After President Joe Biden signed an executive order instructing the government to research and develop central bank digital currency (CBDC), nearly every agency responded with public reports. The one outlier was the Department of Justice (DOJ), which opted to withhold its legislative analysis from the public eye.

I’ve had a Freedom of Information Act request pending for two years now in hopes of making the DOJ’s analysis public, and I’m not the only one seeking answers. Members of Congress have noticed the missing analysis as well. Representative French Hill (R‑AR) and ten other members of Congress wrote to Attorney General Merrick Garland in October 2022 when it became clear that the information had been withheld.

In the two years that have passed since our initial queries, neither my Freedom of Information Act request nor Representative Hill’s letter have been answered. When we discussed the matter, Representative Hill said, “I have pressed the DOJ for two years to receive a copy of their memo on CBDCs yet have received nothing but silence.” He further said,

The House was clear when it passed the Emmer-Hill CBDC Anti-Surveillance State Act to prohibit the Federal Reserve from issuing a CBDC and Chair Powell has publicly stated the Fed would not proceed on a CBDC without Congress—it should not be so difficult for the White House and DOJ to say they agree. The Biden-Harris Administration’s efforts to exert broad and untested executive authority by forgiving student loans give Americans every right to fear the same expansive executive power being abused once more with the creation of a CBDC. I applaud Cato’s FOIA request to obtain this information. If the White House and DOJ have nothing to hide, they should make this memo public and respect Congress’ constitutional authority to coin and regulate the value of money.

Representative Hill is right: it should not be difficult for the DOJ to make this information available. At the end of the day, the information in question is not on the location of witnesses in ongoing cases or the details of undercover agents. Rather, the DOJ was only asked to explain “whether legislative changes would be necessary to issue a United States CBDC” and to provide “a corresponding legislative proposal.” That’s it.

Yet despite the efforts of myself and Representative Hill, the only publicly available information about the DOJ’s analysis appears to be in the footnote of a press release announcing the publication of other reports related to President Biden’s executive order.

Perhaps it’s notable that out of the many reports required by executive order, the question of CBDC legislation was the only one that went to the Assistant to the President for National Security Affairs (APNSA) and the Assistant to the President for Economic Policy (APEP) instead of to the president directly. Still, this information should have been made publicly available once it became clear the public was interested in it.

Given how the rise of CBDCs has increasingly become a public concern, the American people deserve to know what the DOJ and the White House think needs to be done to create a CBDC. 

Millions of Americans do not have a bank account. Known as the “unbanked,” these Americans are often referred to in discussions of financial inclusion. As it stands, the latest survey from the Federal Deposit Insurance Corporation shows that there are currently 5.6 million unbanked households. However, as policymakers read the survey and begin to craft responses, they should take note of all of the data provided rather than the total number of unbanked households alone.

Given that more than 70 percent of the unbanked routinely say they are uninterested in having a bank account, perhaps it is time to redefine the term “unbanked.”

To understand why this distinction is necessary, first consider a more familiar statistic: the unemployment rate.

Although reported as just the “unemployment rate,” the official unemployment rate reflects not just the number of people who are unemployed, but rather the number of people who are unemployed and are actively seeking employment. The general idea is that including college students solely focused on their studies, full-time parents solely focused on caring for children, and the like would give an inaccurate picture of the labor market. Sure, these people do not have jobs, but at the same time they don’t want jobs.

Turning back to the unbanked, there is a similar distinction to be made. Much like interest in a job should be factored into the unemployment rate, so too should interest in a bank account be factored into the unbanked rate. Ideally, this interest would be quantified as the number of people who have tried to open an account in the last six months. Although this exact information is not currently available, the Federal Deposit Insurance Corporation’s biennial survey of unbanked households does have a question that asks unbanked Americans how interested they are in opening an account, and the numbers are astounding.

Over 70 percent of unbanked Americans routinely say they are not interested in having a bank account (Figure 1).

By adjusting for the number of people interested in having a bank account, suddenly the problem becomes drastically different. What were 5.6 million households being classified as unbanked suddenly shrinks to 1.6 million households.

Is this still a problem? Yes. It may be a small portion of the population, but this number shows there are 1.6 million households who want a bank account and don’t have one. That is certainly a problem for these Americans.

The difference is that now we know this is not a problem that requires overhauling the entire financial system—something many people have suggested in calls for central bank digital currencies and postal banking. Rather, it suggests that if any approach is taken, it should be targeted and limited in scope.

