MONEY IN THE TWENTY-FIRST CENTURY:

FROM RUSTY COINS TO DIGITAL CURRENCIES

MARCELO M. PRATES*

After the Global Financial Crisis, central banks became identified as

banks’ closest allies, rescuing them from failure when things go wrong.
Banks, in turn, emerged as complex and unstable institutions that privatize
profits and socialize losses, to the despair of taxpayers. And regulation and
regulators were seen as incapable of curbing financial excess. The
coronavirus pandemic only exacerbated the generally negative sentiment,
as governments lacked a fast and simple way to send relief money directly
to their citizens. In the meantime, sovereign currencies have faced
increased private competition, from Bitcoin to big tech global projects. At
this point, some structural reform of the monetary system seems not only
desirable but inevitable. It is about time to look again at the role of money
in the modern economy and better understand its features and flaws. This
Article thus offers a guide to the recent evolution of money and what its
future might hold.

“Try again. Fail again. Fail better.”

Samuel Beckett
(Worstward Ho, 1983)

Copyright © 2021 Marcelo M. Prates.

*
Lawyer, Central Bank of Brazil. S.J.D. ’18, LL.M. ’15, Duke University School
of Law. This article has benefited from comments made by Lawrence Baxter,
Joseph Blocher, Juliana Bolzani, James Cox, Elisabeth de Fontenay, Camila Villard
Duran, Gustavo Franco, Martijn Konings, Kimberly Krawiec, Michael Kumhof,
Leandro Novais, Lee Reiners, Bruno Salama, and Leônidas Zelmanovitz. The
views and opinions expressed here are mine. The article is dedicated to the memory
of my late father, Emilio Prates.
2021] MONEY IN THE TWENTY-FIRST CENTURY 165

INTRODUCTION

Not long ago, money was simple, central banks were all but invisible,
and banks seemed like an inevitable nuisance. Money consisted of the coins
and notes carried in wallets or the checkbook in the desk drawer. Central
banks were poorly understood institutions, entrusted with the mystical power
to print money. And banks were associated with the agony of waiting in line
to cash a check or having awkward conversations with the loan officer when
credit was needed. While this world had been slowly dying for some time,
the Global Financial Crisis sounded its death knell. Money now takes many
forms, from plastic cards to cryptocurrencies. Central banks have become
identified as banks’ closest allies, rescuing them from failure when things go
wrong. And banks emerged as complex and unstable institutions that
privatize profits and socialize losses, to the despair of taxpayers.
How have we arrived at such a dismal situation? And what is to be done?
Money is a vital part of the answer to both these questions. The Crisis
exposed the weaknesses of central banks in monetary matters—and the
disproportionate influence banks can exert over money. Banks, not the
central bank, are the dominant actors in money creation, circulation, and even
money management. Without the intermediation of banks, the central bank
cannot fully exercise its monetary powers and fulfill its legal mandate. Banks,
in turn, have used the monetary prominence they enjoy to make unsound
decisions with little regard or responsibility for the consequences, greatly
contributing to financial and economic instability. The costs of the current
operational model of the monetary system have far exceeded its benefits.
After the Global Financial Crisis, moreover, confidence in the banking
system and in the central banks’ ability to avoid excesses and promote
stability has waned. This breach of confidence and the ensuing economic
slowdown ended up fostering political and social discontent. The view that
self-serving elites took advantage of the rest of society and yet paid no price
for their misdeeds during the Crisis brewed resentment and conflict.1 These
days, every political debate seems to have only two sides—right and
wrong—with each opposing group vigorously claiming to be on the right
side. Populism, extremism, and nationalism found their way not only in more
unstable societies but also at the heart of the democratic capitalist world.
The coronavirus pandemic only exacerbated the generally negative
sentiment, as one particular limitation of government action became evident.
After crossing political hurdles to provide economic relief to those most in
need, governments realized they lacked a fast and simple way to send money
directly to their citizens. With the economy at a standstill and millions of
people applying for unemployment benefits each week, the U.S. Treasury
had to send relief money to many households by mailing paper checks that

1
See MARTIN WOLF, THE SHIFTS AND THE SHOCKS 351–53 (2014) (explaining how
this sentiment against the elites has developed since the crisis).
166 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

took weeks, if not months, to arrive. The potential for lasting hardship and
social unrest is frightening, requiring governments to do better.2
Against this backdrop, I look, in Part I, at the legal framework of the
monetary system and examine the breadth of the central bank’s monetary
mandate and the limits of the business of banking. The law has historically
allowed banks to collaborate with the central bank in the process of creating
money and providing liquidity to the economy. But the fruitful collaboration
may have come to an end. Building on recent economic and legal scholarship
findings, I contend that banks have been inappropriately dominating the
process of money creation and eclipsing the central bank’s monetary powers,
with dire consequences for monetary and financial stability.
Before advancing to discuss the future possibilities for the monetary
system, I take a step back to consider, in Part II, how we arrived at the current
monetary arrangement. By reviewing the evolution of banking and central
banking, we can better understand how an initially symbiotic relationship
became dysfunctional in the late 20th century. The current situation, in which
banks are the dominant actors in the monetary system and central banks seem
powerless to curb banks’ supremacy, is motivated mainly by the design of
the monetary and banking systems. Only a structural change can thus solve
the imbalance and fragility that today characterize these systems.
Among different possibilities for reorganizing the monetary system, I
contrast two options in Part III. Starting with Bitcoin, private alternatives to
the sovereign money flourished. The amount of attention privately issued
currencies have received lately would have been unimaginable before the
Crisis. It is true that cryptocurrencies, and Bitcoin in particular, have failed
to promote the monetary revolution many people expected. But these private
currencies set out to prove that different monetary arrangements are possible.
The march of technology and the growing dissatisfaction with established
institutions may soon threaten sovereign monies and banking systems more
fiercely. Under this threat, how should central banks react?
Central banks could welcome the monetary competition and engage in
the race to promote their view on the future of money. A central-bank digital
currency, or CBDC, made available to everyone, would be a strong response.
From improving monetary policy to increasing financial stability, several
arguments in favor of central banks issuing the sovereign money in the digital
format can be made.3 But the technological, societal, economic, political, and

2
See Stephen Roll & Michal Grinstein-Weiss, Did CARES Act Benefits Reach
Vulnerable Americans? Evidence from a National Survey, BROOKINGS INST. (Aug.
25, 2020), https://www.brookings.edu/research/did-cares-act-benefits-reach-
vulnerable-americans-evidence-from-a-national-survey/ [https://perma.cc/UNU7-
43Y7].
3
See, e.g., Mohammad Davoodalhosseini et al., CBDC and Monetary Policy,
BANK OF CANADA (Staff Analytical Note 2020-4, 2020),
https://www.bankofcanada.ca/2020/02/staff-analytical-note-2020-4/
[https://perma.cc/C49X-2KUQ]; see also Tobias Adrian & Tommaso Mancini-
2021] MONEY IN THE TWENTY-FIRST CENTURY 167

legal hurdles for full implementation are also numerous. In any case, the
CBDC presents an alternative model of monetary and financial organization
that is worth considering. By exploring the past and present of money in law
and in practice, this Article offers a preview of how money will look like in
the future.
I. MONEY IN LAW AND IN PRACTICE

In the modern economy, money and central banks go together. Central

banks are seen as powerful institutions because they can “print money,”
acting as the ultimate liquidity providers in a sovereign territory—with
“liquidity” here meaning money that can be immediately used to make
payments and settle debt.4 The aftermath of the Global Financial Crisis only
reinforced this view. Central banks around the world have used
unconventional and even unprecedented measures to restore monetary and
financial stability.5 This whole idea of central banks’ powers has become a
distraction, though, as the idea obscures a more pressing concern in the
monetary system: banks are the true holders of the monetary powers, and the
central bank only regains prominence after banks abuse their powers and a
crisis sets in. This arrangement, however, is neither efficient nor legal.

A. The Myth of the Powerful Central Bank

The law of the monetary system is founded on two basic pillars. First,
the law states what should be considered money in the sovereign territory
and grants the central bank a monopoly on creating the money chosen to be
“legal tender.” As legal tender, the designated money has, by law, the
irrevocable power to discharge any debt, from taxes to private obligations
enforceable in courts.6 Because of its legal status, the money recognized as
legal tender becomes the general unit of account—the measure with which

Griffoli, Central Bank Digital Currencies: 4 Questions and Answers, IMFBLOG

(Dec. 12, 2019), https://blogs.imf.org/2019/12/12/central-bank-digital-currencies-4-
questions-and-answers/ [https://perma.cc/JTQ2-8YNX].
4
About “liquidity,” see, e.g., Daniela Gabor & Jakob Vestergaard, Chasing
Unicorns: The European Single Safe Asset Project, 22 COMPETITION AND CHANGE
140, 146 (2018).
5
For an overview of the non-traditional measures adopted by central banks during
and after the Global Financial Crisis, see Claudio Borio & Piti Disyatat,
Unconventional Monetary Policies: An Appraisal, 78 THE MANCHESTER SCH. 53
(2010); and Claudio Borio & Anna Zabai. Unconventional Monetary Policies: A
Re-Appraisal, BANK FOR INT’L SETTLEMENTS, WORKING PAPER No. 570 (2016),
https://www.bis.org/publ/work570.pdf [https://perma.cc/7NX6-UALG].
6
For a historical perspective on the origins and evolution of the idea of legal
tender, see Angela Redish, Anchors Aweigh: The Transition from Commodity
Money to Fiat Money in Western Economies, 26 CAN. J. ECON. 777, 781–85
(1993).
168 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

prices are quoted and debts are recorded7—and tends to be the favored means
of payment in the sovereign territory. Second, the central bank receives the
legal authority and the tools to regulate the supply, value, and circulation of
the sovereign money to attain price stability.8
In America, the legal treatment of the monetary system appears to
diverge from these two pillars. In the United States Code (U.S.C.), a
consolidation and codification of the general and permanent laws of the
United States by subject matter, the subchapter explicitly dedicated to the
monetary system has only three sections.9 The first section sets the dollar and
its subdivisions as the unit of account in the United States. The second
designates the standard used to gauge the weight of the national coins. And
the third and final, provides that the official coins and currency are legal
tender in the sovereign territory. These statutory provisions, however, shed
no light on the details of fundamental monetary issues, like those regarding
how the sovereign money is created, managed, and transferred.
The additional monetary rules are instead found in the chapter devoted
to the Federal Reserve System, under Title 12 of the U.S.C.10 The provisions
in this chapter come mostly from the Federal Reserve Act of 1913, which is
the chief statute about central banking in the United States. But the monetary
powers are rooted in the Constitution, which gave Congress the mandate to
“coin money [and] regulate the value thereof.” 11 Only with the Federal
Reserve Act Congress delegated its mandate to the central bank. Regarding
money creation, Section 16(1) of the Federal Reserve Act gives the Board of
Governors of the Federal Reserve System the power to issue, at its discretion,
the “Federal Reserve Notes.”12 These Notes, which are the dollar bills daily
used for monetary transactions, “are legal tender for all debts, public charges,
taxes, and dues” in the American territory.13 So, the Board of Governors of
the Federal Reserve has a monopoly on creating legal tender in the United
States.
As to the legal authority to regulate the supply, value, and circulation of
the sovereign money, Sections 14 and 19 provide the Federal Reserve System
with two primary tools to adjust the amount of sovereign money available in
the economy and, in turn, its value. The use of the term “Federal Reserve

7
About the importance of the unit of account as one of the defining characteristics
of money, together with the functional characteristics of means of payment and
store of value, see STEPHEN CECCHETTI & KERMIT SCHOENHOLTZ, MONEY,
BANKING AND FINANCIAL MARKETS 24–26, 33–34 (5th ed. 2016).
8
E.g., Section 2A of the Federal Reserve Act, 12 U.S.C. § 225a, sets the monetary-
policy objectives to be pursued by the Board of Governors of the Federal Reserve
System and the Federal Open Market Committee: “maximum employment, stable
prices, and moderate long-term interest rates.”
9
31 U.S.C. §§ 5101–5103.
10
12 U.S.C. §§ 221–522.
11
U.S. Const. art. I, § 8, cl. 5.
12
12 U.S.C. § 411.
13
31 U.S.C. § 5103.
2021] MONEY IN THE TWENTY-FIRST CENTURY 169

System” here, instead of the more specific “Board of Governors,” is not

accidental. The Federal Reserve System is not limited to the Board of
Governors, which is the government agency that manages the System and
holds regulatory and supervisory powers. 14 The System also includes the
Federal Open Market Committee, or FOMC, the separate and independent
body responsible for setting monetary policy, 15 and the twelve Federal
Reserve Banks, the hybrid public-private institutions that implement
policy. 16 In many instances, the typical powers of a central bank are not
exercised by one of these entities alone but shared among them. As Peter
Conti-Brown, a Wharton School professor, puts it, the central bank of the
United States, or simply the Fed, is not an “it” but a “they.”17
It is based on this complex structural arrangement that Section 14(2)(b)
of the Federal Reserve Act stipulates that “[e]very Federal Reserve bank shall
have power” to buy and sell in the open market either government securities,
“in accordance with rules and regulations prescribed by the Board of
Governors of the Federal Reserve System,” or agency securities, “under the
direction and regulations of the Federal Open Market Committee.”18 The Fed
trades securities in open-market operations to increase or reduce the amount
of money in circulation, therefore stimulating or constraining economic
activity—and eventually influencing prices. In practice, only the Federal
Reserve Bank of New York executes open-market operations in the United
States under specific authorization of the FOMC, which appears “in the
minutes of the first FOMC meeting of each year.”19
Section 19 of the Federal Reserve Act, with the subsequent amendments,
gives the Fed another tool for monetary management: reserve requirements.20
Reserve requirements have been used to limit banks’ ability to make new
loans and, with that, to create more money, in the form of bank deposits. To
that end, Section 19 mandates banks to maintain reserves against their
transaction accounts in a ratio determined by the Board of Governors. The
larger the amount of reserves kept at the central bank, the higher the interest
banks charge in their lending operations. As, however, the enforcement of

