Mark Carney’s Trojan Unicorn — Are Central Banks Considering Stealth Nationalization in Sovereign Digital Currencies?

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Whether or not the purported explanation that the plot and characters of Wizard of Oz being an allegory for the Federal Reserve and the Gold Standard is correct, for anyone in finance the notion that central banks operate on a basis of smoke and mirrors certainly rings true. It’s not only that it’s all smoke and mirrors with the central banks. It’s that behind the smoke and mirrors, there’s just more smoke and mirrors. Usually, clues surface when central banks start opining on something that is so fundamentally a bad idea that it really ought to be left to shuffle off into a dark corner and die a quiet, unmourned, death. Something like sovereign digital currencies, for example.

The FT has been trying (more on this later) to work out what central bank governors, like the Bank of England’s Mark Carney, meant when he came down from Mount Parnassus, to tell us all how central banks and governments will increasingly be required to consider the move to a digital reserve currency in a “multi polar world”. Carney was, here, entirely correct in principle. The US manages the US dollar primarily for the US’ interests. Certainly in terms of interest rates, the US Federal Reserve takes the needs of the US economy — as it perceives them — as the basis for how it operates monetary policy and who can use the US dollar, for what purposes. Reading between Carney’s lines, you can also intuit a political frustration that, on more than one occasion, the US will also operate the US dollar in pursuit of US geopolitical policy objectives. Even at some economic cost — and not just to the rest of the world, but potentially to the US itself, too. Carney didn’t mention in his speech about another problem, which is how central banks end up having to step in to support the commercial banks in times of financial stress — the FT spotted this angle, we’ll return to this more fully below.

But firstly – and most importantly – whether a sovereign digital currency ever gets implemented is ultimately going to be a political choice. It is a political – not something that is subject to any economic or technical constraints or influences – decision, if The Powers That Be did decide to introduce a sovereign digital currency. We would have to ask ourselves why it was they made that choice to solve the problems they are confronted with, rather than an equally valid (and considerably simpler) alternative, which was nationalisation of the existing system.

Apart from hard-line free-market ideology, there is another, more subtle, impediment to any ideas about the implicit nationalisation of the payment system through a government-backed digital currency, which the banks could only access through an interface the central banks would have to provide to the currency’s (presumable) distributed ledger. Note that this is a key element of the digital sovereign currency idea – and why a digital sovereign currency would be defacto nationalisation of the payment system. Today, it is the commercial banks which control their individual ledgers which when taken in aggregate form what is in effect a single distributed ledger. They – and add-on’s like the credit card schemes and interlopers such as PayPal – then create bespoke competing and overlapping interfaces. A digital sovereign currency could only have one distributed ledger (which the central bank would maintain) and one interface to it (which again, the central bank would specify and control).

But given that this would entail the central banks and governments taking a far more hands-on role in the provision of what are currently operated solely on a strictly private-sector commercial basis, like money transmission services – a role they are determinedly eschewing — how will the cakeism inherent in what is being mooted be resolved? If central banks — and, by proxy, governments – want to be in control, they’ll need to be willing to to shoulder responsibilities of operating, monitoring and controlling any digital sovereign currency. Responsibilities which they can presently and often conveniently shirk through a “because markets” shrug of the shoulder.

If the system were to be in effect nationalised by migration to a digital sovereign currency, then governments would provide – in response to public, or consumer, demand — the services which societies needed. This would be on a utility basis — there’d be no drive for marketing and adding special bells and whistles onto what would be a generic, core, product of sending money from person (or business) A to person (or business) B. But much of the complexity in the current payments ecosystem is artificial, driven by needless product differentiation. Bank accounts which will clear checks for value on paying-in (rather than having to wait for them to pass to the issuer bank and get a confirmation that the check wasn’t bad). “Instant” transmission of funds whereby there’s no time-lag between, say, using your Debit card in a store and the store getting your money into its account. Some of this was driven by a call, legitimate at the time, to avoid banks being able to profit on the funds held up while payments were being cleared.

