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 The Money Maker Scenario

CBDC as Sovereign Account Money

Money is an instrument of exerting power, comparable only to legal command power backed by force. The right to be a creator and first user of money gives power and privilege over all subsequent users. In modern societies as much as in traditional ones, such power and privilege must not be private, but a sovereign prerogative, preferably under conditions of separation of powers and the liberal rule of law. Control of the money of a realm has always been an element of sovereign rule, much as lawmaking, the judiciary, taxation and the use of force. The monetary prerogative includes the sovereign rights of determining the currency (a country’s monetary unit of account), creating the money denominated in that currency (the official means of payment), and benefiting from the seigniorage thereof by spending or lending the money and thus releasing it into circulation. The constitutional dimension of money must not be disregarded, either in terms of legitimacy and state law, or in terms of economic functionality.


This is not a quote from a central banker but from Professor Joseph Huber,who is one of the first advocates of the idea of central banks creating digital cash . The quote illustrates an approach to money and money creation, which is structured by legal concerns regarding sovereignty and legitimacy. In this approach, the creation of money is ultimately a constitutional matter . This implies that the creation of the nation's money supply is a prerogative of the sovereign state.


In the first sentence of his posts, Huber writes: 'This post aims to make people aware of the central position the monetary system occupies in today's highly monetarized and financialized economies'. In contrast to Skingsley's invocation of 'the general public' as money users, which we encountered previously, Huber addresses 'people' as citizens of a democratic state with a legitimate interest in the constitution of the monetary system. The purpose of the implementation of CBDC, according to Huber, is to reinstate the central bank as the sovereign money maker. In so far as the central bank is a public institution, it is the representative of the people. Huber is thus ultimately addressing people as money makers.


According to Huber, monetary sovereignty includes:

1. Determining the currency of the realm, the common unit of account
2. Creating and issuing the money, the regular official means of payment denominated in that currency,
3. Taking the benefit from money creation, the seigniorage.

The order of this list is not accidental. The determination of the currency is the most important as it is the prerequisite for the second point, which is the prerequisite for the third. The list thus foregrounds the function of money as unit of account. Huber's understanding of our current money system partly relies on the credit theory, which we also found in the money manager perspective. At the same time, Huber insists that the credit theory should be combined with the state theory in order to understand, how banks can only create money as long as the state allows their credit to count as the unit of account . As we have seen, this happens first and foremost as the state accepts bank money in the payment of taxes. This institutes bank money as a concrete unit of account of the currency.


For Huber the state theory of money is not only applicable in the analysis of the money system. It also serves as a normative theory about the way that the money system ought to function. The key feature of the CBDC design model, which follows from the money maker perspective, is the abolition of bank credit as money. In this model, there is a complete identity between the entity, which is responsible for the abstract unit of account, and the entity, which is the creator of the concrete unit of account. While banks would retain their ability to create credit, just like any other business or individual in the economy, there would be no state or central bank guarantee that this credit counts as money and circulates at par in the economy.


The CBDC design model of the money maker scenario solves the monetary policy trilemma by abandoning the responsibility to maintain parity between central bank money and commercial bank money. This is solution (B) in the triangle. In return, the central bank regains monetary sovereignty and the opportunity to use monetary policy for other purposes than providing support for the creation of bank money. Dyson and Hodgson from the UK monetary reform organization, Positive Money, provides a list of such opportunities including the provision of fiscal stimulus to the non-financial economy through money creation (Helicopter Money) and public recapture of seigniorage profits.

Integration of Monetary and Fiscal Policy

The most immediate consequence of the implementation of a CBDC design model without bank money would be a tremendous simplification of the monetary system. Many of the questions and challenges that would have to be addressed and solved in a model where CBDC and bank money co-exist simply vanishes.


First, the money supply would actually become a money supply. As we have seen, the total stock of money under the current monetary system is best referred to as the 'money demand', since it is governed by demand and only in extreme cases restricted by supply. In a CBDC design model without bank money, the central bank would be the only source of the supply of money and would thus be in a sovereign position to increase or decrease the stock of money by adjusting the supply.