14
Federal Reserve Act, 12 U.S.C. §§ 225a, 241–248, 355(1).
15
See id. §§ 225a, 263, 355(2).
16
See id. §§ 301–308, 341–347d.
17
See PETER CONTI-BROWN, THE POWER AND INDEPENDENCE OF THE FEDERAL
RESERVE 13–14, 69–83, 103–26 (2016).
18
“Agency securities” are the securities issued or backed by a Government
Sponsored Enterprise, like Fannie Mae and Freddie Mac. See 12 U.S.C. § 355(1)–
(2).
19
FED. RESERVE BANK OF N.Y., ABOUT THE NEW YORK FED: OPEN MARKET
OPERATIONS (Aug. 2007),
https://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html
[https://perma.cc/P8VG-XHMY].
20
12 U.S.C. § 461.
170 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

this tool is complex and often inefficient, reserve requirements have been
losing much of their importance to monetary policy.21
Section 10B of the Federal Reserve Act,22 which prescribes the terms and
conditions for individual banks to borrow directly from the Fed, was once
viewed as a tool to execute monetary policy. With this tool, the Federal
Reserve Banks lend money against collateral to a bank in need of additional
liquidity at a discount rate that the Board of Governors sets after reviewing
the recommendations of the Reserve Banks.23 As discount lending is targeted
at individual banks facing a liquidity shortfall, this tool is more useful for
financial stability, when the central bank is acting as lender of last resort24—
not when the central bank is aiming for adjusting the amount of money
available to the banking system as a whole.25 In discount lending operations,
moreover, the Fed can accept as collateral a wider range of assets, even
private, when making the loan. The main statutory requirement is that the
loan is “secured to the satisfaction of [the] Federal Reserve bank.”26 In open-
market operations, by contrast, only government and agency securities can
be traded, following the plain language of section 14(2)(b) of the Federal
Reserve Act.27
Discount lending is, in fact, closer to the tool present in the now infamous
section 13(3) of the Federal Reserve Act, which set the conditions for broad
emergency lending, even for non-bank institutions, “[i]n unusual and exigent
circumstances.”28 Section 13(3) was greatly revised after the financial crisis
by the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010, or Dodd-Frank Act, since some believed that the Fed improperly used

21
About the futility of reserve requirements, see CECCHETTI & SCHOENHOLTZ,
supra note 7, at 474–75, 493–94.
22
12 U.S.C. § 347b.
23
Although the term “Fed’s discount window” is commonly associated with this
lending operation, the Fed rarely discount papers presented by banks these days.
Instead, “[a] Federal Reserve Bank generally extends credit by making an advance”
secured by acceptable collateral. 12 C.F.R. § 201.3(a)(1).
24
For an overview of the origins, evolution, and current status of the role of lender
of last resort, see MERVYN KING, THE END OF ALCHEMY: MONEY, BANKING AND
THE FUTURE OF THE GLOBAL ECONOMY 187–207 (2016); see also PAUL TUCKER,
UNELECTED POWER: THE QUEST FOR LEGITIMACY IN CENTRAL BANKING AND THE
REGULATORY STATE 503–24 (2018).
25
About the base discount rate and the lending operations at the “discount
window,” see FREDERIC MISHKIN, THE ECONOMICS OF MONEY, BANKING, AND
FINANCIAL MARKETS 384–89 (9th ed. 2010).
26
Federal Reserve Act, 12 U.S.C. §§ 347b(a), 343(3)(A). The Board of Governors
defined “satisfactory collateral” as including not only federal, state, and local
government securities but also “business, consumer, and other customer notes.” See
12 C.F.R. § 201.3(a)(2).
27
See 12 U.S.C. § 355.
28
Id. at § 343(3)(A).
2021] MONEY IN THE TWENTY-FIRST CENTURY 171

Section 13(3) to bail out institutions during the crisis.29 Despite the normative
tweaks, the essence of the statutory rule remained the same. The crucial
legislative change intended to prohibit the Fed from saving individual
institutions by restricting the provision of emergency loans to “any
participant in any program or facility with broad-based eligibility.” But, as
Princeton University professor and former vice-chairman of the Federal
Reserve Alan Blinder counters, “this policy change is less transformative
than it seems. If a future Fed perceives an urgent need to save some critical
financial company, it shouldn't take much effort to design a lending program
‘with broad-based eligibility.’”30
When it comes to the circulation of the sovereign money in the economy,
sections 13(1) and 16(14) of the Federal Reserve Act are the relevant rules.31
These sections put the Federal Reserve Banks at the center of the payments
system, which is the set of networks banks use to exchange information and
money based on the payments and transfer of funds ordered by their clients.32
Here, “payments system” will be used in a specific sense, focused on the
legal and institutional framework through which banks maintain relations
among themselves and with the central bank when payments and funds are
transferred in the economy. Omitted from this concept and, thus, from the
present analysis are issues connected to payments services or technologies
(like checks or mobile wallets) and to the relations of banks with their
customers when payments are made.33

29
See ALAN BLINDER, AFTER THE MUSIC STOPPED: THE FINANCIAL CRISIS, THE
RESPONSE, AND THE WORK AHEAD 276–77, 293–94 (2013); Alexander Mehra,
Legal Authority in Unusual and Exigent Circumstances: The Federal Reserve and
the Financial Crisis, 13 U. PA. J. BUS. L. 221, 221 (2010). In favor of the Fed’s
actions, see Thomas Baxter Jr., & David Gross, The Federal Reserve’s Response to
the Crisis: Doing Whatever it Takes within its Legal Authority, in INTERNATIONAL
MONETARY AND FINANCIAL LAW: THE GLOBAL CRISIS 293, 298–303 (Giovanoli &
Devos eds., 2010).
30
BLINDER, supra note 29, at 310. The term “broad-based eligibility” was defined
by the Board of Governors in 12 C.F.R. § 201.4(d)(4) (2017): “a program or
facility has broad-based eligibility only if the program or facility is designed to
provide liquidity to an identifiable market or sector of the financial system” and
does not exhibit the disqualifying characteristics described in 12 C.F.R. §
201.4(d)(4)(iii).
31
See 12 U.S.C. §§ 248-1, 342.
32
See James Tobin, Financial Innovation and Deregulation in Perspective, 3 BOJ
MONETARY AND ECON. STUD. 19, 22 (1985) (highlighting the importance of the
payments system not only as a set of networks for the flow of money, but also as a
“communications network” for the flow of information).
33
For a view of the payments system from a perspective close to the one adopted in
the text, see Benjamin Geva, Global Payment and Settlement Systems, in
HANDBOOK OF KEY GLOBAL FINANCIAL MARKETS, INSTITUTIONS AND
INFRASTRUCTURE 513, 513–14 (G. Caprio Jr. ed., 2013). Focusing instead on new
technologies that influence payments processing and on the legal protections for
172 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

So, when persons or institutions make payments with checks or credit

cards instead of using cash, the related payment is ultimately processed and
settled inside the payments system. The payments system facilitates the
circulation of money, especially among persons and institutions that keep
checking accounts with different banks. It is, therefore, to enable the broad
circulation of the sovereign money that the law authorizes the Federal
Reserve Banks to receive deposits, checks, drafts, and other payment orders
from different banks.34 The Reserve Banks then organize all these orders and
sort them by bank and by the bank’s position—sender or receiver of money.
Finally, the Reserve Banks, based on the net result of each bank, collect more
money from the banks with a negative result and transfer money to the banks
with a positive result. By doing so, the Reserve Banks ultimately function as
clearinghouses for the banks in the system. This process is even easier for
banks and other depository institutions that are members of the Federal
Reserve Banks, since member banks keep an account with the Reserve Banks
that can be debited or credited accordingly.35
A similar normative pattern for creating and regulating money is
observed in other jurisdictions as well, although over a somewhat different
legal infrastructure. A direct constitutional mandate for central banks to issue
currency and regulate its value is found in the European Union36 and Brazil.37
The Bank of England, on the other hand, became the monetary authority for
the United Kingdom with the Bank Charter Act of 1844, which granted the
Bank a formal monopoly on issuing banknotes in England and Wales.38 The
story behind the Bank Charter Act of 1844 illustrates the struggle for

end-users of payment services, see Mark Edwin Burge, Apple Pay, Bitcoin, and
Consumers: The ABCs of Future Public Payments Law, 67 HASTINGS L.J. 1493,
1493, 1524, 1527 (2016).
34
See, e.g., 12 C.F.R. §§ 210.28-210.30 (2017) (detailing the relationships between
the banks and the Reserve Banks in one of the major infrastructures of the
American payments system, Fedwire).
35
For simplicity, I will use the term “bank” for all “depository institutions” in the
text, although “depository institution” has a broader meaning than “bank.” In the
United States, “depository institution,” according to section 19(b)(1)(A) of the
Federal Reserve Act, 12 U.S.C. § 461(b)(1)(A) (2018), includes commercial banks,
savings and loan associations, savings banks, and credit unions.
36
See Consolidated Version of the Treaty on the Functioning of the European
Union art. 127(1), 2016 O.J. (C 202) [hereinafter TFEU] (“The primary objective
of the European System of Central Banks (hereinafter referred to as ‘the ESCB’)
shall be to maintain price stability.”), art. 128(1) (“The European Central Bank
shall have the exclusive right to authorise the issue of euro banknotes within the
Union.”) and art. 282.
37
See Constituição Federal [C.F.] [Constitution], art. 21, VII (Braz.) (“The Union
shall have the power to: . . . VII – issue currency.”), and art. 164 (Braz.) (“The
competence of the Union to issue currency shall be exercised exclusively by the
central bank. The central bank may purchase and sell bonds issued by the National
Treasury, for the purpose of regulating the money supply or the interest rate.”).
38
See Bank Charter Act 1844, 7 & 8 Vict., c. 32 (Eng.).
2021] MONEY IN THE TWENTY-FIRST CENTURY 173

monetary power between public and private entities that has long contributed
to the complex nature of money.
When the Bank of England received the monopoly on note issue in 1844,
the Bank was a private organization. The Bank of England only became a
public institution with the Bank of England Act of 1946.39 In any case, the
Bank Charter Act of 1844 was seen as a victory for the Currency School. In
19th-century Britain, the Banking School and the Currency School argued
over how the English monetary system should be organized. The Banking
School believed in monetary flexibility and the importance of banks creating
money as a response to the demand of the economy at large. The Currency
School, in contrast, emphasized the need for having control over the creation
of money, advocating rigid limitations on the capacity of banks to extend
credit or issue means of payment. The victory for the Currency School was
incomplete, however. Although banks other than the Bank of England could
not issue notes anymore, banks could still offer checkable deposits that
circulated and were used as means of payment, thus competing with the
official notes.40
At first glance, the law seems to put the monetary system under the
absolute control of the state, most notably of the central bank. The monetary
powers of issuing the sovereign currency and regulating its supply, value,
and circulation are legally depicted as an attribute of state sovereignty. Often,
these powers receive constitutional status. The legal definition of money
tends to expand this perception of money as a creature of the state. In the
United States, for example, “money” in the ambit of the Uniform
Commercial Code is “a medium of exchange currently authorized or adopted
by a domestic or foreign government.”41 Scholars have even coined the term
“monetary sovereignty” to express how important the power to issue and
regulate money is to any sovereign state that aspires to be independent and
provide its people with the right to self-determination.42 Money and state are
so intertwined that, for centuries, the history and evolution of money have
been connected to the history and evolution of the nation-state.43
1. The Central Bank is Not Alone

39
See Bank of England Act 1946, 9 & 10 Geo. 6, c. 27 (Eng.).
40
About the debate between the Banking School and the Currency School in 19th-
century Britain, see Victoria Chick & Sheila Dow, Financial Institutions and the
State: A Re-examination, in MONETARY ECONOMIES OF PRODUCTION: BANKING
AND FINANCIAL CIRCUITS AND THE ROLE OF THE STATE 99, 107–08 (L.-P. Rochon &
M. Seccareccia eds., 2013); see also MORGAN RICKS, THE MONEY PROBLEM:
RETHINKING FINANCIAL REGULATION 231–33 (2016).
41
U.C.C. § 1-201(b)(24) (AM. L. INST. & UNIF. L. COMM’N 1977).
42
On monetary sovereignty and its meanings and limitations, see, for example,
ROSA MARIA LASTRA, INTERNATIONAL FINANCIAL AND MONETARY LAW 3–27 (2d
ed. 2015).
43
For detailed accounts of the strong relations between state and money over time,
see KING, supra note 24, at 211–48; see also FELIX MARTIN, MONEY: THE
UNAUTHORISED BIOGRAPHY 66–121 (2013).
174 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