But that was only a true statement in the days of high positive returns on cash (or positive liquidity). Now holding cash – having a positive balance in funds awaiting release through clearing — can be a cost to the banks.

And for consumers, just how useful is this incessant demand that all payments must be settled instantly? Gone are the days where you could issue a check, but get a cooling-off period through the ability to stop it, should you find that there was some (valid) reason why you no longer wished to have the recipient get their hands on your money. Or that you could instruct your bank to make a wire transfer, but then realise momentarily later that you’d specified the wrong amount or had the payee’s details incorrect. Too late, in the world of instant money transmission – it’s your liability and it’s your problem to get the money back from whoever you (possibly inadvertently) sent it to.

In a nationalised payment system, governments would be forced to determine what, on a social utility basis was the most appropriate feature-set for money transmission services, at what costs to system users and with what benefits. And once that line is crossed – governments taking ownership of the money transmission services – they won’t be able to avoid all the associated baggage that comes with it, like dispute resolution, fraud and money-laundering countermeasures and Know Your Customer verification. And it gets even worse from there. Once those functions are, unavoidably, subsumed into a nationalised payment services system, what, exactly, would the commercial banks — certainly at a retail level — be for? Apart from possibly gaudy branding and gruesomely sentimentalising marketing.

Moreover, while at a retail level simple checking accounts and card payments are easily-understandable and worthwhile services for consumers, at the margins – such as for large corporate customers – it’s not nearly so clear-cut what is socially useful and what is inherently full of hard-to-determine compromises. For example, the commercial banks and their large corporate customers utilise netting and pooling arrangements to minimise transactions volumes and thus costs. The banks often sell pooling services to their large customers manage complex accounting needs, so it’s also a valuable revenue stream for the banks. But in a Central Bank-managed digital sovereign currency, this could no longer happen because any pooling or netting run by the commercial banks (and their customers) presents credit risk as counter parties’ positions are not instantaneously settled. “Someone” would have to decide whether netting and pooling arrangement would be permissible, if so to what extent and available to which types of customers on what basis.

In our prevailing small-state cultures, it’s perhaps no wonder governments would rather not have to do the hard work of making those sorts of choices and explaining to their electorates what the trade-offs are which are available to them. “Conventional” nationalisation of the existing system and its key players would be too overt and their newly-acquired responsibilities too obvious and traceable. Perhaps something a little more opaque is needed? Hence the sudden appearance of a new-fangled technology-based sleight-of-hand in the form of the sovereign digital currency.

We can forgive, then, the Financial Times for doing its part in keeping a flame burning under the meagre gruel being cooked up by purveyors of digital currencies, such as Facebook’s Libra, because the central banks have not stopped muttering on about it for months. The FT does its best in their article to puzzle out why central banks are even entertaining the possibility of implementing a digital currency. To be fair, if you read the piece closely, you can see that it expands on a key difference between something like, say, Libra – which is entirely a private sector owned and operated system – and a sovereign digital currency which would be, notionally, run in the public interest by governments.

You have to wade through the entire thing, though, before you get to the real explanation for why this concept is being given the trial-balloon treatment by the central banks. To save readers’ patience’s, I’ll cut to the chase for you:

The picture that is emerging is one in which private institutions are licensed to issue digital currencies either through accounts or “wallet” applications that are fully backed by central bank reserves, which are already electronic.

The BoE’s [Bank of England] recent consideration to giving non-bank fintech companies access to its reserves was intended to encourage this type of system.

To consumers it would feel very much like the electronic payment and transfer solutions that are already available today through their banking apps or a service such as PayPal. The difference would be that both the safety of the intangible cash and the reliability of the transfers would be fully secured by the sovereign provider of money: the central bank.

[emphasis mine]

I think the FT’s writer stumbled across the truth of the matter, but didn’t realise it. Certainly, they could have simply printed their last paragraph and be done with it. It’s the only thing that tells us what’s going on here, in the entire article. Because the FT stopped at that point – just where it was getting interesting — rather than using that as their introduction, we’ll need to pick up that baton from there and explain what’s really afoot.

