- - Tuesday, November 2, 2021

America will have digital dollars accessible through smartphones and computers within a few years.

Treasury Secretary Janet Yellen and Federal Reserve Governor Lael Brainard, who may be the next Fed Chairman or Vice Chairman for Supervision, have expressed strong interest in a digital currency. The benefits are compelling.

Most Americans receive paychecks, social security benefits and other payments digitally through direct deposit. They can swap those funds for paper currency or write checks, but these days most payments are made through credit and debit cards and electronic transfers. Usually, household and business payers and payees have accounts at different commercial banks, and banks have their accounts at the Federal Reserve.

Payments from consumers and businesses first move through their bank’s internal and sponsored credit-card systems. Then various Federal Reserve systems distribute funds to the banks where landlords, merchants and suppliers have their accounts.

The system is multilayered, expensive, and with many links offers many opportunities for hacking and fraud.



Banks-sponsored credit cards and payment processors impose 1.5 to 3.5 percent charges on merchants to process payments to cover theft, consumer defaults and still make a nice profit. Fees are smaller but still substantial for debit cards and other direct electronic payments, mostly owing to the absence of credit risk and regulation.

The essence of a digital currency is that everyone could have an account directly at Federal Reserve regional banks. We could pay merchants and monthly bills directly through Fed payments systems with fewer fees.

Eliminating all those layers and most fees could save consumers billions of dollars and shorten payment time from days to hours. With appropriate encryption and eliminating multiple layers of transactions, it would be more secure.

Already the central bank is planning to roll out a FedNow Service that would permit instantaneous transfers among commercial bank accounts. All that is required is to establish a framework for ordinary individuals to establish similar accounts, and the digital dollar would be with us.

Households and businesses would not have to keep their money at banks. The same goes for the federal, state and local governments who have bank accounts to process tax collections and payments of benefits and for goods and services. That has banks sufficiently agitated enough to raise distracting questions about the legality of digital currencies.

However, the essential role of banks would not change. Folks who want to carry credit card balances or borrow for homes, cars and run businesses would still rely on them, but banks would have to pay more interest than the paltry sums for checking accounts they now offer to entice us to move money from Fed wallets to accounts with them.

The Constitution authorizes the federal government to issue paper currency, or the folks that work at the bureau of engraving have been criminals for more than 150 years. If individual accounts at the Federal Reserve are illegal, then so must be banks’ accounts with the central bank and the entire banking system.

Digital dollars, which are nothing more than individual accounts at the Federal Reserve, could make the most basic financial services—accounts to receive paychecks, make ordinary payments and access to cash through ATMs everywhere — much more accessible to underserved, poorer Americans.

The Postal Service is experimenting with once again offering banking services. Local post offices could provide counter services in places where banks will not go. However, fewer counter services will be needed other than accessing paper currency, and paper checks would be virtually obsolete.

If every American had a Federal Reserve account, then distributing governments’ benefits would be much easier. Especially at times of crisis like the pandemic, stimulus checks could get out much more quickly.

International funds transfers often impose even greater costs than credit and debit card systems. Suppose central bank digital currencies protocols were harmonized. In that case, the working poor could send money to relatives abroad — and the corner hardware store to foreign suppliers for imported items — at a much lower cost.

China has already conducted pilot studies for its digital currency—as have several other countries. The United States risks the dollar’s status as the primary reserve currency if it lets China or the European Central Bank pioneer an internationally convertible, secure digital currency.

Chairman Jerome Powell has dragged his feet, saying it’s better to get it right than to be first. It seems they don’t read about “first-mover advantage” at law school.

Digital dollars are an imperative, not a choice. The best reason I know to replace Mr. Powell with Ms. Brainard is that she gets it; he doesn’t.

• Peter Morici is an economist and emeritus business professor at the University of Maryland and a national columnist.

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