On closer inspection, though, the reality is more nuanced, and money

looks more like a public-private effort than like a sovereign endeavor. Many
rules and regulations allow or even require banks to play a role in the
monetary system and share with the central bank much of the monetary
powers, from money creation and circulation to the very management of
money’s value. Several statutory rules have, moreover, been developed by
judicial interpretation in a way that permits banks to create and manage the
sovereign money. Finally, how the organization of the monetary system has
evolved and, in turn, how the practice of money as a shared enterprise has
consolidated over the years also contributed to placing banks as an essential
part of all monetary activities.
Although relatively scarce on the topic in the United States, judicial
decisions have already recognized the legitimacy of this public-private
monetary arrangement. The most meaningful decision was rendered in an
action brought in 1984 by Senator John Melcher, a Democrat from Montana.
Senator Melcher was challenging the participation in the FOMC of five
members selected by the private Reserve Banks rather than nominated by the
President and confirmed by the Senate. Senator Melcher argued “that only
public officials nominated by the President and confirmed by the Senate may
carry out or participate in the carrying out of those responsibilities.”44 As the
U.S. District Court for the District of Columbia summarized: “[t]he broader
issue, therefore, is whether under the Constitution, Congress may permit
open market trading as an element of monetary policy to be exercised by
private persons, or whether it is restricted in that regard to a grant of authority
to government officials.”45
Reasoning that “plaintiff has failed to offer any cogent reason why
Congress may not establish or continue a partnership of public and private
control over these functions [open-market operations] in lieu of execution of
these responsibilities exclusively by government officials,” 46 the District
Court ruled in 1986:
Congress has employed its undoubted power to regulate the
banking industry and the nation’s money supply by a system
that is in part private although it also includes significant
avenues for decisive governmental influence. Few issues in
the history of this nation have been as thoroughly considered
and debated as central banking and the regulation of the
money supply, and private participation, or even control,
have been hallmarks of what was from time to time
prescribed by the Congress. The current system is also the
product of an unusual degree of debate and reflection within
the Legislative Branch, with the participation from time to
time of the Executive, and it represents an exquisitely

44
Melcher v. Fed. Open Mkt. Comm., 644 F. Supp. 510, 522–53 (D.D.C.
1986), aff'd, 836 F.2d 561 (D.C. Cir. 1987).
45
Melcher, 644 F. Supp. 510 at 523.
46
Id.
2021] MONEY IN THE TWENTY-FIRST CENTURY 175

balanced approach to an extremely difficult problem. To be

sure, this background would not save the legislation if it
clearly contravened the Constitution. But the Court
concludes on the basis of its consideration of all the factors
discussed above, that, while the composition of the Federal
Open Market Committee may be unusual, it is not
unconstitutional.47
In 1988, after the U.S. Court of Appeals for the D.C. Circuit affirmed the
judgment dismissing the action despite vacating the District Court’s opinion,
the Supreme Court denied certiorari to the petition filed by Senator
Melcher.48 In denying certiorari, the Supreme Court does not express any
opinion on the previous decisions. It merely acknowledges that fewer than
four Justices considered the case to deserve review at the Supreme Court
level. In fact, the Supreme Court has never ruled on the constitutionality of
the public-private nature of the monetary system or, for that matter, of the
Federal Reserve System.49 But the decision by the U.S. District Court for the
District of Columbia in Melcher provides enough context about the sway
banks can legitimately hold over sovereign money. And the legal framework
of the monetary system only makes this preeminence stronger.
The concept of legal tender, to begin with, is not as steady as it appears.50
Although legal-tender rules usually create some constraints favoring the use
of sovereign money, these constraints tend to be soft: contracting parties can
freely decide on what constitutes a means of payment and how a debt may
be discharged between them. Consequently, the legal concepts of “money”
and “payment” become not a matter of strict statutory definition, but a matter
of contracts, open to private negotiation and agreement. 51 The idea that
sovereign money has to be used or accepted in all monetary transactions
conducted in the sovereign territory is wrong in most jurisdictions.
In the United States 52 and the United Kingdom, 53 for instance, legal
tender is a narrow disposition that does not compel the parties to use the
official currency in their economic transactions. The parties can agree to

47
Id. at 523–24.
48
See Melcher,836 F.2d at 561, cert. denied, 486 U.S. 1042 (1988).
49
For more on the cases challenging the constitutionality of the FOMC’s structure
and why these cases tend not to be heard by the courts, see CONTI-BROWN, supra
note 17, at 117–20.
50
See Antonio Sáinz de Vicuña, An Institutional Theory of Money, in
INTERNATIONAL MONETARY AND FINANCIAL LAW: THE GLOBAL CRISIS 517, 521–
23 (Giovanoli & Devos eds., 2010).
51
See LASTRA, supra note 42, at 13–14.
52
See 31 U.S.C. § 5103.
53
See Tom Fish & Roy Whymark, How has Cash Usage Evolved in Recent
Decades? What Might Drive Demand in the Future?, 55 BANK OF ENG. Q. BULL.
216, 218 (2015), https://www.bankofengland.co.uk/quarterly-
bulletin/2015/q3/how-has-cash-usage-evolved-in-recent-decades-what-might-drive-
demand-in-the-future [https://perma.cc/2ES2-7289].
176 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

accept any (legal) form of payment and even refuse the currency.54 As the
Board of Governors of the Federal Reserve System website clarifies, “no
Federal statute mandat[es] that a private business, a person, or an
organization must accept currency or coins as payment for goods or services.
Private businesses are free to develop their own policies on whether to accept
cash unless there is a state law which says otherwise.”55
In the Eurozone, the euro should be accepted if used as payment for a
debt, but parties can still decide on a different medium of exchange.56 More
than that, as Recital 19 of Council Regulation nº 974/98, issued by the
Council of the European Union at the time of the introduction of the euro,
makes clear: “limitations on payments in notes and coins, established by
Member States for public reasons, are not incompatible with the status of
legal tender of euro banknotes and coins, provided that other lawful means
for the settlement of monetary debts are available.” 57 Brazil, in contrast,
adopts a more restrictive approach, as legal tender means “forced tender”:
the use of the national currency in economic transactions is mandatory, and
no one can refuse a payment made in the national currency.58 Contracting
parties, moreover, cannot choose any other medium of exchange, foreign
currencies included, in the national territory.59

54
See Hilary J. Allen, $=Euro=Bitcoin?, 76 MD. L. REV. 877, 900–01 (2017).
55
BD. OF GOVERNORS OF THE FED. RES. SYS., FAQS—CURRENCY AND COIN—IS IT
LEGAL FOR A BUSINESS IN THE UNITED STATES TO REFUSE CASH AS A FORM OF
PAYMENT? (June 17, 2011),
https://www.federalreserve.gov/faqs/currency_12772.htm [https://perma.cc/GES5-
HJF3].
56
See TFEU art. 128(1). See also Court of Justice of the European Union,
Judgment of 26 January 2021, Dietrich and Häring, C‑422/19 and C‑423/19,
EU:C:2021:63 (ruling that “it cannot be considered necessary (…) for the
establishment of the status of legal tender of banknotes denominated in euro (…) to
impose an absolute obligation to accept those banknotes as a means of payment.
(…) Nor, moreover, is it necessary (…) that the EU legislature lay down
exhaustively and uniformly the exceptions to that fundamental obligation, provided
that every debtor is guaranteed to have the possibility, as a general rule, of
discharging a payment obligation in cash).
57
Recital 19 of Council Regulation (EC) 974/98 of 3 May 1998, Introduction of the
Euro, 1998 O.J. (L 139) 1–5.
58
See Decreto No. 857, de 11 de setembro de 1969, Diário Oficial da União
[D.O.U.] de 12.9.1969 (Braz.), art. 1°; Decreto No. 10.192, de 14 de fevereiro de
2001, D.O.U. de 16.2.2001 (Braz.)., art. 1° (providing that the “Real” is the legal
tender to be used in all payments in the national territory); see also Decreto No.
10.406, de 10 de janeiro de 2002, D.O.U. de 11.1.2002 (Braz.) art. 318 (illustrating
a general prohibition on using gold or foreign currency as means of payment in
contract clauses).
59
Foreign currencies can only be used in transactions involving currency exchange.
The main purpose of this legal rigidity has been to avoid the dollarization of the
economy in times of crisis. See Decreto No. 857, de 11 de setembro de 1969,
D.O.U. de 12.9.1969 (Braz.), art. 2°.
2021] MONEY IN THE TWENTY-FIRST CENTURY 177

In all these jurisdictions, however, balances denominated in the

sovereign currency and held in bank accounts—or simply, bank deposits60—
are as legitimate to act as means of payment as the currency issued by the
central bank. As the current-account balances can be converted into currency
on demand or transferred to another account through the payments system
with no loss of value, these balances offer a close and convenient substitute
for currency.61 As an example, Section 16(13) of the Federal Reserve Act
provides that checks and bank deposits used by banks’ clients to transfer
funds or make payments shall be sent and received at par, or dollar for dollar,
between banks. These checks and bank deposits are also transferred at par
from banks to the central bank—in this case, the Federal Reserve Banks—
for clearing and final settlement.62
Under certain circumstances, the law even creates a preference for bank
deposits over the sovereign money issued by the central bank. Attempting to
curb money laundering, tax evasion, and the financing of terrorism,
numerous countries have enacted legislation capping the amount of cash that
can be used to make payments.63 In many European countries, the amount of
cash a person can use in a single transaction without identification varies
from €1,000 to €3,000. No limit exists in Germany, though, and this limit is
raised to 100,000 francs in Switzerland. In the United States, any business
receiving more than $10,000 in cash must file Form 8300 with the Internal
Revenue Service to report the transaction and identify the payer. 64 By
contrast, in the United Kingdom and Brazil, fewer limitations in the use of
cash apply. 65 In any case, all these countries, following Financial Action
Task Force (FATF) recommendations, have enacted rules about the reporting
of suspicious transactions. 66 These rules can include requirements that

60
“Bank deposits” is used throughout the text in the sense of bank-created money:
the money deposited in current accounts that can be easily converted into currency
(central-bank created money) or transferred to another bank account to make a
payment. For a comprehensive regulatory definition of deposits—highlighting
different types, inclusions, and exclusions—see 12 C.F.R. § 204.2 (2017).
61
See E. Gerald Corrigan, Are Banks Special?, FED. RES. BANK OF MINNEAPOLIS
ANN. REP. (1982), https://www.minneapolisfed.org/article/1983/are-banks-special
[https://perma.cc/WDF5-RE2N]; and LASTRA, supra note 42, at 25.
62
See Federal Reserve Act, 12 U.S.C. §§ 342, 360.
63
See, e.g., Sáinz de Vicuña, supra note 50, at 522.
64
See 31 U.S.C. §§ 5313-5316, 5331; 31 C.F.R. § 1010.330 (2017) (stipulating at
the regulatory level that “[c]urrency in excess of $10,000 received by a person for
the account of another must be reported.”). Similarly, sending to or receiving from
a foreign country “currency or other monetary instruments in an aggregate amount
exceeding $10,000 at one time” also creates the legal obligation of reporting. 31
C.F.R. § 1010.340 (2017).
65
See Fish & Whymark, supra note 53, at 225.
66
See FIN. ACTION TASK FORCE, INTERNATIONAL STANDARDS ON COMBATING
MONEY LAUNDERING AND THE FINANCING OF TERRORISM & PROLIFERATION (THE
FATF RECOMMENDATIONS) (2020), www.fatf-gafi.org/recommendations.html
[https://perma.cc/JG2W-9QG4].
178 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

financial institutions and some designated non-financial businesses and

professions report cash transactions above a pre-set threshold.
In the modern monetary system, the legal concept of “money”—in the
narrow sense of a generally accepted instrument to make payments and settle
debt 67 —is expanded. This concept has to include not only central-bank
money (currency in the form of banknotes and coins, or just cash 68 ) but
balances held in current accounts (bank deposits) that can be easily redeemed
or transferred with no loss of value. Any of these types of “money” can be
used to discharge debts and make payments, although they are not always
interchangeable: in normal times, the law may require the use of bank
deposits instead of cash for some payments; in a banking crisis, though, only
central-bank money retains its liquidity and availability.69
Bank deposits have thus become, mainly in advanced economies, the
most used means of payment by households and institutions in their monetary
transactions.70 As former governor of the Bank of England Mervyn King
illustrates, the share of bank deposits in total money (in the sense of means
of payment, also including cash) is around 90% in the United States. And this
share “is even higher in other major countries, at 91 percent in [the] euro
area, 93 percent in Japan and no less than 97 percent in the United
Kingdom.”71 In the United Kingdom, moreover, the proportion of payments
using cash, in value terms, has been in gradual decline.72
A survey in the euro area, in apparent contrast, highlights that, in 2016,
people used cash in almost 80% of transactions—but for small payments,
particularly below €25. In terms of value, payments in cash amounted to
53.8% of all low-value payments, while the use of cards reached 39%. Even
so, 93% of euro area consumers owned or had access to a payment card, and
the amount of cash people carried, on average, in their wallets was below
€100, except for Luxembourgers (€102) and Germans (€103). More than

67
About the different types of “money” and the inherent hierarchical character of
money based on the levels of liquidity of different financial instruments (from
securities and demand deposits to currency and gold), see Perry Mehrling, The
Inherent Hierarchy of Money, in SOCIAL FAIRNESS AND ECONOMICS: ECONOMIC
ESSAYS IN THE SPIRIT OF DUNCAN FOLEY 394 (2012).
68
In some countries, however, coins are issued not by the central bank but by the
treasury, as a legacy of the time when the sovereign issued gold or silver coins by
itself. In the United States, for example, coins are issued by the Secretary of the
Treasury, under 31 U.S.C. § 5111(a)(1) (2018).
69
See KING supra note 24, at 53–54; Perry Mehrling, Financialization and its
Discontents, FINANCE AND SOCIETY 1, 7-8 (2017),
http://financeandsociety.ed.ac.uk/ojs-
images/financeandsociety/FS_EarlyView_Mehrling.pdf [https://perma.cc/UN7W-
EQVG].
70
See, e.g., Sáinz de Vicuña, supra note 50, at 521–23.
71
KING, supra note 24, at 62.
72
See Fish & Whymark, supra note 53, at 217, 220.
2021] MONEY IN THE TWENTY-FIRST CENTURY 179

that, 84% of euro area consumers answered that, in 2016, they had not
received any regular income in cash.73
Bank deposits are as legitimate as the official banknotes and coins for
making payments and transferring funds. In effect, bank deposits tend to be
the ultimate representation of “money” in modern economies. As bank
deposits are under the direct control of banks, does that mean that not only
the central bank can create the sovereign money but also banks? A look at
the legal framework of banking will point to an affirmative answer. Yet a
look at the reality of banking will show that banks have taken their legally
established monetary power too far.
B. Banks and the Real Monetary Power
In the United States, the “business of banking” was defined in Section 8
of the National Bank Act of 1864. This Section, now as Section 24, Seventh,
in Title 12 of the United States Code, remains the relevant statutory provision
on the topic until these days, with the developments brought by years of
regulatory and judicial interpretation. The then Section 8 authorized national
banks to exercise, among others, the powers of “receiving deposits” and
“loaning money on personal security.” At that time, national banks could also
issue notes redeemable on demand at par to circulate in the economy.74 Both
notes and deposits had to be partially backed by the official currency
(greenbacks) or gold.75 In any case, Section 31 of the Act explicitly allowed
national banks to multiply the money received from customers, as the
statutory rule required banks to keep “on hand” (as a reserve requirement)
just a partial amount of money relative to their notes and deposits. Currently,
Section 19 of the Federal Reserve Act of 1913 sets the rules on reserve
requirements.76
The subsequent legislation reinforces the idea that the combination of
receiving deposits 77 and making loans is the essence of the business of
banking and, thus, the distinguishing characteristic of banks. 78 Since the

