Unstable Coins: The Early History of Central Bank Analog Currencies

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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.

Key finding:

  • 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


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