As policymakers read the Federal Deposit Insurance Corporation’s latest survey on the unbanked, they would be wise to keep this distinction in mind.

The European Central Bank remains committed to developing a central bank digital currency (CBDC), but it seems not every member of the Eurozone is equally interested.

According to reporting in Politico by Giovanna Faggionato and Ben Munster, “Several European Union governments, including France and Germany, argue the [European Central Bank] has gained too much control over one crucial aspect: how much digital currency citizens will be allowed to hold in ‘wallets’ backed by the central bank.”

The issue in question relates to concerns that a CBDC could increase both the severity and the frequency of bank runs. To remedy this concern, many policymakers have proposed setting restrictions on how a CBDC is used. For example, some proposals aim to limit the total amount a citizen may own while other proposals aim to limit how much a citizen may spend over time.

Policymakers generally hope these restrictions would limit how much money can leave the banks in a time of panic. Yet the issue isn’t so simple in practice.

If the limit is too high, it won’t be effective in curbing bank runs. If the limit is too low, it will prevent people from using the CBDC. In my book, Digital Currency or Digital Control? Decoding CBDC and the Future of Money, I describe this issue at length as the “CBDC tradeoff” (a term first coined by economist William Luther). In short, the tradeoff is between making something people might want at the expense of the larger financial system versus making something no one will want and outright wasting taxpayer resources.

It seems European politicians are increasingly taking notice of the pitfalls that come with this tradeoff. Politico reported that European politicians are concerned that a CBDC would “jeopardiz[e] the stability of the entire banking system,” “infringe on personal financial freedom,” and “stok[e] fears of a ‘Big Brother’ state.”

All of these concerns are warranted. And considering that the benefits of issuing a CBDC in the first place are not clear, the CBDC tradeoff should be rejected altogether. That is, people shouldn’t be forced into choosing between two bad options.

Back in the spring, the House of Representatives passed a bill to prohibit the creation of a CBDC in the United States. At the time, some members of Congress objected saying that this bill would make the United States the only country in the world to reject CBDCs. Based on the debates in the Eurozone right now, it’s possible the United States won’t be the only one objecting for long. It may turn out that the United States carved a path for others to follow.

Are you interested in learning more about CBDCs? My book, Digital Currency or Digital Control? Decoding CBDC and the Future of Money, is available here. Also, if you are interested in learning about the status of CBDC development around the world, the Human Rights Foundation’s CBDC Tracker is available here.

The Treasury Borrowing Advisory Committee has published a new presentation calling for central bank digital currencies (CBDCs) to replace stablecoins. Pointing to a history of so-called “wildcat banking,” the committee argued that just as the government monopolized the issuance of paper currency by establishing the Federal Reserve, the government should monopolize digital currency by establishing a CBDC:

In a similar manner to how privately-issued “wildcat” currencies were replaced by government-backed central currencies in the late-1800s, Central Bank Digital Currencies (CBDC) will likely need to replace stablecoins as the primary form of digital currency underpinning tokenized transactions.

This statement has several problems, but let’s consider just three.

The first problem is the implication that the history of banking in the United States was a history of wildcat banking. The idea that banks were defrauding customers and disappearing with their money is certainly a concerning one. And it did happen at times. However, such wildcats were far from the norm. 

While it is difficult to put an exact number on the issue, George Selgin, director emeritus of the Cato Institute’s Center for Monetary and Financial Alternatives, estimates that the total number of wildcats was “no higher than 173.” In contrast, he estimates there were around 2,450 banks in total during this time. 

Second, while many people like to suggest wildcats were the source of failures during this period, the bigger problem was that the laws governing banks had undermined financial stability. Again, as Selgin explains, “free banking” laws during this period,

forced banks to invest in … very risky securities—and especially in risky state government bonds—while the rule against branching limited their ability to diversify around this risk…. It was owing to these restrictive components of U.S.-style free banking that scads of American free banks ended up going bust.

Third, it does not follow that because the government took over one area of money, it should take over another. What the experience in the 1800s showed was that the government has a unique power over others. Competitors in the private sector must strive to offer a better product. The government, however, can undermine others through laws and regulations that make it nearly impossible for the private sector to function. For a modern example, one need only look to the government’s hostility towards stablecoins and other cryptocurrencies.