Second, central bank monetary policy would no longer have to rely on the assumption of an indirect causality between central bank reserve interest rate adjustments and commercial bank money creation, which is assumed to be mediated by complex transmission effects. In a CBDC design model without bank money, the payment of interests on CBDC deposits would effectively be money creation. When the central bank credits the CBDC accounts of money users, because they have accrued interests, it simply creates money. Should the central bank decide to impose negative interest rates on CBDC, the debiting of these interests would amount to a destruction of money. The payment or collection of positive or negative interests on CBDC is, in other words, one of the channels through which the central bank can increase or decrease the money supply.


Third, the distinction between monetary and fiscal policy interventions in the economy would disappear. The implementation of CBDC without bank money does not necessarily mean that the current institutional division between decisions on monetary policy and fiscal policy is abandoned; Decisions on how much money should be created could still be made by an independent central bank on the basis of a certain monetary policy mandate. And decisions on how to spend newly created money would still be made by an elected parliament based on fiscal policy preferences. The novelty is that the even monetary policy decisions made by the central bank would have immediate fiscal implications. If the central bank pays interest on CBDC it is effectively paying a kind of social benefit to money holders. If it charges negative interest rates on CBDC it is levying a tax on money. Besides interests on CBDC there are a number of other channels through which the central bank can introduce new CBDC into the economy; If its monetary policy mandate requires an expansion of the money supply, the central bank can simply credit the treasury's CBDC account and thus make new money available for public investment and spending. The central bank can also simply credit the CBDC accounts of all citizens in the country with an equal amount. Since new CBDC is in both of these cases immediately distributed to money users, it is impossible to distinguish between their monetary and fiscal policy effects.


Fourth, the decision on whom to allow the privilege of exchanging financial assets for CBDC directly with the central bank has much less significance for monetary policy. In addition to the above mentioned channels for the introduction of new CBDC into the economy, the central bank could also make an amount of new CBDC available for banks and other financial intermediaries to borrow, who are then able to expand their lending into the economy. This would probably remain a more pure form of monetary policy intervention. In contrast to the CBDC design model with bank money, the central bank is now in a much better position to make a sovereign decision on how much new money it wants to lend into the economy and then subsequently decide to whom it wants to lend and what kind of assets it will accept as collateral. Since the central bank is no longer compelled to defend parity, commercial banks are no longer in a position to drive the money supply through a demand for conversion of financial securities into CBDC.

What about Cash?

As introduced already in section three, the money maker scenario branches off
into two different design models: 

-CBDC as a replacement for both cash and bank money, 

-CBDC as complimentary to cash and a replacement for bank money. 

The first thing to note in the comparison between these two models is that the abandonment of bank money and the relinquishment of the central bank responsibility for parity reconfigure the question of cash. In a CBDC design model with bank money, the existence of cash stands in the way of negative interest rates and thus curbs the central bank's ability to defend parity in situations with widespread mistrust in the commercial banking sector. This is what Huber is hinting at in the following:


Irritatingly, what central bankers seem to have in mind when reflecting on alternatives to traditional solid cash is the questionable aim of imposing without hindrance negative interest rather than worrying about monetary sovereignty.


In a design model without bank money, the central bank has regained monetary sovereignty and is no longer forced to use interest rates or other monetary policy tools to maintain private bank money creation. Hence, the abolition of cash has no significant implications for the relation between the central bank and the commercial banks.


In turn, what is at stake in the question of cash is the relation between the central bank and the money users. This brings us back to the kinds of concerns raised in the money user scenario including issues of privacy, anonymity, security in crisis situations, and financial inclusion. The option to choose between holding cash and holding CBDC provides some measure of freedom and power to money users in their relation with the central bank. Even if the central bank is no longer compelled to defend parity between CBDC and bank money, it may still find it convenient to impose negative interest rates on CBDC. The existence of cash would again constitute some measure of restraint on this option.