Unstable Coins: The Early History of Central Bank Analog Currencies
Recently, there has been much discussion as to whether central bank digital currencies (CBDCs) should be introduced, and if so, how they should be designed. This article offers a historical perspective on this discussion, with a survey of early public bank (proto-central bank) "analog currencies"—circulating banknotes. Public banknotes were an experimental product when they were first issued in sixteenth-century Naples, but by the late nineteenth century, such notes could be found in most European countries. In between came all sorts of implementation difficulties: egregious insider fraud, a real estate finance bubble, hyperinflation, rampant counterfeiting, and complete institutional collapse. Despite these many misfires, central bank–issued notes eventually became the default form of payment in virtually every country worldwide.
- Introduction of a new public payments instrument can entail serious operational and reputational challenges.
- Promoting the use of publicly issued instruments through exclusive privileges may simply motivate the private sector to innovate around these privileges.
- A successful public payments instrument will have monetary policy ramifications.
- Implementation difficulties notwithstanding, a lower-cost method of transacting can be very valuable to society, as was evidenced by the (eventual) widespread adoption of central banks' notes.
Center Affiliation: Center for Financial Innovation and Stability
JEL classification: E58, N13
Key words: central bank digital currency, banknotes
The Federal Reserve Bank of Atlanta's Policy Hub leverages the expertise of Atlanta Fed economists and researchers to address issues of broad policy interest. Our research centers coordinate this work and seek to influence policy discussions. Areas of interest include: forecasting, fiscal policy, and macroeconomics (Center for Quantitative Economic Research); financial stability, innovation, and regulation (Center for Financial Innovation and Stability); human capital, labor markets, health, and education (Center for Human Capital Studies); and government-sponsored entity reform, mortgage markets, and affordable housing (Center for Housing and Policy). Sign up for email updates. Under "Publications" select "Policy Hub."