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Cash is better for privacy, not subject to systemic digital failures, & accessible to all (even those who can't afford digital svcs).
CBDC may be cheaper for govt to offer, enables greater use of negative interest rates as a tool of monetary policy, makes money laundering/terrorist financing more difficult, reduces friction in txns, & enables financial inclusion.*
*Just stating args-don't necessarily agree.
*Just stating args-don't necessarily agree.
One will be more desirable in certain situations (cash in a negative interest rate environment or when privacy concerns are high or when digital infra fails), and one will be more desirable in others (CBDC for...convenience?)
Because of their fundamentally different characteristics, the two govt forms of money could have divergent values - an 'exchange rate'.
(Would there be an attempt to peg the rates to one another?)
(Would there be an attempt to peg the rates to one another?)
There could well be a Gresham's Law situation (bad money drives out good) as the two forms of govt money compete.
People could start demanding a particular form of money (CBDC or cash) to settle obligations, and could put such provisions in their contracts, as a way of hedging and ensuring they received the value they required in the future.
This reminds me of what happened when the US paper dollar related to gold, and people regularly put 'gold clauses' into their contracts, requiring payment in gold or a gold value equivalent in the future.
The divergence in value between two different forms of legal tender (gold and paper greenbacks) was sometimes a very serious problem, leading to 2 different series of Supreme Court cases: the Legal Tender Cases and the Gold Clause Cases.
(Summarizing these cases in tweets is hard (maybe I'll do another thread), but both raised important questions about the limits of the govt's ability to say what money is, & whether people were entitle to receive the form of payment they had contracted for.)
Anyway, the divergence in value between gold and the US dollar came to a head during the Great Depression, when people could not repay their debts if they had to pay in gold or a dollar equivalent in gold (as they had promised to do in a gold clause when taking on the debt).
There was a fear that all of these debt defaults could be catastrophic, and in 1932, Congress passed a law invalidating all gold clauses across the board, effectively protecting debtors and harming creditors (who had bargained for this very protection).
FDR also issued an Executive Order mandating that people turn in their gold to the govt in exchange for cash (the govt set the exchange rate).
Unsurprisingly, these actions were extremely controversial, and cases related to the abrogration of gold clauses quickly made it to the Supreme Court.
(There is a TON of rich history here to explore.)
(There is a TON of rich history here to explore.)
The Supreme Court upheld the govt's actions, but FDR had prepared a speech saying he would not abide by the ruling if it didn't go his way (never delivered).
These historical moments seem extremely relevant to our current discussions of issuing Central bank digital currencies, and we would do well to examine them closely now.
Offering two forms of currency, with different characteristics and risk profiles, has significant implications.
Getting rid of cash in favor of a CBDC would avoid the 2 competing currencies problem, but has other serious issues, well articulated by folks like @Suitpossum.
I've been meaning to write a paper on this for a while, but #crypto has been stealing my attention! Time to do it!
We have been grappling with these questions in my Law of Money class for a number of years now.
Interestingly, students immediately pick up on the major differences btwn the forms of money, and articulate privacy & negative interest rate concerns as reasons why they'd find cash attractive.
I find this intriguing as all are regular users of Venmo & social media.
I find this intriguing as all are regular users of Venmo & social media.