73
For details on the survey in the euro area and the source of the cited data, see
Henk Esselink & Lola Hernández, The Use of Cash by Households in the Euro
Area, EUR. CENT. BANK OCCASIONAL PAPER SERIES (Nov. 2017),
https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op201.en.pdf. The use of cash in
the United States is similar to the results found in the Eurozone. See KENNETH
ROGOFF, THE CURSE OF CASH 49–51 (2016).
74
See National Bank Act of 1864 § 23 (repealed 1920).
75
See id. at § 31 (repealed 1913).
76
See 12 U.S.C. § 461 (2018).
77
For purposes of deposit insurance, “deposit” has a statutory definition in 12
U.S.C. § 1813(l) (2018).
78
This view has been recently challenged by the Office of the Comptroller of the
Currency (OCC), which is defending in court its legal authority to issue special
purpose national bank charters for financial technology (fintech) companies that
make loans but do not receive deposits. For an overview of the case and its
implications, with links to relevant court filings, see Lev Menand & Morgan Ricks,
180 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

Banking Act of 1933—known as the Glass-Steagall Act—no person or

corporation can engage, without getting the proper authorization, “in the
business of receiving deposits subject to check or to repayment upon
presentation of a passbook, certificate of deposit, or other evidence of debt,
or upon request of the depositor.”79 Similarly, the Federal Deposit Insurance
Act of 1950 defined “State bank” as an institution “engaged in the business
of receiving deposits.”80
And finally, the Bank Holding Company Act Amendments of 1970,
besides referring to the definition of bank from the Federal Deposit Insurance
Act, added that a bank is an institution that both: “(i) accepts deposits that
the depositor has a legal right to withdraw on demand; and (ii) engages in the
business of making commercial loans.”81 The second and conjunctive prong
to the statutory test of what constitutes a “bank” (“making commercial
loans”) was only introduced with the 1970 Amendments. The statutory
emphasis on “commercial loans,” leaving aside “consumer loans,” indicates
that, at the time, regulators were concerned with banks providing credit to
businesses and, in consequence, with both banks and corporations
accumulating too much power. Personal loans were not seen as an activity
that required special regulation or supervision.82
The case law in the United States reaffirms this understanding of banking
centered around receiving deposits and making loans. As early as 1872, in
Oulton, the Supreme Court stated that “[s]trictly speaking the term bank
implies a place for the deposit of money, as that is the most obvious purpose
of such an institution.”83 In the 1986’s Dimension case, the Supreme Court
went further and acknowledged: “the narrowed statutory definition [based on
the Bank Holding Company Act of 1956] required that both the demand
deposit and the commercial loan elements be present to constitute the
institution as a bank.”84

Lacewell v. OCC, JUST MONEY (July 2020), https://justmoney.org/lacewell-v-

occ/[https://perma.cc/TKU5-EGSK].
79
Originally, Banking Act of 1933 § 21(a)(2) (1933). Currently, 12 U.S.C. §
378(a)(2) (2018).
80
Originally, Federal Deposit Insurance Act § 3(a), 12 U.S.C. § 264 (1950).
Currently, 12 U.S.C. § 1813(a)(2)(A) (2018).
81
Originally, Bank Holding Company Act Amendments of 1970 § 101(c) (1970)
Currently, 12 U.S.C. 1841(c)(1)(A)-(B) (2018), with an updated text.
82
About the evolution of the statutory definition of “bank” in the United States, its
main exemptions, and the reasons for the statutory emphasis on “commercial
loans,” see Saule Omarova & Margaret Tahyar, That Which We Call a Bank:
Revisiting the History of Bank Holding Company Regulation in the United States.
31 REV. BANKING & FIN. L. 113 (2011).
83
Oulton v. German Sav. & Loan Soc., 84 U.S. 109, 118 (1872) (holding that a
savings bank operating for profit was not exempt from taxation on the deposits the
bank held for its customers).
84
Bd. of Governors of the Fed. Res. Sys. v. Dimension Fin. Corp., 474 U.S. 361,
367 (1986) (holding that the Board of Governors of the Federal Reserve lacked
2021] MONEY IN THE TWENTY-FIRST CENTURY 181

The case law, moreover, has provided the legal basis underpinning
fractional-reserve banking, the ability that banks have to hold in reserve just
a fraction of the total amount they receive in deposits, using the rest to make
loans. In 1881, the Supreme Court asserted that “the relation between a bank
and its general depositor is that of debtor and creditor. When he deposits
moneys with the bank, it becomes his debtor to the amount of them.”85 This
rule was reaffirmed by the Supreme Court several times since, making it clear
that a bank account “consists of nothing more or less than a promise to pay,
from the bank to the depositor;” and not “money belonging to the depositor
and held by the bank.”86 As the Supreme Court underlined in the 1904 case
New York County National Bank v. Massey,
except under special circumstances, or where there is a
statute to the contrary, a deposit of money upon general
account with a bank creates the relation of debtor and
creditor. The money deposited becomes a part of the general
fund of the bank, . . . and the right of the depositor is to have
this debt repaid in whole or in part by honoring checks drawn
against the deposits. It creates an ordinary debt, not a
privilege or right of a fiduciary character.87
And that is the legal reason why banks—and banks only—can use the
money deposited to make new loans and keep just a part of the amount
deposited to meet legal and regulatory requirements. In the majority opinion
of the Supreme Court in the 1963 case United States v. Philadelphia National
Bank, Justice Brennan contended that “[c]ommercial banks are unique
among financial institutions in that they alone are permitted by law to accept
demand deposits. This distinctive power gives commercial banking a key
role in the national economy.” 88 Even Justices Harlan and Stewart, who
dissented from the majority opinion, agreed on that point: “The unique
powers of commercial banks to accept demand deposits, provide checking
account services, and lend against fractional reserves permit the banking

statutory authority to expand the definition of “banks” contained in the Bank

Holding Company Act of 1956).
85
Libby v. Hopkins, 104 U.S. 303, 308 (1881). To make this point, the U.S.
Supreme Court invoked the authority of the emblematic English case Foley v. Hill,
(1848) 2 HLC 28, 9 Eng. Rep. 1002, which was decided by the House of Lords, the
highest court at the time. Foley is one of the fundamental cases in the English
banking law about the nature of the relationship between the bank and its
depositors. About Foley and its relevance, see E. P. ELLINGER ET AL., ELLINGER'S
MODERN BANKING LAW 120–22 (5th ed. 2011).
86
Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 21 (1995). Following the same
line, see Bank of Marin v. England, 385 U.S. 99, 101 (1966) (stating that “the
relationship of bank and depositor is that of debtor and creditor, founded upon
contract.”).
87
New York Cnty. Nat’l Bank v. Massey, 192 U.S. 138, 145 (1904).
88
United States v. Philadelphia Nat’l Bank, 374 U.S. 321, 326 (1963).
182 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

system as a whole to create a supply of ‘money,’ a function which is

indispensable to the maintenance of the structure of our national economy.”89
Finally, since the late 19th century, the Supreme Court has underscored
the importance of national banks in supporting the government in its
monetary and financial duties. As opposed to banks incorporated under state
laws, national banks organized under the National Bank Act of 1864, a
federal law, were viewed as “instrumentalities of the federal government.”90
In their origin, national banks were “established for the purpose, in part, of
providing a currency for the whole country, and in part to create a market for
the loans of the General government.” 91 Some historical context helps to
understand the early decisions of the Supreme Court on national banks.
After the two frustrated attempts to create a federal bank that could serve
as a central bank in the late 18th and early 19th centuries, free banking
prospered between 1837 and 1863. With no federal laws in place, states set
low entry barriers and allowed banks to issue notes, which circulated and
were used as means of payment. Free banking, however, did not mean that
an individual or entity could start a banking business without constraints or
government involvement. Any new bank had to register with state authorities
and deposit securities to support all of the notes issued. Charles Calomiris,
from Columbia Business School, and Stephen Haber, from Stanford
University, explain the arrangement:
[Although] bank charters no longer had to be approved by
state legislatures, . . . individuals could open banks provided
that they registered with the state comptroller and deposited
state or federal bonds with the comptroller as a guarantee of
their note issues. . . . [U]nder free banking, all banknotes had
to be 100 percent backed by high-grade securities—which,
notably, included bonds issued by the state government—
that were deposited with the state comptroller of the
currency. Free banks were forced, in essence, to grant a loan
to the state government in exchange for the right to operate.92
Free banking was not unrestricted, but it was not well regulated either. The
large number of banks subject to weak requirements and feeble supervision

89
Id. at 374.
90
Davis v. Elmira Sav. Bank, 161 U.S. 275, 283 (1896) (holding that a state has no
authority to enforce state rules against a national bank when these rules conflict
with a federal statute).
91
Tiffany v. Nat’l Bank of Missouri, 85 U.S. 409, 413 (1873) (holding that a
national bank may charge the highest interest rate allowed in the state, even when a
lower rate is set for the banks organized under the state laws).
92
CHARLES CALOMIRIS & STEPHEN HABER, FRAGILE BY DESIGN: THE POLITICAL
ORIGINS OF BANKING CRISES AND SCARCE CREDIT 169 (2014).
2021] MONEY IN THE TWENTY-FIRST CENTURY 183

led to the fragmentation of the monetary system and to instability, which was
made worse by the Civil War of the 1860s.93
The National Bank Act of 1863, amended in 1864, aimed to organize the
banking system, establish a national currency, and solve fiscal problems, all
with the help of national banks.94 In the absence of a central bank, national
banks were therefore seen as “instrumentalities of the federal government.”95
The original rationale for giving national banks preferential treatment ended,
though, with the enactment of the Federal Reserve Act of 1913 and the
creation of the Federal Reserve System.96 As the Supreme Court explicitly
acknowledged in 1940, “[t]hough the national banks’ usefulness as an agency
to provide for currency has diminished markedly, their importance as general
bankers shows a constant growth.”97 So, even after the Federal Reserve Act
transferred the monetary functions to the authority of the central bank,
national banks continued to receive preferential treatment from the Supreme
Court, this time regarding their commercial operations.98
This view of national banks as “national favorites,” as affirmed in the
1873 case Tiffany v. National Bank of Missouri, 99 was softened more
recently. In the 2009 case Cuomo v. Clearing House Association, for
instance, the Supreme Court conceded, in a majority opinion, that national
banks, despite their privileged position in the American financial system, are
subject to the law enforcement of the states and the related actions brought
by a state attorney general.100 The Dodd-Frank Act, moreover, introduced the
“National Bank Act preemption provisions” stipulating that, except under

93
For a detailed and more favorable analysis of free banking, see GEORGE SELGIN,
THE THEORY OF FREE BANKING: MONEY SUPPLY UNDER COMPETITIVE NOTE
ISSUE (1988).
94
About the historical context of the emergence of national banks, see Arthur
Rolnick & Warren Weber, New Evidence on the Free Banking Era, 73 THE AM.
ECON. REV. 1080, 1080–84 (1983). In any case, national banks were “national”
“only in the sense that their charter was granted by the federal government, not in
the sense that they could operate nationwide branches. They continued to be
subject to state laws that either made branching entirely illegal or limited the
number of branches that could be operated.” CALOMIRIS & HABER, supra note 92,
at 179.
95
Davis, 161 U.S. at 283.
96
Although the Federal Reserve System was statutorily created in 1913, Peter
Conti-Brown contends that, in fact, the Fed had “three foundings”: in 1913, with
the Federal Reserve Act; in 1935, with the Banking Act; and in 1951, with the Fed-
Treasury Accord. See CONTI-BROWN, supra note 17, at 15–39.
97
Colorado Nat’l Bank of Denver v. Bedford, 310 U.S. 41, 48 (1940) (holding that
a safe-deposit business can be considered an “incidental power” relative to the
business of banking).
98
See, e.g., Marquette Nat’l Bank of Minneapolis v. First of Omaha Serv. Corp.,
439 U.S. 299 (1978) (holding that a national bank based in one state may charge its
credit-card customers from another state the interest rate allowed by its home state,
even if it is higher than the maximum rate permitted in the state of the customer).
99
Tiffany v. National Bank of Missouri, 85 U.S. 409, 413 (1873).
100
See Cuomo v. Clearing House Ass’n, LLC, 557 U.S. 519 (2009).
184 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

specific circumstances, states have the power to apply their laws to national
banks.101 In any event, the one point all these Supreme Court decisions have
in common is to show how banking has historically been an activity close to
the sovereign and to money creation and circulation.
1. The Legal Limits of Banking: Multiplying Existing Deposits

