Former Fed Governor Kevin Warsh has published an editorial in the Wall Street Journal expressing support for a digital dollar, lest the United States lose competitive ground to China. Since Warsh is a possible Fed chairman should Republicans gain the Presidency in 2024, his support for a digital dollar is truly alarming, given the civil liberties dangers involved. However, his economic argument is specious and his solution damaging; there is indeed a better way to go.
There are three arguments for a digital dollar, one intellectually respectable, the other two decidedly not so. The respectable argument is that it would simplify payments, cutting out the middlemen like Mastercard and Visa. Warsh argues that China’s digital yuan gives it a unique cost advantage over Western countries because payments are cheaper and more efficient. I find this completely impossible to believe, but there are undoubtedly cost advantages to a digital dollar that must be taken into account when deciding on the matter.
The modest advantages of a digital dollar are however far overbalanced by its disadvantages, which must be disqualifying to those of us who do not wish to live in a totalitarian surveillance state. The Chinese dictatorship like the idea because it enables them to keep track of all their citizens’ transactions. It also enables them, should they disapprove of a particular citizen, to cut him or her off the banking system, freezing their assets and preventing them from making purchases (that is not yet quite true, because paper renminbi still exist, but in a fully digitalized system it would be true). For many of the wokies, this is an ideal situation, provided they could be sure of controlling it – at last hate speech and hate thought could be properly punished! For the rest of us, it would be an Orwellian nightmare that makes ‘1984’ look like amateur hour.
The other “advantage” of the digital dollar is even more dangerous to those of us who keep our heads down when faced with wokies and a surveillance state, for it threatens even the livelihoods of quiet self-effacing people. Through a digital dollar, the Fed can abolish the ability to hold cash, and thereby set interest rates at any absurd negative figure they like, destroying ordinary people’s savings whether or not they are guilty of “wrongthink.” There is great enthusiasm in certain quarters, notably the World Economic Forum and the European Central Bank, for setting interest rates at negative levels to “stimulate” the economy and allow governments to sequester ever larger amounts of our resources at no cost to themselves. Like the surveillance possibilities of the digital dollar, this would place unholy temptations in the hands of bureaucrats who have in the past as during the COVID epidemic shown no ability whatever to resist them.
Compared to these two massive drawbacks, the cost advantages of a digital dollar are thus trivial, even nugatory, and I am alarmed that so intelligent an individual as Warsh cannot see this. If China goes all-in on the digital renminbi, we have learned from the experience of the Soviet Union that such oppression and GOSPLAN-like meddling with the price mechanism will not lead to the greater prosperity of the industrious, well-educated and intelligent Chinese people; it will merely lead them back into the impoverished servitude of 1984’s “proles.” In the long run, a society in which the vast majority of people are proles must succumb to a free society; that is not an ideological belief but a self-evident economic truth. Hence, there may be many reasons to fear China’s aggressive emergence, but a digital renminbi is not one of them, whatever minor cost advantages China may gain from it.
If the United States wishes to operate a digital currency for payments reasons, there is a better way to get it, by using cryptocurrency technology to create a better successor to e-gold. e-gold was a digital currency payments mechanism set up by a clever libertarian doctor in 1996 (two years before PayPal) which lacked Blockchain technology, but used a centralized payments processor and a full gold backing. The Feds claimed it violated the Gold Clause prohibitions that had been validated by the Supreme Court in 1935, in one of its worst decisions. However, in reality those prohibitions had been quietly repealed by Congress in 1977. Nevertheless, because the system had a centralized payments hub, the Feds (who hated it because it threatened to replace the fiat dollar and remove the Fed’s seigniorage privileges) was able to claim, correctly, that it facilitated illicit transactions; it was therefore closed down in 2009.
A new version of e-gold will use Blockchain technology, or some variant thereof, thus becoming decentralized like Bitcoin; without a central node the authorities will have more difficulty closing it down. It can either be public sector, managed by the Treasury or the Fed, or private sector. A private sector digital gold could be controlled by a consortium of digital gold holders, thus having the same security protections as Bitcoin; provided no more than 50% of the digital gold was controlled by any one holder, it would be legally immune from seizure by the Feds or any other authority. Since it would be fully backed by physical gold and holders of digital gold would have the option of taking delivery in bullion, its price would fluctuate only modestly against gold itself, being far more stable than prices of Bitcoin or other cryptocurrencies.
As for a public sector digital gold, if managed by the Treasury/Fed, it will probably need Congressional authorization. Rep. Alex Mooney (R.-W.Va) has introduced a Gold Standard bill and would presumably be interested in sponsoring legislation for a Federal digital gold; he has announced his intention to run for the Senate seat currently held by Joe Manchin (D.-W.Va.) and must have a decent shot at winning if he survives the Republican primary, likely to be keenly contested. Should he win, and a “proper” Republican win the 2024 Presidential election, he will be in a good position to sponsor the relevant legislation.
A Congressionally authorized digital gold would provide users with the payment efficiencies of a digital dollar. It would not suffer from the negative interest rates danger, because even if it replaced cash (which would be unlikely) interest rates could not be pushed to artificial levels without causing adverse gold flows, similar to those of the Gold Standard period in those circumstances. In addition, it would have an important protection beyond any conventional digital currency, in being exchangeable for gold itself at bullion value – this was an important protection for e-gold compared with a conventional crypto-currency.
Even though digital gold payments would be traceable, like those in digital dollars, a digital gold holder would have the option of going “off-grid” at any time by demanding an exchange of his account balance for physical gold. This optional anonymity would be an important additional protection for digital gold holders against malfeasance by the authorities controlling digital gold.
If the US Treasury or the Fed wish to introduce a digital currency, a digital gold is by far the most sound, economically efficient and liberty-preserving means of doing so. Rather than Governor Warsh’s chimerical proposal, therefore, they should bend their efforts to this proposal, which would provide a useful check on U.S. monetary policy, as well as a superior alternative to the digital renminbi or any other state cryptocurrency.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)