet under existing arrangements spending operations render the system incapable of being understood even by “experts,” much less the public. The profound benefits of good governance are not, and cannot, be reaped. A rational, coherent public accounting of spending and saving would change that.