Fedbucks coming to a theatre near you this summer: FedNow, the SVB editorial, and a catalogue of recent Fed flops
The argument was that because the Fed had let the banks fail, the Fed should hold everyone's money directly. That is the fox applying for the henhouse on the strength of the feathers.
Early summer is when the studios release their blockbusters and their flops, and in the summer of 2023 the Federal Reserve was to release its own: FedNow, a platform for the instant settlement of payments between banks, which the Fed had described as infrastructure and its critics described as the plumbing for a digital dollar. This page kept two things about that moment: the argument being made for going further, and the Fed’s record, which was the argument against.
FedNow
What FedNow does is simple. A payment made through it clears in seconds, at any hour, rather than in the one to three days a cheque or transfer took. The float, the gap during which money was in neither account, disappears. On its own that is a service, and most rich countries already had one. What made it more than a service was the timing and the company it kept: the New York Fed’s wholesale digital-money pilot, recorded earlier in this section, had reported its design feasible, and instant settlement between banks is the layer a retail central bank digital currency would sit on. The Fed said FedNow was not a CBDC. It was, on this reading, the road to one.
The editorial
The Financial Times published an editorial after the failure of Silicon Valley Bank whose logic deserves to be set out in full, because it was the case for a CBDC in its most respectable form. Banks, it said, quoting Matthew Klein, are “speculative investment funds grafted on top of critical infrastructure”, structured to extract subsidies from society by threatening crises if their bets are allowed to fail; the SVB rescue proved the threat works. So far this page agreed with every word. The editorial’s conclusion was that if safe storage of business deposits required banks to hold riskless assets, businesses might as well hold central-bank reserves directly, and that a CBDC would provide “a means by which businesses could keep cash completely safe, without any need for banks”.
The objection was not to the diagnosis but to the physician. The Fed had supervised Silicon Valley Bank. The Fed had raised rates at a pace that, as the Fed above all should have known, would destroy the value of the long bonds the bank held against its deposits. The Fed’s own review would shortly say its supervisors had seen the problems and not acted. And the Senate’s oversight hearing had, in the usual way, let the Fed blame the banks and praise its own rescue. The proposal, then, was that because the regulator had failed, the regulator should become the sole custodian of every account in the country, with no bank between the citizen and the state and no record of the citizen’s money outside the state’s ledger.
The flops
The rest of the page was a catalogue, assembled with the help of Rudy Havenstein’s running commentary, of why that custodian should not be trusted with the job. The Bank of England’s chief economist had just told the British that they “need to accept” they were poorer, after a policy error he helped make. The Fed’s officials had said, in as many words, that they were surprised inflation had come in above their forecasts, after the government had put more than a trillion dollars directly into households and businesses during a period of guaranteed shortages, with the Fed funding every dollar. A former Fed chair had promised in 2017 that there would be no financial crisis in her lifetime. The “transitory” episode was eighteen months old. These were the people the editorial proposed as the only counterparty for everyone’s money.
The last point was practical. Deposits at a bank are not fully trusted here either, but at a bank the Fed is the regulator and the backstop, not the counterparty; there is someone else with a record of the money and a commercial reason to keep it. With a central bank digital currency there is nobody else. If the ledger loses your balance you have no proof you had it, and if the state decides you should not have it, the ledger is the only place it lives.
Later note. FedNow launched on 20 July 2023 with 35 banks and had over a thousand participants by 2025. The Fed’s own review of Silicon Valley Bank, published two days after this page, found that supervisors had identified the risks and been too slow to force action. No American CBDC followed; the 2025 executive order recorded on the earlier page prohibits one.