The law, therefore, builds a distinctive legal framework for banks,

allowing them to receive deposits from the public, keep a fraction in reserve,
and use the rest to make loans. Under this framework, banks can legitimately
collaborate with the central bank in creating money—still in the narrow sense
of a generally accepted instrument to make payments and settle debt—by
following a particular sequence, here stylized:
the central bank creates money and puts it in circulation102
→ people deposit spare money in banks → banks keep in
reserve only a part of the deposits but guarantee the entire
amount (fractional reserve) → banks lend the rest of the
money deposited → private creation of money occurs
through multiplication
As the sequence makes clear, the legal framework implies that the central
bank starts the process of money creation, not the banks. Under this
traditional or orthodox model of banking, banks are depicted as
intermediaries of “loanable funds,” receiving funds in deposit from savers
and using these funds to make loans for borrowers. This view does not imply
that banks cannot take part in the process of money creation. Banks can and
do create money through fractional reserving. Under any fractional-reserve
system of banking, banks can use their balance sheet to expand the money
supply: banks record the full amount deposited by customers as an
accounting entry but keep in reserve just a fraction of the money received on
deposit, using the rest to fund loans that will generate new deposits.103
President Franklin D. Roosevelt eloquently described this model of
banking in his “fireside chat” of March 12, 1933, the first in a series of thirty
radio broadcasts delivered to the nation. In this speech, President Roosevelt
was trying to restore public confidence in the banking system after the 1929
crash:
First of all let me state the simple fact that when you deposit
money in a bank the bank does not put the money into a safe

101
See 12 U.S.C. § 25b (2018).
102
In this stylized model, central-bank money enters circulation through the
banking system. The central bank purchases securities from the banks and pays the
banks with central-bank money in the form of central-bank reserves. These central-
bank reserves are later transformed into currency (banknotes and coins) when
banks’ customers start making withdrawals.
103
On the process of fractional reserving and money multiplication, see CECCHETTI
& SCHOENHOLTZ, supra note 7, at 462–75.
2021] MONEY IN THE TWENTY-FIRST CENTURY 185

deposit vault. It invests your money in many different forms

of credit-bonds, commercial paper, mortgages and many
other kinds of loans. In other words, the bank puts your
money to work to keep the wheels of industry and of
agriculture turning around. A comparatively small part of
the money you put into the bank is kept in currency—an
amount which in normal times is wholly sufficient to cover
the cash needs of the average citizen. In other words the total
amount of all the currency in the country is only a small
fraction of the total deposits in all of the banks.104
This model based on the multiplication of central-bank money by banks
made sense in a commodity-money regime, in which the expansion of money
by the central bank depended on the supply of an underlying commodity, like
gold. Without the underlying commodity, no more central-bank money could
be created and put in circulation by the central bank. Fewer deposits, in turn,
were made with the banks, reducing banks’ capacity to multiply deposits and
create more money.105 When, however, money lost its mechanical connection
to a commodity and became pure fiat-money, a simple accounting entry on
the liabilities side of the central bank’s balance sheet was enough to create
more central-bank money. 106 The central bank did not have to back this
newly issued money with a commodity anymore. The chief constraint on the

104
Franklin D. Roosevelt, Fireside Chat 1: On the Banking Crisis (Radio broadcast
Mar. 12, 1933), https://millercenter.org/the-presidency/presidential-
speeches/march-12-1933-fireside-chat-1-banking-crisis https://perma.cc/HE83-
VA9J. Criticizing the model of banks as “intermediaries of loanable funds” and the
idea that “banks put our money to work,” see Robert Hockett & Saule Omarova,
The Finance Franchise, 102 CORNELL L. REV. 1143 (2017); Zoltan Jakab &
Michael Kumhof, Banks are not Intermediaries of Loanable Funds – And Why This
Matters (Bank of Eng,, Staff Working Paper No. 529, 2015),
https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2015/banks-
are-not-intermediaries-of-loanable-funds-and-why-this-
matters.pdf?la=en&hash=D6ACD5F0AC55064A95F295C5C290DA58AF4B03B5
[https://perma.cc/PLE8-6ZEC]; McLeay et al., Money Creation in the Modern
Economy, 54 BANK OF ENG. Q. BULL. 14 (2014),
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-
creation-in-the-modern-
economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654
[https://perma.cc/PLE8-6ZEC].
105
About the limitations imposed by commodity money on money creation and
monetary policy, see CHARLES GOODHART, THE EVOLUTION OF CENTRAL BANKS
5-6 (2d ed.1988)
106
See McLeay et al., supra note 104, at 15-16.
186 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

central bank’s capacity to issue money indefinitely came to be inflationary

pressure.107
2. Breaking the Legal Limits: Creating Deposits
Independently
In line with this increased monetary freedom for the central bank, banks
also could adjust their actions. Banks no longer had to wait for deposits to
come before making new loans. Banks could now create both at the same
time by making the loan (an asset on the banks’ balance sheet) and crediting
the borrower’s bank account with the sum equivalent to the amount lent (a
liability on the banks’ balance sheet). And as the central bank started focusing
on meeting the goal of price stability, the central bank would support the
increased liquidity banks created as long as the target for interest rates was
met.108 This process of money creation grew ever more common in the early
2000s, when price stability consolidated its position as the dominant concern
in central banking, and the inflation-targeting regime gained widespread
acceptance.109
The mechanics of this process of money creation led by banks is
straightforward. Typically, the central bank sets a target for the base interest
rate, which influences other interest rates in the economy and, in turn, the
spending decisions of households and corporations. The base interest rate is
the price banks have to pay in the interbank market to get additional central-
bank money, known as electronic reserves, or simply reserves. Reserves are
digitally issued by the central bank and used exclusively by banks to settle
transactions in the payments system with other banks, the central bank, and
the government. More lending operations create more bank deposits and, to
support these new deposits, banks need to get more central-bank money
(reserves) in the interbank market. With higher demand for reserves, their
price—the base interest rate—tends to go up, moving away from the target.
To avoid missing the target, the central bank uses open-market operations to
put more reserves in the interbank market at an interest rate closer to the

107
About the constraints inflationary pressure can put on the capacity of central
banks to issue money indefinitely, see Robert Hall & Ricardo Reis, Maintaining
Central-Bank Financial Stability under New-Style Central Banking (Nat’l Bureau
of Econ. Res., Working Paper No. 21173, 2015),
http://www.nber.org/papers/w21173 https://perma.cc/6ZNR-BQKW].
108
See Victoria Chick, The Current Banking Crisis in the UK: An Evolutionary
View, in FINANCIAL CRISES AND THE NATURE OF CAPITALIST MONEY: MUTUAL
DEVELOPMENTS FROM THE WORK OF GEOFFREY INGHAM 148, 151–58 (J. Pixley &
G. C. Harcourt eds., 2013).
109
The inflation-targeting regime, developed in the late 1990s, is the current policy
framework of choice. Under this framework, the central bank will make its
judgment based on the target for the overnight interbank interest rate (the nominal
base interest rate), which is set according to a specific target for inflation publicly
announced. See CECCHETTI & SCHOENHOLTZ, supra note 7, at 497–500.
2021] MONEY IN THE TWENTY-FIRST CENTURY 187

target, ultimately supporting the process of money creation started by the

banks.110
This process might have been facilitated, in the United States, by the
easing of monetary policy in the first half of the 2000s. Concerned with low
economic growth following the burst of the dot.com bubble and the 9/11
attacks, and alarmed by the Japanese deflationary experience, the Federal
Reserve lowered the target for interest rates and kept it low until late 2005.
The target went from 6.5% in January 2001 to the lowest point of 1% between
mid-2003 and mid-2004.111 With rates being so low, it was cheaper for banks
to eventually get from the central bank the support they needed to keep the
process of money creation going. For Stanford University economist John
Taylor, “[s]tarting in 2003-05, [the Fed] held interest rates too low for too
long and thereby encouraged excessive risk-taking and the housing boom.”112
The transition from commodity money to fiat money made the process
of money creation easier not only for the central bank but also for banks. And
although a growing amount of research in recent years has acknowledged the
monetary change,113 the banking law and traditional economic textbooks are
still stuck with the old model.114 In the context of a fiat-money regime, which
became prevalent after the end of the gold standard in the 1930s and is the

110
See JOSEPH HUBER, SOVEREIGN MONEY: BEYOND RESERVE BANKING 125
(2017).
111
See SIMON JOHNSON & JAMES KWAK, 13 BANKERS: THE WALL STREET
TAKEOVER AND THE NEXT FINANCIAL MELTDOWN 146–47 (2010); SEBASTIAN
MALLABY, THE MAN WHO KNEW: THE LIFE AND TIMES OF ALAN GREENSPAN 580–
82, 593–607, 632–45 (2016).
112
John Taylor, The Dangers of an Interventionist Fed. WALL ST. J. (Mar. 29,
2012),
http://www.wsj.com/articles/SB10001424052702303816504577307403971824094
[https://perma.cc/DHX8-2ADE]. In defense of the Federal Reserve’s monetary
policy of this period, see Ben Bernanke, Chairman, Bd. of Governors of the Fed.
Res. Sys., Speech at the Ann. Meeting of the Am. Econ. Ass’n: Monetary Policy
and the Housing Bubble (Jan. 3, 2010),
https://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm
[https://perma.cc/7NK2-ZQGM].
113
Acknowledging the power banks have to create money through lending, with no
need to rely on previous deposits, see Hockett & Omarova, supra note 104; HUBER,
supra note 110, at 57–64; Jakab & Kumhof, supra note 104; McLeay et al., supra
note 104; RICKS, supra note 40, at 52–62. An earlier voice about this process of
money creation by banks can be found in James Tobin, Commercial Banks as
Creators of “Money,” in BANKING AND MONETARY STUDIES 408 (D. Carson ed.,
1963).
114
Among traditional economic textbooks advancing the view that banks are
“intermediaries of loanable funds,” see LAURENCE BALL, MONEY, BANKING, AND
FINANCIAL MARKETS 317–24 (Craig Bleyer et al. eds.,2009); MISHKIN, supra note
25, at 354–66.
188 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

reality for most countries today,115 the sequence of money creation occurs in
reverse order relative to the orthodox model:
a potential borrower asks the bank for a loan → the bank
decides to lend → the bank makes the loan and credits the
account of the borrower with a deposit in the amount of the
loan → private creation of money occurs through
accounting → the borrower uses the new deposit to make a
payment for a customer of a different bank → the new
deposit enters circulation → the lender bank needs central-
bank money (reserves) to settle outstanding balances related
to the new deposit in circulation → central bank creates
reserves to meet the increased demand
But nowhere in the relevant law, as discussed above, appears any
authorization for banks to start the process of money creation, to “create” or
“issue” more deposits before receiving money from their customers—and
this is what is happening in the monetary system.116 In the United States, it
could be argued that “issuing” demand deposits before receiving central-
bank money could be included in the “incidental powers as shall be necessary
to carry on the business of banking,” as provided in Section 24, Seventh, of
Title 12 of the United States Code.117 No judicial or regulatory decision ever
went that far in extending banks’ “incidental powers,” though. In any case,
when the Supreme Court examined the power of banks to create money,
Justice Brennan acknowledged that “banks do not merely deal in but are
actually a source of, money and credit; when a bank makes a loan by crediting
the borrower's demand deposit account, it augments the Nation’s credit
supply.” But in footnote No. 4, at the end of this excerpt, Justice Brennan
added: “Such creation is not, to be sure, pure sleight of hand. A bank may
not make a loan without adequate reserves. Nevertheless, the element of bank
money creation is real.”118
3. Banks’ Dominance and the Powerless Central Bank
So, although the legal framework of the monetary system has not been
revised accordingly, banks changed the way they treat loans and deposits and,
as a consequence, the way money is created in the economy. And central
banks could not help but adjust accordingly. Instead of constraining the
banks’ actions from the start, the central bank reacts to the banks’ decisions,
assuming the role of a supporting character, not of the protagonist. Banks

115
Fiat-money regimes became prevalent after the end of the gold standard. The
gold standard was abandoned in the 1930s, and the fixed exchange-rate regime
based on the dollar and gold that emerged from Bretton Woods permanently ended
in 1973. See Redish, supra note 6, at 788–90.
116
In the present days, “it may be more accurate, or at least more useful, to say that
deposits are instruments that the bank issues.” RICKS, supra note 40, at 57.
117
12 U.S.C. § 24 (Seventh) (emphasis added).
118
United States v. Philadelphia Nat’l Bank, 374 U.S. 321, 326 n.4 (1963).
2021] MONEY IN THE TWENTY-FIRST CENTURY 189

begin the process of money creation, and the central bank uses its monetary
tools at the end of the process to keep the base interest rate on target and
attain price stability.
The central bank’s control, although deferred, is tighter during periods
of inflationary pressure, when prices in the economy are rising. In these
periods, the central bank must keep reserves at a low level so that their cost
remains high, thus dampening banks’ willingness to make new loans and
create deposits. The higher the cost for banks to get more reserves, the lower
the incentive banks have to lend, an arrangement that leads to less money
available and serves to curb inflation. But in times of stagnant economic
growth and stable or even falling prices, the central bank’s control over
money creation by banks loosens, and banks’ dominance becomes more
worrisome. As the central bank does not want reserves to be expensive,
which would translate into higher interest rates and less incentive to borrow
and spend, the central bank stands ready to provide banks with more reserves
whenever needed. By doing so, the central bank accommodates banks’
increasing creation of money, in the form of bank deposits, as a result of their
lending operations. Under this scenario, therefore, the risk of the central bank
getting too complacent and of banks abusing their monetary powers grow.
But even here, banks cannot create money without limits.
The first limitation for banks to create money comes from the demand of
their customers, since a weaker demand for loans leads to fewer opportunities
for banks to start the process of money creation. Banks also have to control
their lending activity to meet regulatory standards (like capital and liquidity
requirements) and manage risks, especially if banks want to stay competitive
and profitable. 119 Limitations on money creation by banks still exist.
However, they do not typically result from monetary constraints directly
imposed by the central bank but from banks’ business and legal strategies.
Let’s take a look at how we got to this point of banks dominating the
monetary system.
II. FLAWED BY DESIGN
Central banking has been evolving for more than 300 years. But it was
not until the first half of the 20th century that central banks consolidated what
today is their most problematic and perhaps most overlooked characteristic:
central banks have no direct relations with the public and economy at large.
The modern central bank depends on the banking system to perform all the
basic monetary functions, from getting currency into circulation to managing
the supply of money and, in the end, pursuing price stability. The banking
system, built over a payments system that connects the economy with the
centralized reserves held with the central bank, is the only channel the central
bank has to reach the real world and implement its policies.
Even when the central bank trades with non-bank institutions—