To understand what’s piqued central banks’ interest in digital currencies, we need to remind ourselves about a feature of the banking system which is hidden in plain sight. If, as a suggestion, you decide to make a donation to the Naked Capitalism fundraiser and you, wisely, don’t want to risk putting cash in the mail, you can use the PayPal option or post a check. These are money transmission, or remittance, products. They move money from the sender of the funds to the recipient of them.

But what happens in the – highly likely – event that several different financial institutions are involved in the flow-of-funds chain? To return to the fundraiser donation example, unless you and Yves have the same bank, there’s your bank (the one which maintains your account) and Yves bank (where her account is held). And that’s just the most straightforward of scenarios. If I send a donation, there’s my bank in London (HSBC in my case), HSBC’s office overseas (in NY), a currency conversion from £ to $ (potentially done via HSBC’s NY branch and the NY Fed, should HSBC need to access a fresh supply of dollars for the dollar clearing) then finally Yves’ bank as she doesn’t have a bank account with HSBC.

In normal circumstances, none of this is a problem. The central bank which looks after UK banks (the Bank of England) is happy to provide HSBC in London with whatever GBP (£) liquidity it needs to send the money to its NY branch, the NY Fed is happy to let HSBC’s NY branch have whatever USD ($) liquidity it needs to convert the GBPs to USDs and then the regional fed which supervises Yves bank is happy to let Yves have her money knowing that it can get it back from HSBC in NY.

But in times of financial stress, especially systemic ones like those which occurred in the Global Financial Crisis (GFC) 10 years ago? It was in those circumstances where the (unwitting) generosity of the central banks to support all that nice “provision of industry and payment services” came back to bite them on the bum. By making all those $’s and £’s (and other currencies, like ¥ from the Bank of Japan, or € from the European Central Bank) available on demand (subject to the proffering of high quality collateral, or what was supposed to be high quality), the central banks prop up the whole show. This is known in the industry as intraday liquidity.

To say that the central banks are vexed by this shotgun marriage between public funds and private capital is an understatement. Since the GFC — so we are talking a decade or more now — central banks have been ruminating over how to extricate themselves from this role — while at the same time save the money transmission system from complete collapse in times of upheaval. Take the Bank of England:

Intraday liquidity

5.1 This chapter provides a definition of intraday liquidity risk and outlines the PRA’s [Prudential Regulatory Authority] approach to assessing and calibrating intraday liquidity risk under Pillar 2.

5.2 The PRA defines intraday liquidity risk as ‘the risk that a firm is unable to meet its daily settlement obligations, for example, as a result of timing mismatches arising from direct and indirect membership of relevant payments or securities settlements systems’.

5.3 The PRA considers that all firms connected to payment or securities settlement systems, either directly or indirectly, are exposed to intraday liquidity risk.

[emphasis mine]

I’ll leave interested readers to digest all 18 pages of the Bank of England’s report, in all its wonderful wonkery, at their leisure, should they so wish. Suffice to say that the initiative referenced (“Pillar 2 liquidity”) is, as the name implies, just the latest in a long line of other initiatives. And the report linked to is a summary of a much more detailed policy statement on how the bank of England wishes to lessen the money centre banks’ reliance on its involuntary largess.

Somewhere, though, a light seems to have gone on in the central bank governors’ minds that they will never be able to truly square this circle – guaranteeing the functional stability of the banking system, certainly for money transmission, but avoiding being on the hook for losses if the central banks have to step in and act as the liquidity providers of last resort.

Readers of sites like Naked Capitalism would be shouting at their screens “But why not rely on a Post Office bank?!” – or, in more technical terms, a nationalised provider of banking and money transmission services. A simple and technically proven ready-made solution. Unfortunately, its politically and culturally impossible. Instead, we have yet more of the smoke and mirrors which get brought in to try to disguise how the central and the commercial banks are inseparably joined in a push-me pull-me connivance of mutual dependency and loathing.