With these problems in mind (and many still on the table), it’s unfortunate that the Treasury Borrowing Advisory Committee found the wildcat argument persuasive. Yet the committee is not alone. This argument has been used by the likes of Senator Elizabeth Warren (D‑MA), Securities and Exchange Commissioner Gary Gensler, then-Federal Reserve Vice Chair Lael Brainard, European Central Bank President Christine Lagarde, European Central Bank board member Fabio Panetta, and countless others in the pursuit of expanding the state.

The real lesson from the “wildcat story” is that policymakers must be held accountable. They should not be allowed to undermine an entire industry and they should not be allowed to swoop in to monopolize it when it eventually fails. That was true in the past and it’s true today. The difference comes down to whether Americans let it happen again. 

In September, the Fed cut the target range for its policy rate by 50 basis points to much publicity, with several media outlets claiming that this was the first step toward reducing borrowing costs and easing the debt burdens faced by many Americans. Of course, the implicit assumption is that economy-wide borrowing rates such as auto loans, credit cards, or mortgages are intrinsically linked to the Fed’s policy instrument—the federal funds rate (FFR). It may come as a surprise, then, that several borrowing rates, ranging from treasury securities to mortgage rates, have increased since the Fed’s rate cut.

In fact, the discrepancy between the FFR and other borrowing rates has been prevalent for some time. The rates had started to increase before the series of rate hikes executed by the Fed in response to post-pandemic inflation. On the surface, it is fair to assume that changes to the FFR should be transmitted through to other borrowing rates. After all, the FFR is believed to represent the cost borne by financial institutions to acquire liquid reserves for themselves in the interbank lending market. If the cost to acquire funds is low, then the cost of lending these funds to consumers must be equivalently low. However, since the overhaul of the Fed’s operating procedures in the aftermath of the financial crisis, the FFR no longer holds sway as it once did.

Following the financial crisis of 2008-09 and its associated recession, the Fed shifted to a “floor system” that would ensure abundant reserves in the financial sector. That is, it instituted policies such as interest on excess reserves and quantitative easing that ensured banks would maintain a large surplus of reserves, reducing their need to engage in interbank lending and thereby reducing the importance of the FFR. Of course, the FFR still matters as a numeric stance of monetary policy, but it is hard to see how it can hold any importance beyond this signaling effect.

Data on borrowing costs confirm this hypothesis. Figures 1–3 show the correlation between monthly FFR and three other key borrowing rates. These include the 30-year mortgage rate (Figure 1), Moody’s Baa corporate bond yield (Figure 2), and the 10-year Treasury yield (Figure 3)—which represent benchmarks for consumer, corporate, and government debt, respectively. Additionally, correlations were computed for various lag structures so that any leading or lagging effects between the FFR and other borrowing rates may be observed. This analysis was conducted over two periods—the Great Moderation (1984 through 2006) and the post–financial crisis (2009 to present)—to see how the post-2008 change to the Fed’s operating system affected these correlations.

As all figures show, before the financial crisis, the FFR was linked almost perfectly (i.e., a near 100 percent correlation) with other borrowing costs. Within the same month, changes to the FFR were matched by near identical changes to other borrowing costs. This is no longer true following the financial crisis. Under the Fed’s revised framework, the same-month correlations fall drastically. FFR correlation with the 30-year mortgage rate falls to 70 percent, with Baa bond yield falling to 58 percent, and with the 10-year Treasury yield falling to 71 percent.

Additionally, the skew of the cross-correlation distribution has changed since the financial crisis. Before 2007, the correlation distribution was symmetrical around a zero lag. That is, changes to the FFR and other borrowing rates occurred simultaneously with neither being a leading nor lagging indicator of the other. However, under the post-crisis regime, the distribution shows a significant left skew. This implies that the FFR is much more likely to be correlated with other borrowing rates at a lag and much less likely at a lead. Put differently, the results suggest that other borrowing costs move first (probably in response to economic conditions) and are then followed by movements to the FFR.

Naturally, the FFR is still correlated with other rates even though this correlation has fallen significantly over time. This is because all borrowing rates respond to general economic conditions that may warrant tighter or looser lending conditions. However, the results presented here indicate that the mechanism by which this transmission occurs from the broader economy to relevant borrowing costs seems to bypass the Federal Reserve. If anything, the Fed seems to take its cue from the markets, not the other way around.