119
For a more detailed account of the limitations banks face in money creation, see
McLeay et al., supra note 104, at 17–21; Tobin, supra note 113, 412–18.
190 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

purchasing financial assets under a quantitative-easing program, for

example—all the related payments are processed within the banking system.
The problem appears because central banks only make payments to, and
receive payments from, banks that hold accounts with the central bank—the
reserve accounts, also known as master accounts in the United States.120 In
consequence, for every asset purchase the central bank makes in the economy
to implement policy, the related payment has to go through the banking
system. The central bank issues money in the form of electronic reserves to
the banks, and they in turn credit the bank account of the sellers with money
in the form of a deposit corresponding to the value of the assets transacted.121
The structure and operation of the monetary system thus help to explain
the prominence of the banking system and the difficulties the central bank
faces to limit banks’ dominance. Banks are the only monetary institutions in
the financial system, providing the economy with money (in the form of bank
deposits) and allowing this money to circulate through the processing of
payments.122 And, as monetary institutions, banks cannot simply fail. When
a bank fails, not only individuals and corporations but also non-bank
financial institutions, like pension funds and insurers, lose access to their
funds, in a process that can become systemic and bring the entire economy
to a halt.123 Without banks, people cannot withdraw cash, pay bills, transfer
funds, or even receive their wages and salaries.
From this perspective, modern central banking is in the banks’ hands—
not necessarily because of capture,124 but mostly because of design. Little,
though, can the government—the original master of the central bank—do to
prevent this situation from worsening, as the government allowed its old
financier to become too intertwined with the banking system. And for a good
reason: government borrowing has reached such a vast amount that only

120
Regulation J issued by the Board of Governors, for instance, defines reserve
account simply as “an account on the books of a Federal Reserve Bank” 12 C.F.R.
§ 210.2(a) (2017).
121
See John Barrdear & Michael Kumhof, The Macroeconomics of Central Bank
Issued Digital Currencies 12–13 (Bank of Eng., Staff Working Paper No. 605,
2016), https://www.bankofengland.co.uk/-/media/boe/files/working-
paper/2016/the-macroeconomics-of-central-bank-issued-digital-
currencies.pdf?la=en&hash=341B602838707E5D6FC26884588C912A721B1DC1
[https://perma.cc/9PVM-J8CN]; McLeay et al., supra note 104, at 24–25.
122
Developing the idea of banks as “monetary institutions,” see HUBER, supra note
110, at 64–67. See also Corrigan, supra note 61 (arguing that banks are “special”
among financial institutions).
123
See Ben Dyson & Graham Hodgson, Digital Cash: Why Central Banks Should
Start Issuing Electronic Money, POSITIVE MONEY 10-11 (2016),
http://positivemoney.org/wp-
content/uploads/2016/01/Digital_Cash_WebPrintReady_20160113.pdf
[https://perma.cc/Z2NJ-BKYM].
124
About capture in the relationship of the central bank with the banks, see
Lawrence Baxter, Capture in Financial Regulation: Can we Channel it Toward the
Common Good?, 21 CORNELL J.L. & PUB. POL’Y 175 (2011).
2021] MONEY IN THE TWENTY-FIRST CENTURY 191

banks, and “big banks” in particular, are capable of efficiently making a

market and creating liquidity for government debt.125 Quid pro quo has been
at the heart of central banking since its origins.126 To mitigate the effects of
this structural flaw of the monetary system leading to the near-impossibility
of bank failures, a legal and institutional framework based on lender of last
resort, deposit insurance, and extensive financial regulation had to be
developed.127 Design, therefore, matters. Design can be the decisive factor in
building monetary and financial stability. Understanding how and why the
monetary system reached the current predicament will help us explore the
possibilities of different monetary arrangements later on.
A. Deconstructing Central Banks

Central banks have evolved as servants of two masters. They have long
served as the government’s bank and the banker’s bank.128 This dual nature
has shaped the development of central banking over the years and is at the
core of the complex and controversial issues involving central banks: from
monetary financing to independence; from bailouts to quantitative easing;
from managing the money supply to facing monetary competition. The dual
nature has also influenced the institutional and legal framework governing
central banks, their actions, and their relations with the government and the
banks. Since their origins, central banks have functioned as a public-private
partnership trying to reconcile the needs of their two masters—not always
with positive outcomes.129
1. A Central Bank for the Government
Central banks started to appear in the late 17th and 18th centuries in
Europe mainly because of a political quid pro quo. The first central banks, in
Sweden and England, were private commercial banks that, in return for
helping to finance the government, received privileges and eventually
monopoly rights on issuing notes to be used as currency in the sovereign
territory. The favored bank granted the government a loan, especially during
wartime, and the notes issued as the representation of this loan were spent by
the government in the economy. Since these notes were not only redeemable

125
See Lawrence Baxter, Betting Big: Value, Caution and Accountability in an Era
of Large Banks and Complex Finance, 31 REV. BANKING & FIN. LAW 765, 818–21
(2011–2012).
126
Developing the idea that central banks, notably the Bank of England, appeared
because of a quid pro quo between the sovereign king and private bankers, see
MARTIN, supra note 43, at 117–21.
127
See Chick, supra note 108, at 149–51; Daniela Gabor & Jakob Vestergaard,
Towards a Theory of Shadow Money, INST. FOR NEW ECON. THINKING 4–9, 27
(2016),
https://www.ineteconomics.org/uploads/papers/Towards_Theory_Shadow_Money_
GV_INET.pdf.
128
See LASTRA, supra note 42, at 33, 45–52.
129
See MARTIN, supra note 43, at 117–18.
192 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

for gold coins at the issuer bank but accepted by the government as payment
for taxes, the notes circulated as money. People were willing to receive these
notes as payment because they knew other persons and, ultimately, the
government would also take the notes in exchange for goods and services or,
at least, to settle taxes.130
Although other banks could still issue banknotes to private customers,
representing deposits received or loans granted, the power to create the
official currency gave the favored bank a share in the profits of seigniorage.
Seigniorage represented the difference between the face value of the currency
issued, which could be used to acquire goods and services, and the cost of its
production.131 Because banknotes were then based on and convertible into
some quantity of gold or silver coins, the arrangement also allowed the
government to, through the favored bank, acquire more control over the
metallic reserves of the country.
This privileged position of a private bank as the banker to the government
and, later, as the monopolistic issuer of the official currency ended up having
a side effect: the other commercial banks increasingly turned to this favored
bank for holding their reserved assets, or simply “reserves,” the assets banks
kept available to face immediate demand. Commercial banks found the
favored bank to be not only a trustworthy guardian for their reserves but a
liquidity provider for difficult times. As the issuer of the sovereign money,
the favored bank would rediscount private promissory notes that the banks
held. By doing so, the favored bank was making the sovereign money
available to the other banks so that they could meet public demand and
financial obligations denominated in the official, and generally used, unit of
account. The role of bankers’ bank, therefore, came not because of a
deliberate or formal provision but because of a natural development rooted
in the historical characteristics of the banking system.132
2. The Problem of the Banks
Much before central banks began to monopolize the issue of banknotes,
a monopoly that crystalized only in the mid-19th century, commercial banks
had been issuing notes that could be used as means of payment. These notes
were issued in exchange for a deposit of metallic coins or as a sign of a loan
granted, which would otherwise require providing borrowers with coins for
the time of the lending operation. And the notes carried the promise of being
convertible on demand into the commodity that had been deposited or had
backed the amount loaned. But instead of being issued for the exclusive use

130
About the building of this close relationship between a favored bank and the
government, see CHRISTINE DESAN, MAKING MONEY: COIN, CURRENCY, AND THE
COMING OF CAPITALISM 361–62, 386–89 (2014).
131
On seigniorage, see CECCHETTI & SCHOENHOLTZ, supra note 7, at 397–98;
ROGOFF, supra note 73, at 80–81.
132
On the emergence of the first central banks, see DESAN, supra note 130, at 386–
89; GOODHART, supra note 105, at 4-5, 19–20, 122–28; MARTIN, supra note 43, at
238–39.
2021] MONEY IN THE TWENTY-FIRST CENTURY 193

of the depositor or the borrower, these notes were payable to the bearer,
creating a claim against the issuer bank that any person holding the note could
redeem.133 Banknotes were then interest-free promissory notes redeemable
on demand by the holder.134
These notes were, thus, used to make payments, serving as privately
issued paper money. As commercial relations spread geographically, notes
issued by commercial banks circulated more and were presented far from the
place the notes had been issued. In many cases, the counterparties receiving
these notes had little information about the issuer and were rarely able or
willing to travel to redeem the note directly at the issuing bank. 135 This
imperfect information about issuers of banknotes circulating widely in the
economy tended to have two big implications—and not only for the banks
receiving these notes but for the issuing banks as well.
On the one hand, this increased distance between the issuing bank and
the note holder could create incentives for over-issue. If the issuer expected
that few notes would be redeemed in the short or medium terms, the issuer
would be tempted to issue notes without having or retaining enough assets,
usually coins, to guarantee future convertibility. Over-issue could also result
from another lesson commercial banks had learned from their long
experience in financial intermediation. Banks noticed that depositors and
bearers would seldom come all at the same time to redeem the banknotes for
the underlying commodity. So, after a reasonable pool of deposited assets of
the same sort had been formed, banks could attempt a new trick: they could
use the idle pool of assets in more productive and profitable ways, namely to
back banknotes issued with new loans. Banks no longer had to rely only on
their capital to originate loans. After all, it was cheaper and easier for the
banks to “multiply” deposits and transfer banknotes to borrowers when
making loans than to accumulate scarce gold coins that could then be lent
and made physically available to borrowers.136
This ingenious method, which provided the base for fractional-reserve
banking, enhanced banks’ returns because of the multiple uses of the
deposited assets. And this method received legal support once courts
recognized, notably in early 19th-century England, that the assets deposited
were property not of the depositor but of the banks. Banks could then use the
deposited assets freely, since their legal obligation was to return the same
amount of assets—but not the same assets—on demand. The method,
however, also set the stage for runs if ill-designed—too many loans
originated or non-performing, for example—or if a confidence crisis

133
See CALOMIRIS & HABER, supra note 92, at 72.
134
See DESAN, supra note 130, at 394–97; GOODHART, supra note 105, at 30;
HUBER, supra note 110, at 15–18.
135
See Gary Gorton, Pricing Free Bank Notes, 44 J. MONETARY ECON. 33, 34–37
(1999).
136
About the “efficiency logic for economizing on [scarce] money,” see James
Buchanan, The Constitutionalization of Money, 30 CATO J. 251, 255–56 (2010).
194 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

motivated a surge of withdrawals.137

On the other hand, the banks dealing with notes issued by distant and
unfamiliar banks had incentives to form or join an interbank association.138
A bank could try to identify all the other banks with which it would exchange
notes, open a correspondent account in each of these banks, and keep some
money deposited in this type of account for future settlements. The other
banks would do the same, opening correspondent accounts with the soliciting
bank. This solution, however, would be too costly, as it would have high
transaction costs and require that considerable amounts of money remained
idly deposited in the accounts of correspondent banks for long. The
alternative offered by the interbank association was more appealing.
In the interbank association, banks were required to deposit in one or a
few trustworthy major banks some amount of the assets they kept available
to be immediately redeemed. With a centralized pool of reserved assets, the
major banks could act as central correspondents and clearinghouses.139 The
central commercial banks would then have enough scale and resources to
amass information even about distant issuers. These banks were thus able to
redeem, net out, or even discount—usually with a haircut depending on the
issuer’s location and credibility140—the different notes that the association
members held. These central commercial banks also provided information
about their members and ensured that the amount of assets held by each
member was proportionate to the volume of the member’s transactions,
avoiding settlement problems.141 Central banking thus started to take form
and, in its origins, was represented by big commercial banks acting like
central clearinghouses.
With the flow of payments increasingly channeled to the interbank
association and finally settled through the banks’ accounts with a central
commercial bank, an internal market for reserves was created. At the end of
each day, some banks would need more reserves to meet settlement demands,
and some would be willing to offer their excess reserves for a profit. As
members of the interbank association had notes against each other, balances
could be netted out at some point before reserves were exchanged, and
reserves could be kept only as a fraction of the total volume of daily
transactions. The emergence of a full-reserve system was thus forgone in
favor of banks’ resolve to allocate liquidity more efficiently and profitably.
More than that, by creating this rudimentary payments system and enforcing
an early form of reserve requirements, central commercial banks were