By adopting a digital currency – which is also sovereign – the central banks could rip out the current money transmission plumbing and allow the commercial banks to create payment services products which look and feel much like the ones we know and use today but which remove all counterparty risk (because there are no counter-parties any more — everything is done on the the central banks’ digital sovereign currency’s distributed ledger and the services are accessed via an interface available to all authorised system participants). It would achieve the same thing as nationalisation of the payment services system. And the best part is, if you’re a central bank trying to sell the idea of nationalising the payment system to governments incurably beholden to free market dogma, it all looks like a refreshingly familiar and unquestioned standard-issue tech unicorn. You have to look really – really — closely at its teeth to see the inherent slippery slope to full nationalisation it is carrying with it.

The “only” downside, for the rest of us, is the inevitable overbearing monitoring and surveillance.

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  1. The Rev Kev

    Not only the inevitable overbearing monitoring and surveillance. With such power over a digital currency, it would only be a matter of time before they would be putting restrictions into how it could be used because the temptation would be too much. In Australia, they are introducing Cashless Debit Cards for payment to the unemployed and the like but there are restrictions put on those cards as in no booze, gambling, smoking, gift cards, cash, etc. so you can see how it would go for fully digital currency – for your own good mind you.

    1. Clive Post author

      That is a very good point I hadn’t appreciated in this context. Already, the card networks (Mastercard, Visa etc.) come down hard on merchants engaging in what, in their view, is “brand damaging activity”.

      A small step, once someone got a taste for it, from that to “person X isn’t allowed to purchase product Y because of reason Z” or set daily (or whatever) limits on digital currency conversion to cash.

    2. Ohnoyoucantdothat

      It’s worse than that. I live in Crimea. We are under sanctions and getting money from my accounts are impossible because ALL transfer options are blocked. I have to visit home every spring to get money (in cash) for the year. An all digital, cashless system would make that impossible as the government could just block any transfers. How would I get money to live on under this scenario?

    3. Joe Well

      In the US, there’s always been a black market where people sell food benefits for a fraction of the face value. It used to literally be people standing outside grocery stores selling food stamps. I wonder how this would work in a fully cashless world.

      1. notabanktoadie

        There’s no need to abolish physical fiat so long as banks and other large fiat users or hoarders may not use it to escape negative interest to a significant extent.

        Three methods to prevent this come to mind:
        1) Use date stamps on fiat so that it may be discounted wrt its age.
        2) Inflate the value of existing fiat away with new fiat issued in the form of an equal Citizen’s Dividend.
        3) Limit physical fiat issue to individual citizens – only so much per year.

  2. Susan the other`

    Thanks Clive. Very informative. No wonder Carney was pretending like he really didn’t have a clear picture of what he wanted. He was just floating an idea and he pawned off the details by comparing this new medium of exchange not to digital currencies but to “something like Libra” – a private currency backed by “a basket” of sovereign currencies. So currency exchange and purchasing power entwined in one easy click. And it’s nobody’s loss because at NIRP interest revenue doesn’t exist. If the central banks want to extricate themselves from intraday liquidity risk and still maintain liquidity, won’t they have to have some kinda digital slush fund to smooth the bumpy transactions? – like somebody didn’t credit an account correctly. Snafus could get very large. This is bigger than nationalizing banking; it is globalizing banking. Skipping the national part that creates sovereign fiscal controls to the benefit of a society and going straight to the private money monolith controlled by who knows for whose benefit? If it were just limited to the payments and settlements of transactions it isn’t a bad idea – but the ability to hoard and skim is not addressed. There will have to be a firewall whereby any private digital currency cannot be exchanged for any asset or national currency until it has a clean pedigree, or something like that.

  3. notabanktoadie

    I can’t speak for Carney’s ideas but I don’t see how allowing citizens debit/checking accounts at the Central Bank itself, alongside those of depository institutions, is anything but the provision of an ADDITIONAL but inherently risk-free payment system to work alongside the inherently risky payment system that must work through private banks.

    1. Clive

      How would the commercial banks cover the costs of their “risky” payment infrastructure? More’s to the point, how would the central banks cover the cost of their new risk-free system if they had to “compete” for business with the commercial banks?