This analysis only adds to the litany of evidence we have presented that the Fed matters much less than people think. Of course, some may claim that the Fed is still a primary determinant of lending conditions but that how it controls such markets has changed. If that is true, then the onus is on the Fed to provide a detailed explanation of which policy instrument now matters instead of the FFR and the mechanism by which this instrument affects lending standards and, thereby, its dual mandate objectives of low inflation and stable employment. So far, it has not provided any such explanations.

The author thanks Jerome Famularo for his excellent research assistance in the preparation of this blog.

The Human Rights Foundation’s Central Bank Digital Currency (CBDC) Tracker shows that over 1.5 billion people are living in countries where CBDCs have been rolled out. However, not all central banks appear to be on board. The central banks in Canada, Australia, and Colombia recently came out in opposition to the idea of issuing CBDCs. 

In an update to its website, the Bank of Canada said it is “scaling down its work on a retail central bank digital currency and shifting its focus to broader payments system research and policy development.” Just before that, the Reserve Bank of Australia published a report that said, “There is no clear public interest case to issue retail CBDC in Australia as yet.” Finally, in July, the Banco de la República de Colombia published a report that said “there are not sufficient reasons for the issuance of [a CBDC] (retail or wholesale) in Colombia.”

It may be difficult to imagine government opposition given that the risks of CBDCs largely center on giving governments more power and that power is being rapidly pursued around the world. However, the news from these three countries shows that not everyone is on board.

To be clear, the statements made by the Canadian, Australian, and Colombian central banks are by no means binding, but these statements are a welcome change of pace, nonetheless. 

After former President Donald Trump announced his proposal to restrict credit card interest rates, I warned Americans that price controls are something to be wary of, no matter who is proposing them. I then posted a video on X showing how Trump criticized price controls and then proceeded to propose a price control ten minutes later. Needless to say, both supporters and critics flooded in to share their thoughts.

If I were to boil down the responses, there were really two main themes that came up in defense of Trump:

1. Interest rate caps are not price controls.
2. Usury laws already exist.

Let’s briefly walk through both of these themes to better understand where they go awry. As we will see, defenders of Trump may have more in common with supporters of Vice President Kamala Harris than they might think.

“Interest Rate Caps Are Not Price Controls”

For many people, the defense of Trump rested on the argument that interest rate caps are not price controls, but something else. But no matter how strongly they might believe otherwise, having the government control what rate of interest lenders can charge is to have the government control the price of loans. That is describing a price control.

When reading these responses, I couldn’t help but feel a sense of déjà vu for these same arguments were made in defense of Harris’s proposed price controls just a month earlier. One notable example occurred during an interview when US Commerce Secretary Gina Raimondo said Harris “is not for price fixing—that’s a distortion [and] a Republican talking point.” CNBC’s Sara Eisen correctly responded, “It’s confusing [considering Harris] called for a federal ban on price gouging for food…. That’s a place where the government then controls what the fair price of a good is.” In other words, that’s a price control.

“Usury Laws Already Exist”

Other people countered that usury laws have been around for years. However, the fact that something is old does not mean it is right. History has unfortunately provided many examples of bad ideas that just won’t go away. For instance, the postal banking pilot program was supported by many people because the US Postal Service provided banking services during the 1900s. Yet, the Postal Service’s most recent attempt had just seven customers despite being available in four cities for the past two years. And usury laws have not been without criticism: evidence suggests they likely harm people more than they help as would-be borrowers are forced across state lines or into black markets. As I wrote in Ryan Bourne’s book, The War on Prices, this experience has been seen internationally as well. 

Turning back to the interview with Commerce Secretary Raimondo, she also appealed to history in defense of Harris. She even cited usury laws as part of her defense. Raimondo argued, “Many states in this country… have anti-price gouging regulations [and] usury laws. For hundreds of years, we have had laws which provide guardrails for the economy.” Again, however, it doesn’t matter if a Republican or a Democrat is proposing it, the age or existence of an idea does not justify it by default.

Conclusion

Trump’s proposal may be less bad than Harris’s proposal by virtue of being one price control instead of many, but that’s no defense for the hypocrisy of his statements in New York. He was correct in calling out the flaws of price controls. He should have stopped there. The Washington Post’s Catherine Rampell warned Harris, “When your opponent calls you ‘communist,’ maybe don’t propose price controls.” Trump should also heed this warning, but for him, perhaps the warning should be, “When you call your opponent communist, maybe don’t propose price controls.”

Are you interested in learning more about how price controls distort the market? Ryan Bourne’s latest book, The War on Prices, is available here and features 24 chapters that will walk you through price controls large and small.