137
For an overview of the English courts’ landmark decisions in the 19th century
that favored fractional-reserve banking, see DESAN, supra note 130, at 389–94.
138
See GOODHART, supra note 105, at 69–75.
139
Id. at 31–37.
140
As Gary Gorton remarks, the farther the note was from where it had been issued,
the greater tended to be the haircut to discount the note, especially because of the
costs and risks involved in redeeming the note directly with the issuer. See Gorton,
supra note 135, at 39, 45–50.
141
See GOODHART, supra note 105, at 34–37; Gorton, supra note 135, at 34–36.
2021] MONEY IN THE TWENTY-FIRST CENTURY 195

building protection against over-issue that would be useful centuries later for
central banks when managing money.142
Commercial banks have, therefore, shown a historical tendency to
centralize a part of their reserved assets in the vaults of one or a few bigger
banks. The goal of these banks was to make interbank transactions more
efficient and less costly or risky for all of them. When a favored bank later
appeared as the government’s bank and monopolistic note issuer, commercial
banks realized that this powerful bank could offer a better solution for their
historical needs. Banks would prefer to centralize their reserves with this
favored bank, which was no longer a competitor given its close relationship
with the government, not with the other commercial banks, all of them
competing for the same customers and opportunities. So, from the banks’
perspective, the rise of the central bank was not seen as an undesirable
intervention from the government but as a welcome remedy for the troubles
within the interbank association.143
3. A Central Bank for the Banks
But why exactly was a favored bank, with close ties to the government,
held in such high regard by the commercial banks of the late 17th and 18th
centuries? The then big commercial banks that held reserves for other banks
already performed a central-bank-like role, especially when clearing
transactions and providing short-term liquidity. These big banks, however,
were also competing and profit-maximizing banks, features that created
conflicts of interest. The more reserves other banks placed with one
commercial bank, the more powerful the bank acting as a central bank would
become. The central commercial bank would, therefore, be ever more
competitive and profitable at the expense of the other members of the
association.144
This arrangement could also create perverse incentives in times of crisis.
The bank or banks controlling the centralized reserves could see a crisis as
an opportunity for forcing troubled competitors out of the market instead of
providing them with liquidity assistance. All the other member banks would,
in turn, try to keep deposited with the central commercial banks as few
reserves as they could. Not only would member banks want to save some
reserves for themselves if they were not to find financial help within the
association, but they would also want to limit their losses if another member
bank had to be rescued. Distrust would, thus, jeopardize the operation and
even the purpose of the interbank association. Creating constraints on
banking behavior would be the best option to control these perverse
incentives. But then again, banks would have to trust a competitor, possibly
one of the biggest and most influential banks, to regulate and supervise them.

142
About the making of the payments system, see THOMAS CONWAY JR. & ERNEST
MINOR PATTERSON, THE OPERATION OF THE NEW BANK ACT 282–89, 323–27
(1914); GOODHART, supra note 105, at 31–37.
143
This view is promoted and developed by GOODHART, supra note 105.
144
Id. at 37–39.
196 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

The initial model of central banking based on private clearinghouses

managed by the big banks was not working.145
It was only when the government-connected commercial bank appeared,
and particularly when this favored private bank evolved into a governmental
institution apart from the banking system, that the conflict of interests among
commercial banks could be solved. Commercial banks finally had the
opportunity to take part in a network that revolved around a powerful yet
noncompeting, non-profit-maximizing bank. This model of a separate and
noncompeting central bank seemed to offer such a reasonable solution that,
in the 20th century, most countries were creating their central banks as
government institutions—in contrast to the first central banks, like the
Swedish Riksbank or the Bank of England, which were private banks turned
into central banks and only later made into government institutions.146
The process of creating the central bank from scratch occurred even in
countries where a major commercial bank had performed central-bank-like
functions, such as the Imperial Bank of India or the Banco do Brasil. The
goal was to avoid making an existing commercial bank even more powerful,
a situation that would only aggravate the conflict of interests usually present
in banking networks. 147 Section 19(e) of the Federal Reserve Act, for
instance, restricted the ability of member banks to keep deposits with and to
make discounts for non-member banks after the creation of the Federal
Reserve System in 1913.148 The provision aimed to invigorate the recently
created Reserve Banks by ending with the practice of big commercial banks,
notably from New York City, acting as central clearinghouses for smaller
banks across the country.149 By the 1940s, most central banks, even those that
started as private institutions, were operating under state ownership or
control, as government institutions. Central banks also stopped dealing
directly with the public, a vestige of the private origin of many, to focus on
being bankers only for the banking system.150
For the central bank, assuming the unintended role of bankers’ bank

145
For more on the American reality, see CONWAY JR. & PATTERSON, supra note
142, at 4–17, 202–07, 282–89. For a European perspective, see GOODHART, supra
note 105, at 38, 43–44, 53–55.
146
Both the Riksbank of Sweden and the Bank of England were founded in the late
17th century as private institutions and only acquired governmental status either in
the transition from the 19th to the 20th century, the Riksbank, or in the mid-20th
century, the Bank of England. See GOODHART, supra note 105, at 104, 122–28;
KING, supra note 24, at 159–60.
147
See GOODHART, supra note 105, at 9, 35–36, 104.
148
See 12 U.S.C. § 374 (2018).
149
See CONWAY JR. & PATTERSON, supra note 142, at 282–89 (on how New York
City big banks acted as central banks for banks all over the country before the
creation of the Federal Reserve System).
150
Contrasting the reality of the newly created Federal Reserve System, based on
little direct interaction with the public, with the practice then adopted by leading
European central banks, dealing with all classes of people and institutions, see
CONWAY JR. & PATTERSON, supra note 142, at 171–72.
2021] MONEY IN THE TWENTY-FIRST CENTURY 197

brought more risks and responsibilities, but this role also contributed to
furthering a welcome synergy. As the bankers’ bank, the central bank was
put in the middle of the banking system, holding reserves from different
commercial banks and facilitating payments, clearing, and settlement. In this
position, the central bank was exposed to the banks’ troubles and even to
potential failures, as banks would rely on the central bank for liquidity
provision. Central banks, thus, had to get involved in the regulation and
supervision of the banking system to avoid that the provision of liquidity
turned into a blanket protection against reckless risk-taking. But the role of
bankers’ bank also created the possibility for the central bank to strengthen
the relations between its two masters. Sovereigns have always relied on
banks—state-controlled or private—for funding, and bankers have long seen
sovereigns as less risky borrowers.151 By the end of the 19th century, central
banking was consolidated as a public-private partnership, serving both the
government and the banks’ needs.
4. A Model for Central Banking
Modern central banking was, therefore, built over three core features,
which had been shaped by the historical experience of the Bank of England
since its foundation in 1694. First, a favored bank becomes the government’s
bank, managing the government’s debt and fiscal affairs, and, in
consequence, receives the monopoly on issuing the sovereign currency.
Second, and mostly because of the first characteristic, commercial banks trust
this favored bank to hold the reserved assets they traditionally keep to face
immediate demand and make interbank transactions easier and safer. The
favored bank, holding the centralized reserves, turns into the banker’s bank,
acting as a manager and a liquidity provider of last resort for the banking
system. And third, consolidating its position as a noncompetitive, non-profit-
maximizing bank among banks, the central bank emerges as a government
institution that does not establish direct relations with the public. Central
banks would only reach the economy and its actors through the commercial
banks—this often-overlooked feature is crucial to understanding the
dominance of banks in the modern monetary system.152
5. Away from the Government—and Closer to Banks
The initial feature of central banks—to act as government’s bank—soon
lost its appeal, as the dramatic episodes of hyperinflation following World
War I provided strong evidence against central banks getting too close to the
government. 153 This view led to the outright prohibition on monetary
financing of governments, a statutory limitation enacted in many countries

151
On the long-standing relationship between sovereigns and banks, see
GOODHART, supra note 105, at 7–8, 48–49.
152
About the three core features of central banking and how they developed over
time, see DESAN, supra note 130, at 360–421; GOODHART, supra note 105.
153
See BALL, supra note 114, at 422–25; KING, supra note 24, at 68–71.
198 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

since the 1930s.154 In the 1970s, after President Nixon severed the final link
of the dollar to gold, completing the transition from commodity money to fiat
money, the process of money creation and the implementation of economic
policies aimed at stimulating growth were made easier. The combination of
this new reality with the oil crises of 1973 and 1979 caused inflation to run
out of control, reinforcing the idea that politicians should not have excessive
power over money matters. As a consequence, the effort to make central
banks independent from the government and insulated from political pressure
gained widespread acceptance in the 1990s.155 By the end of the 20th century,
central banks’ close ties with the government had loosened.
In the United States, the statutory limitation on monetary financing was
originally imposed in 1935 by Section 206(a) of the Banking Act. The
limitation was relaxed in 1942 during the war period and only became
effective again in 1981, upon the termination of the final exemption period
set in the 1979 Amendment. 156 Today, the statutory limitation appears in
Section 14(2)(b) of the Federal Reserve Act. The Federal Reserve Banks are
allowed to buy and sell government and agency securities, but only in the
open market.157 “In the open market” means that the Reserve Banks have to
use the secondary market to buy or sell government securities instead of
transacting directly with the Treasury. Direct transactions should be avoided
to prevent the central bank from issuing money to finance government needs
with no consideration for holding deficit or inflation in check.158 This idea is
also present in Article 123(1) of the Treaty on the Functioning of the
European Union. This Article expressly prohibits the European Central Bank
and the national central banks of the euro area from purchasing debt
instruments directly from the government or other public authorities.
Meanwhile, the relations of the central bank with the banks, a feature that
had initially been all but accidental, grew stronger.159 As central banks had
not established relations with the public, the only way central banks had to
control the supply of money in the economy—therefore stimulating or
constraining spending and growth—was through an intermediary. And the
banking system was the sole intermediary that interacted both with the

154
See Manuel Monteagudo, Neutrality of Money and Central Bank Independence,
in INTERNATIONAL MONETARY AND FINANCIAL LAW: THE GLOBAL CRISIS 484
(Mario Giovanoli & Diego Devos eds., 2010).
155
For an overview of the origins and evolution of central-bank independence, see
Stanley Fischer, Vice Chairman, Bd. of Governors of the Fed. Res. Sys., Herbert
Stein Memorial Lecture at the Nat’l Econ. Club: Central Bank Independence (Nov.
4, 2015).
156
See Act of June 8, 1979, Pub. L. No. 96-18, § 3(a), 93 Stat. 3. On the legislative
history of the provision and how it changed over time, see Kenneth Garbade,
Direct purchases of U.S. Treasury Securities by Federal Reserve Banks (Fed. Res.
Bank of N.Y., Staff Reports, No. 684, 2014), https://www.newyorkfed.org
/medialibrary/media/research/staff_reports/sr684.pdf.
157
See 12 U.S.C. § 355 (2018).
158
About the meaning of “open market,” see MISHKIN, supra note 25, at 381–83.
159
See Chick, supra note 108, at 150–53.
2021] MONEY IN THE TWENTY-FIRST CENTURY 199

general public, providing financial services and processing payments, and

with the central bank, through the payments system and the centralized
reserves. As a consequence, banks have since been deeply involved in the
process of money supply and management, and the banking system is the
only bridge between the central bank and the economy.160
The end of the gold standard and the rise of fiat money also helped to
strengthen central banks’ connections with banks. Money would no longer
be exchangeable for any metal. It would be pure fiat money, an abstraction
that could be issued at will with few constraints.161 For the central bank, this
transition meant first and foremost that the complexity of monetary policy
was about to increase. Under a commodity standard, the money supply was
determined by the production of the convertible commodity, usually gold,
and the opportunity for monetary discretion or management was hardly
available.162 With a fiat-money regime, in contrast, the supply of money was
not controlled by the mining industry anymore. Central banks had to find
ways to achieve the right level of money growth by themselves, without any
external or rigid determination. The time to explore the possibilities of the
old monetary system built around centralized reserves and an integrated
payments system had arrived—and the assistance of the banks and, in turn,
their prominence would prove unavoidable.
B. The Neglected Payments System
With the rise of fiat money, the monetary powers of the central bank
increased, but the use of these powers got more complex. Since money was
not convertible into a commodity any longer, the central bank could freely
create any amount of money with a simple accounting entry on the liabilities
side of its balance sheet.163 The problem was to determine how much money
should be created based on market participants’ demand. Supplying too much
money could lead to escalating inflation, whereas excessively controlling the
money supply could compress economic growth to the point of deflation. But
how could the central bank know the need and demand of market participants

160
See BD. OF GOVERNORS OF THE FED. RES. SYS., THE FEDERAL RESERVE
SYSTEM: PURPOSES & FUNCTIONS 4–5, 17, 38–50 (10th ed. 2016),
https://doi.org/10.17016/0199-9729.10 [https://perma.cc/2TNE-8Y6R].
161
About the monetary revolution brought by the end of the gold standard, see John
Exter, Future of Gold and the International Monetary System, XIII ECON. EDUC.
BULL. 1 (1973), https://www.aier.org/research/future-of-gold-and-the-international-
monetary-system/ [https://perma.cc/4RGD-C7MA]; Redish, supra note 6, at 788–
90.
162
Despite its formal rigidity and objectivity, with the fixed money supply not
allowing much room for discretion or management, the gold standard could still be
subject to turnabouts. To wit, the gold standard was repeatedly suspended by
countries during wartime, when, because of increased public expenditure and
inflationary pressure, it was impossible to keep the promise of converting notes
into gold at the announced fixed exchange rate. See DESAN, supra note 130, at 16–
20; KING, supra note 24, at 75–77.
163
See McLeay et al., supra note 104, at 15–16.
200 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

if the central bank interacted solely with the government and the banks? By
using the structure of the existing payments system to manage the flow of
information and money, with banks serving as conduits between market
participants and the central bank. The payments system commercial banks
had developed to clear transactions among them and prevent settlement
failures would now turn into the central bank’s primary tool to manage the
supply of money in a fiat-money regime.
Recall that “money,” in its narrow sense of a generally accepted
instrument to make payments and settle debt, appears in the economy in one
of two forms: the physical currency issued by the central bank (cash) or
balances deposited in current accounts with banks (bank deposits).164 Every
household, corporation, or government institution that opts for the sovereign
currency in their economic transactions will use banknotes and coins or bank
deposits to make their payments.165 As the central bank issues banknotes and
coins, it can more easily control the availability of these types of money and
make the required adjustments.
Bank deposits, on the other hand, are under the exclusive command of
banks, which can create more deposits through the multiplication process or
through lending operations. And bank deposits are the type of money most
used by households and companies to make payments in the more developed
monetary systems. In the United States, the estimated number of non-cash
payments—ultimately involving the transfer of bank deposits—amounted to
174.2 billion transactions in 2018, with a total value of $97 trillion, excluding
wire transfers. 166 More than 477 million retail non-cash payments, on
average, were thus processed daily in 2018 in the American payments
system. Also in 2018, cash withdrawals at depository institutions—here used
as a rough sign of the circulation of central-bank-created money—amounted
to $800 billion, as a result of 5.1 billion operations.167 Every time a non-cash
payment is made, money in the form of bank deposits circulates in the