      And how would you differentiate the two offers from a marketing and pricing perspective? Offer, from a commercial bank account a “click here to pay Aunt Agatha risk free, but it’ll cost you a $1” and “click here to pay Aunt Agatha, it’ll not cost you anything, but if the markets go haywire, Aunt Agatha won’t get her dosh”.

      1. notabanktoadie

        How would the commercial banks cover the costs of their “risky” payment infrastructure? Clive

        Being inherently risk-free, accounts at the Central Bank should return no more than zero percent.

        That leaves a market for inherently risky but interest paying accounts at entirely private banks with entirely voluntary depositors.

        1. Clive

          A nice idea, but only really effective in a positive-rate environment. And there’s always the moral hazard aspect — people who deposit money in the riskier deposit-taking institution might say they accept the risks, but when the roof falls in, there’s the inevitable sob-stories about how they “didn’t know” what the conditions were.

          Hence, for example, the supposedly hard-lined Financial Services Compensation Scheme (the UK’s deposit protection) ending up having tearjerker fire-at-the-orphanage wriggle room

          1. notabanktoadie

            And there’s always the moral hazard aspect — people who deposit money in the riskier deposit-taking institution might say they accept the risks, but when the roof falls in, there’s the inevitable sob-stories about how they “didn’t know” what the conditions were. Clive

            Deposit guarantees should be abolished in stages, e.g. 95%, a year later 90%, a year later 80%, a year later 50%, a year later 25%, a year later 10%, then none.

            And accounts at the Central Bank should be as convenient as any private bank with expanded Post Offices serving, perhaps, as local branches.

            1. Clive

              No matter how much you tell people “your money is at risk” they assume, in certain circumstances, the state will always step in.

              I can guarantee you, even if it was written in inch-high red letters on the Terms and Conditions, if a crunch was to hit, this “you’ll not get a penny” tough talk will get eroded in the face of the first person who put Grandma’s life savings in the “private bank” but “without knowing” there was no government backing and now she’s living in a tent in the park, crying into their sleeves on TV.

              1. notabanktoadie

                Shouldn’t we have an adequate safety net too?

                Plus, a proper Citizen’s Dividend would replace all fiat creation beyond that created by deficit spending for the general welfare. It’s explicit purpose would be to counter price deflation and that could be quite substantial as privileges for the banks are abolished.

            2. Joe Well

              Deposit guarantees should be abolished

              You’re talking about getting rid of FDIC? One of the few surviving achievements of the New Deal? Wouldn’t there be bank runs?

              1. notabanktoadie

                One of the few surviving achievements of the New Deal? Joe Well

                Makes you wonder, doesn’t it? Social Security is under attack but welfare for the banks and, by extension, for the rich, the most so-called worthy of what is currently, in essence, the public’s credit but for private gain is sacrosanct?

                1. Wombat

                  Funny, People never mention that FDIC was a Glass-Steagall provision! Yet it sticks around because it socializes bank risk… the part about separating Speculation from Commercial Banking- well that’s long gone.

                  1. notabanktoadie

                    Wombats are lovely creatures, I just discovered on youtube.

                    And your comment is penetrating.

                    Thanks for both.

              2. notabanktoadie

                Wouldn’t there be bank runs? Joe Well

                Just gentle ones whose purpose would be to separate what should be risk-free deposits from what should be at-risk ones.

              3. Wukchumni

                A friend had around $900k in an IndyMac bank account a dozen years ago when things were about to get squirrely and in the course of a day, he opened 9 different accounts with the proceeds in other banks, cognizant of the $100k FDIC insurance.

                Those that had more than $100k got screwed, as the weeks went on, and Angelenos lined up for a good old fashioned bank run, with Mnuchin being the big winner in the deal when the smoke cleared.


        2. NARmageddon

          Being inherently risk-free, accounts at the Central Bank should return no more than zero percent.

          Not fair. Currently, banks get interest both on necessary and excess reserves, and at a much higher rate than most customers get in a commercial bank checking account.

          I, Joe Citizen, also want to earn that same level of interest on my reserves.

