Could a New Public Digital Dollar Enhance Democracy?

For the first time since the Lincoln administration introduced a national paper currency during the Civil War, the Federal Reserve may soon create a new kind of federal money: a digital dollar. Now as then, what matters most is not the material form of money but who makes and manages it.

Americans already conduct most of our monetary transactions with cards and computers instead of cash, just as our predecessors paid with paper money long before the Civil War. But the digital money we use today comes from privately run banks instead of the U.S. Mint (which emits coins) or the Federal Reserve (which issues paper bills).

Though they are often described as go-betweens, which transfer funds from depositors to borrowers, banks actually create the money they lend. When you borrow $1,000, the bank simply records a $1,000 deposit in your name, which the federal government enables you to use as you would coins or bills. The Treasury accepts deposit dollars from taxpayers and operates the electronic clearinghouse through which deposits move from bank to bank, whether by check, credit card or online platforms like PayPal and Venmo. The Federal Deposit Insurance Corporation also makes deposits as secure as cash by insuring them against bank default, and the Federal Reserve exchanges cash for banks’ deposits to meet their customers’ demands.

Yet, though enabled by governmental support, banks control the deposit dollars they generate. Their focus on profits means they provide grossly unequal access to financial services essential for earning, spending, saving and surviving. Now the Fed is considering creating a public virtual currency that would come from offering accounts to the general public at the central bank itself. Instead of private bankers, public officials would decide how much of the digital money to generate and how to lend or spend it into circulation.

The debate over the digital dollar is ultimately about whether the production of money should be a business run for private profit or a resource owned and operated by the public. Recent proposals mark a revival of the contest between these contrasting visions, which actually began 100 years before the federal government and American banking were born.

Starting in the 1690s, the British colonies issued the first paper currencies controlled by elected legislatures, unlike in England, where bankers took command of the pound sterling. By paying for public services with “bills of credit,” lending them to colonists at low interest rates and accepting them for tax payments, colonial assemblies made and managed their own money. They treated currency and credit as collectively controlled public utilities rather than private assets, staving off extortion of farmers and shopkeepers by merchants and moneylenders. And when the British government cracked down on the provincial currencies and imposed taxes that had to be paid in scarce sterling instead, the colonies rose in revolt.