Should We Fear a Digital Dollar?

Getting your Trinity Audio player ready...

Over the past few years, the European Union has moved forward with a proposal for a digital euro (a form of the euro held completely in a central-bank-managed digital wallet). The EU is not the first to propose a digital currency; both China and India have adopted similar proposals. With increased adoption, however, many have criticized the privacy and stability of digital currencies. Critics raise concerns that governments could track and surveil users with information from purchases, and hackers could compromise the security of funds.

History & Reactions

It only takes looking back a little over 50 years ago to see a similar monetary change. President Richard Nixon’s decision in 1971 to end foreign governments’ right to convert their U.S. dollars to gold at a fixed rate pushed the international monetary system into a fiat/market-led system from a gold/state-led one. Following currency’s evolution from commodity monies (such as salt and livestock) to precious metals to paper currency to fiat, over time money has generally become less tied to physical/valuable objects and progressively more dependent on trust in issuing institutions. 

Counterintuitively, past reactions to this trend have generally been positive. In 1971 polls showed no negative impact to Nixon’s approval rating after his decision to sever the dollar’s connection to gold. In the United States, recent reactions to the possibility of a digital dollar have largely been the opposite. Just this year, the bipartisan 21st Century ROAD to Housing Act banned the Federal Reserve from issuing any type of digital currency through December 31, 2030. If a government-run digital dollar is just a continuation of the trend toward less physical monies, why is today’s public reaction different from those in the past?

Everyday Impact

When comparing the impacts of a potential digital dollar to those of the shift from gold-backed to fiat currency, a few structural differences emerge. The biggest difference is that while every previous form of money was a static object once issued, new digital currency could be affected by rules, spending restrictions, or other conditions that restrict its use after a user already possesses it. This is something already seen on a smaller scale with credit cards, but potentially losing a less-surveiled alternative in the future could pose challenges. Digital money also gives a central authority the ability to monitor spending patterns in a way that wasn’t possible in the past. Many of these aspects aren’t inherently bad until misused, but an especially American distrust of centralized authority has amplified concerns. Society has also had far less time to develop the systems and become comfortable with digital currency, whereas past changes happened at a slower pace. 

Influence on Coin Collecting

Selfishly, as a coin collector, digital currency can seem unappealing for the obvious reason that it is clearly building toward a future with no need for coinage. The decline of mailing personal letters is said to be a major reason why stamp collecting has shrunk over the past century. In a future with no coinage, numismatics could face a similar outcome. Though scary to imagine, this fear may be misplaced. Unlike other obsolete objects, coins have an advantage in that they are physical artifacts of economies and nations. Roman coins and Confederate currency are still traded today, even though the systems in which they were used have long been extinct. Even if daily use coinage eventually does fade, coins will still retain collecting value because their value was never about spending them to begin with.

Conclusion

So, should we fear a digital dollar? Jerome Lawrence and Robert E. Lee wrote in their 1955 play Inherit the Wind, “Progress has never been a bargain. You have to pay for it. Sometimes I think there’s a man who sits behind a counter and says, ‘All right, you can have a telephone, but you lose privacy and the charm of distance.’” The specific risks this transition presents, like surveillance and the loss of a private alternative, are real. 

This is, however, exactly why collectors and consumers are debating it now before any transition is implemented. The history of money has shown that coins and currency will continue to change. By engaging in debate now about how this change will occur, society can ensure that the future of money protects the utility and privacy that we have relied upon for thousands of years.

Sign up for the monthly Reading Room Rundown to receive more great stories!