          1. notabanktoadie

            Of course (positive) Interest on Reserves should be forbidden too and Joe Citizen, unless rich, might easily do better with an equal Citizen’s Dividend as a replacement for all fiat creation beyond that created by deficit spending for the general welfare.

            1. flora

              Your arguments sound reasonable if money were a non-manmade resource, like water or coal. But money is very much a manmade political/govt resource.

              Appeals to extra-governmental dispensation are appeals to that which does not exist. Who, for example, would guarantee a Citizens Dividend if not the govt – the same govt you decry as unresponsive to average citizens?

              The reach for a greater power outside the current system to fix the current system is the magical thinking that’s got us into the predicament we’re in, imo.

              1. skippy

                Some are desperate to find a A-political solution to the proverbial political solution.

                You might also find such pundits singular focus on this topic and not a word on any other matter.

              2. notabanktoadie

                Who, for example, would guarantee a Citizens Dividend if not the govt flora

                If forbidden BY LAW to create fiat for any other reason than:

                1) to finance deficit spending


                2) finance an equal Citizen’s Dividend

                then what other choice than 2) would the Central Bank have if 1) was inadequate to quell deflation if it raised its ugly head?

                1. skippy

                  Depends on the humans running the Fed and what theory of money or economics is driving the agenda.

                  Not that Corporate governance or its mandate changes due to your suggestions. Still leaves the barn door wide open for endemic corruption or changes the fact that money can buy what reality is most profitable – see mainstream economics or how health or education is structured.

                  You seem to expect if money is structure a specific way the market will automatically desist in socially corrosive activities.

  4. notabanktoadie

    what, exactly, would the commercial banks — certainly at a retail level — be for? Clive

    Even entirely private banks with entirely private depositors might safely create SOME deposits but beyond that “banks” could serve as loan brokers between inherently risk-free accounts at the Central Bank itself.

    Plus, the banks could continue to offer those who choose to deposit with them (instead of the Central Bank) as much privacy as they currently do – such as that is – but likely for a price once all privilege for depository institutions has been abolished.

      1. Clive

        The problem with that is, there’s inevitably going to be a whiff of suspicion around private bank deposits if they sell on privacy. “What have you got to hide?” would be the unasked — or even overtly asked! — question for anyone choosing the riskier (but private) option.

  5. Mattski

    Yes, is there some lurking fear–perhaps prompted by the increasingly popular insights of MMT–that true government(s) of the people (hey we can dream) decide that they’d like to control the creation and maintenance of their own currencies?

  6. john brewster

    The picture that is emerging is one in which private institutions are licensed to issue digital currencies either through accounts or “wallet” applications that are fully backed by central bank reserves, which are already electronic.

    This is precisely what the New Currency Theory crowd proposes: Full Reserve Banking. Monetarism on steroids. Government licensed to meddle in every single financial transaction and to set the level of inlfation/deflation by fiat – leading inevitably to massive political corruption.

    This whole approach was dissected at Naked Capitalism over a year ago by Richard Murphy:

    The Battle for Money Has Begun

  7. chuck roast

    We spend plenty of time on this site yucking it up and sticking the needle into Elizabeth Warren, but lets give the woman her due here. She has been advocating for a PO Bank for years. Kudos to her.
    As far as I know only she and Bernie are taking this position.
    Uh oh…I just remembered…how then would would I launder all my ill gotten cash?
    Never mind!

    1. Joe Well

      >>how then would would I launder all my ill gotten cash?

      umm… real estate? cash-only businesses?

    2. Yves Smith

      I have to tell you, the old US Post Office Bank (unlike the Japanese version) never amounted to much. Deposits were limited to $500 and services were limited too. Banks were effective at keeping the Post Office Bank from doing much and that was when banks were less powerful than now.

      I think the better approach politically is to push for a PO Bank for the unbanked (the people that the banks admit they don’t want to serve), offer a good menus of products, and then push to go up market.

      1. Wukchumni

        I’ve always wondered why there weren’t more post office robberies, most of the post offices i’m familiar with have essentially scant security measures, and all they do pretty much is take in money all day long, especially so with those buying postal money orders, for which payment has to be in do re mi.

        1. chuck roast

          That’s how I contribute to my favorite candidates. Postal MOs. Put a bogus name and address on them. The candidate gets the cash and doesn’t become a nuisance.
          Be sure to contribute to Yves, Lambert and the crew. You may use a bogus name and address…just get ’em the cash.

  8. cuibono

    “The “only” downside, for the rest of us, is the inevitable overbearing monitoring and surveillance”

    Wait, isn’t that the entire point of this schema?

  9. notabanker

    Could this be preparing for the inevitable implosion of the dollar? I’m not going to pretend to have a grasp on the macro-level FX market, but it just seems to me that the Chinese could wreak total havoc on the USD if they one day decide t-bills have no value to them.

  10. RBHoughton

    Quote – “Nationalisation of the existing system” Unquote. Very happy to read that. Can NC readers agree to assemble our many varying opinions around that core requirement? Clive follows it through to the recognition that a nationalised system replaces commercial banks. That’s where the opposition will come from, with central banks fighting for their constituents.

    The way the moneymen are going reminds me of that article on NC several months ago that commended the financial world be run by insurance companies. At least the parlous state of the global economy is heading inexorably towards a crisis of some sort. I hope this is debated as a solution.

  11. Wandering Mind

    As I understand the current system in the U.S., the private banks issue deposits, clear claims against those deposits and use reserves issued by the Fed to clear any remaining balances.

    If there is some international unit issued by some internationally controlled organization which is supposed to sit atop the entire system, then it seems to me that private banks could continue to issue deposits, national central banks could continue to issue national currency, there would be inter-bank clearing, with balances nationally cleared in central bank issued currency and international balances cleared in the new, international currency.

    Why would the introduction of a new reserve currency, regardless of the form, necessarily eliminate the current infrastructure?

    1. Yves Smith

      Because current intra-bank clearing depends on a central bank to back the settlement of large intra-day balances at the end of the day. A competing settlement system would be nightmarishly complex to manage in addition to the extant system for both the central banks and the individual banks. A reserve currency solely in the hands of central banks, not traded with private parties, would not have much point.

      1. Wandering Mind

        I guess I’m still somewhat confused by this. It seems to me that there must be a system currently in place for settling international balances. Since the dollar is the reserve currency, I am assuming that the mechanism for doing so presently involves the Fed in some way.

        Prior to the creation of the Fed, there was a U.S. clearing system, but it was private. That private clearing system, as I understand it, did not disappear, but rather evolved, with the Fed sitting on top of it to provide reserves needed to clear any balances remaining at the end of each day.

        What I was envisioning above was not a competing system, but the addition of a layer above the current system which would provide new, international reserves, created by the new entity, to clear international balances once all the clearing at the national level was done.

  12. Mark

    What I see here is many dozens of reasons why a controllable currency will not be universally acceptable for all users. Whether those reasons are political, legal, or functional if there are barriers then it cannot be the only currency. In fact if it isn’t universally tradable does it meet the literal role of ‘currency’.

    Go down this path and you’ll see something else pop up in its place.

  13. notabanktoadie

    … but only really effective in a positive-rate environment. Clive

    Up to a reasonable size, individual citizen accounts at the Central Bank should be exempt* from negative interest but beyond that size and for other accounts, including those of banks, there should be no such exemption.

    Still, even if banks were subject to negative interest on their reserves they might still offer at least a less negative interest rate on deposits with them.

    Of course, negative can’t compete with zero so individual citizens below the account limit would have NO incentive to have inherently risky private bank accounts but actually a disincentive besides the risk.

    So Grandma can be driven out of her risky private bank account into the safety of a Central Bank individual citizen account with sufficiently large negative interest on bank reserves.

    And, unless she’s rich, an equal Citizen’s Dividend to replace all other fiat creation beyond that created by deficit spending might easily be more than the positive interest she might be accustomed to.

    Since this thread is dying if not dead, best wishes to you, Clive and thanks for the sharpening (Proverbs 27:17).

    *Since citizens have an inherent right to use their Nation’s fiat and not just depository institutions.

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