164
See id.
165
In the United States, investors have also been able to use “checkable” money-
market mutual fund (MMMF) accounts to make payments. But the terminology is
misleading. Unlike a regular check, an MMMF account “check” does not represent
a direct drawing on balances kept in the MMMF account that can be immediately
transferred to another account. Instead, a check from an MMMF account involves
“a dual order to the fund’s manager to sell a specified portion of the shareowner’s
asset holdings and then to transfer the monetary proceeds to a third party named on
the check.” JOSEPH SALERNO, MONEY, SOUND AND UNSOUND 124 (2010). And this
transfer is made with the use of bank deposits, credited by the fund’s manager to
the current account of the third party. So, a “checkable” MMMF account is not a
separate means of payment but a platform that eventually leads to the use of bank
deposits as a means of payment.
166
See data from BD. OF GOVERNORS OF THE FED. RES. SYS., THE 2019 FEDERAL
RESERVE PAYMENTS STUDY (2020),
https://www.federalreserve.gov/paymentsystems/fr-payments-study.htm.
[https://perma.cc/8GSE-YD4N].
167
See id.
2021] MONEY IN THE TWENTY-FIRST CENTURY 201

economy, and the central bank has no direct control or information about it.
But the central bank has the payments system.
It is with the payments system that the central bank gets a grip on what
banks are doing regarding money creation and circulation, in the form of
bank deposits. First, the central bank can only gather information about the
volume of money banks are transacting if the transfers of bank deposits are
finally settled in the reserve accounts banks keep with the central bank.168
Second, the central bank can only exert some control over the volume of
money banks are transacting if the final settlement of all transfers of bank
deposits is made using electronic reserves. As electronic reserves are a type
of money that only the central bank can issue, the central bank can limit
banks’ capacity to create and exchange more money (bank deposits) by
limiting the amount of electronic reserves available to banks.169
The reserve accounts banks keep with the central bank and their balances
of electronic reserves are thus vital for the payments system’s operation and
for the central bank to manage the monetary system. Before digging deeper
into the payments system’s workings, let’s first set forth the current meaning
of “reserves” and why they are relevant. In the context of a fiat-money
regime, the concept of “reserves” acquires a new significance. “Reserves”
are no longer a fraction of the physical currency, normally gold or silver
coins, banks received in deposit from their customers, as happened when
money was convertible into a commodity and could be redeemed. Nor are
“reserves” some quantity of metal, like gold bars, kept in vaults to back the
paper money issued.
“Reserves” are instead the amount of central-bank money that banks hold
to face immediate demand from their customers or regulatory requirements.
“Reserves” are thus represented by the two types of central-bank money,
which in turn constitute two different assets for commercial banks: the
currency (banknotes and coins) banks keep available in their vaults and cash
dispensers or ATMs;170 and the electronic reserves banks have deposited in
their reserve accounts with the central bank not only to meet reserve
requirements—in the jurisdictions that still enforce reserve

168
In fact, banks and other depository institutions are required to maintain reserve
accounts with the central bank under Section 19 of the Federal Reserve Act, 12
U.S.C. § 461 (2018). For simplicity, I use “bank” for “depository institutions” in
the text.
169
For more on the “central bank as a monopoly supplier (and withdrawer) of
reserves” and its implications, see Benjamin M. Friedman, The Future of Monetary
Policy: The Central Bank as an Army with Only a Signal Corps?, 2 INT’L FIN. 321,
323–26 (1999).
170
See Todd Keister & James McAndrews, Why are Banks Holding so Many
Excess Reserves?, 15 CURRENT ISSUES IN ECON. & FIN. 1, 1 (2009),
https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci15-
8.pdf.
202 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

requirements 171 —but especially to settle transactions in the payments

system.172
More than that, “reserves,” and electronic reserves in particular, are not
simply an asset that banks deposit and keep with the central bank. “Reserves”
are, in fact, a dynamic monetary instrument, traded not only among banks
but also between banks and the central bank, which can always issue more
“reserves,” if need be. As the statutory language of Section 19(f) of the
Federal Reserve Act makes clear, “[t]he required balance [of reserves]
carried by a member bank with a Federal Reserve Bank may . . . be checked
against and withdrawn by such member bank for the purpose of meeting
existing liabilities.”173
Because “reserves,” on the other hand, are a bank’s asset, they are not
meant to absorb losses the bank may face in the value of its assets—“capital,”
which represents shareholders’ equity in the bank, is used to that end.
Holding more “reserves,” therefore, does not increase the amount of bank’s
capital or help the bank to comply with capital requirements. On the contrary.
As assets appear in the denominator of capital ratios (the required amount of
bank’s capital divided by its assets, risk-weighted or not), holding reserves
in excess increases the volume of assets and may, in turn, require the bank to
raise more equity to meet capital requirements.174 Holding more “reserves,”
however, does contribute to enhancing the short-term liquidity position of the
bank, as “reserves” are a type of money in the narrow sense of liquidity or an
instrument to make payments and settle debt—although only among banks
and with the central bank.
The focus here is on electronic reserves, this unique type of money issued
by the central bank and used in its transactions with the banking system that,
contrary to currency, is not available to the public. Electronic reserves exist
solely in digital form and never appear in the economy in their original form.
Banks can only move reserve balances from their accounts with the central
bank to the economy by converting electronic reserves into currency, as
electronic reserves can always be exchanged for currency at exact parity.175
And the focus is on electronic reserves because their connection with bank

171
For a comparative overview of how reserve requirements are used in different
countries, see Simon Gray, Central Bank Balances and Reserve Requirements
(IMF Working Paper No. 11/36, 2011),
https://www.imf.org/external/pubs/ft/wp/2011/wp1136.pdf.
172
See Friedman, supra note 169, at 332; McLeay et al., supra note 104, at 16.
173
12 U.S.C. § 464 (2018).
174
For more on how excess reserves can complicate banks’ balance-sheet
management in the longer run, see Peter Stella, Exiting Well, at 13–18 (Dec. 31,
2015), https://8b1fe6ec-20e9-4128-8a79-
c598c4f073fb.filesusr.com/ugd/c55963_a16ab2e069304431b5530e579bea8347.pdf
.
175
About electronic reserves and their uses and limitations, see Keister &
McAndrews, supra note 170, at 5–8; McLeay et al., supra note 104, at 16–18.
2021] MONEY IN THE TWENTY-FIRST CENTURY 203

deposits reveals the operating structure of the monetary system and the roots
of the central bank’s dependence on the banking system.
Two features of the payments system are crucial for the central bank to
follow how much money is circulating in the economy and, based on the
objectives set in monetary policy, react accordingly. First, the flow of bank
deposits in the payments system is tied to the electronic reserves banks keep
in their reserve accounts with the central bank. And second, all payments are
required to be finally settled in these reserve accounts. 176 Under this
structure, the central bank can increase or reduce the amount of electronic
reserves available for banks when settling the transactions among
themselves, thus expanding or constraining banks’ capacity to process more
payments—which, in the end, means banks’ capacity to create more money
in the form of bank deposits. A closer look at the payments system’s
mechanics will help elucidate this intimate relationship of electronic reserves
with bank deposits and, ultimately, of the central bank with the banking
system.
1. The Mechanics of the Payments System
For all transfers of funds involving the sovereign currency that are made
without the use of banknotes or coins—or simply, a non-cash payment—the
payments system comes into play. However different the beginning of a non-
cash payment is (a debit or credit card, a wire transfer, PayPal, Apple Pay),
the related payment will eventually be processed through a bank network and
settled at the central bank.177
Some payments systems work with the individual processing of each
payment in real time within the central bank, transaction by transaction—the
Real-Time Gross Settlement or RTGS systems. RTGS systems require banks
to hold more liquidity, in the form of electronic reserves, throughout the day
so that credit risk is reduced. By contrast, other systems allow payment
transactions to be processed in batches and settlements to be made with
multilateral netting—the Deferred Net Settlement or DNS systems—
although the final settlement will still be made at the central bank. Here,
banks can operate with less liquidity since they will exchange electronic
reserves less often and only for the net value of the transactions, but credit
risk is higher. 178 Most payments systems today are hybrid, though. Even
RTGS systems count with multilateral netting mechanisms for saving
liquidity, and many of them have the central bank providing intraday
liquidity to facilitate payments processing at times of increased movement.179

176
See Corrigan, supra note 61.
177
Describing these payments innovations as “new technologies running on old
rails” since they offer a new interface but are processed like all the other non-cash
payment methods, see MICHAEL BARR ET AL., FINANCIAL REGULATION: LAW AND
POLICY 823–25 (2d ed. 2018).
178
For more on the different types of payments systems that exist today and their
basic characteristics, see Geva, supra note 33, at 513–17.
179
See id. at 515.
204 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

In its essence, every non-cash payment involving customers who bank

with different institutions leads to a transfer between banks’ current accounts,
reducing the balance of the payer’s bank account and increasing the balance
of the payee’s bank account by the same amount. The payment will thus take
place with no immediate flow of physical currency; only the balance sheets
of the banks involved in the transaction and the balance of the accounts of
the payer and the payee will be affected.180 For banks, however, the transfer
of money in the form of bank deposits is not finished when their customers’
accounts (payer and payee) are debited and credit—unless both payer and
payee are customers of the same bank, in which case the process ends with
this first step since it only requires accounting records reflecting the balance
changes of the two current accounts affected.
After that stage, the banks of the payer and of the payee have to clear and
settle the transfer of funds between them. As bank deposits are liabilities,
when a bank transfers balances to another bank through the payments system,
the transferring bank also has to transfer a corresponding asset. And this asset
is money in the form of electronic reserves banks keep in their reserve
accounts with the central bank.181 Two different yet interconnected structures
work every time a non-cash payment is processed between different banks:
first, the structure of bank accounts held by banks’ clients, in which bank
deposits are transferred; and second, the structure of reserve accounts held
by banks with the central bank, in which electronic reserves are
transferred.182
The simultaneous transfer of the liability with an asset is necessary
because of the double-entry accounting system. In this system, widely
adopted in the governmental, corporate, and financial sectors, every change
in one account of the balance sheet (like one of the liability accounts) must
be matched by a corresponding change in another account (like one of the
asset accounts). The ultimate goal is to keep all the accounts in balance so
that errors can be easily identified, since they will inevitably create a flaw in
the basic accounting equation, which should always remain true: assets =
liabilities + equity.183 Financial institutions in the United States, for instance,
are statutorily required to prepare their financial statements based on the
Generally Accepted Accounting Principles (GAAP), which follow the
double-entry system.184 Most other countries use the International Financial

180
See Eugene Fama, Banking in the Theory of Finance, 6 J. MONETARY ECON. 39,
42–43 (1980).
181
See McLeay et al., supra note 104, at 18–19.
182
See HUBER, supra note 110, at 57–59.
183
About the double-entry bookkeeping system and, in particular, its relevance for
the origin and operation of banks, see ALVARO CENCINI & SERGIO ROSSI,
ECONOMIC AND FINANCIAL CRISES: A NEW MACROECONOMIC ANALYSIS 19–20,
25–37 (2015).
184
See, e.g., 12 U.S.C. § 1463(b)(2)(A) (2018) (mandatory use of GAAP by
savings associations); 12 U.S.C. § 1831n(a)(2)(A) (2018) (mandatory use of GAAP
by “all insured depository institutions”).
2021] MONEY IN THE TWENTY-FIRST CENTURY 205

Reporting Standards (IFRS) as their preferred accounting standard, which

also adopts the double-entry system.185
So, the more money—in the form of bank deposits, the liability—a bank
transfers to other banks because of orders received from its customers, the
more money—in the form of electronic reserves, the asset—the transferring
bank will need to send to the other banks, settling all transactions within the
reserve accounts at the central bank.186 This process linking bank deposits
and electronic reserves is what allows central banks to keep track of what is
happening in the economy. Since this process creates demand for electronic
reserves, the central bank, as their monopolistic issuer, can set the total
amount of reserves available to the banking system. By setting the total
amount available, the central bank influences the price of electronic reserves,
which matters because it is the base cost of money. This cost determines the
value of the short-term interest rate that, in turn, affects all other interest rates
in the economy—basically, the price of money.187 Banks’ cost to get more
electronic reserves when needed is, thus, the fundamental element the central
bank relies on to assess and influence the monetary reality.
2. The Cost of Electronic Reserves and its Significance
But how does the central bank influence the formation of the price of
electronic reserves in the interbank market? The answer to this question will
reveal how fragile the central bank’s capacity currently is to implement
monetary policy. With the flow of payments affecting the balance of reserve
accounts kept with the central bank, some banks may need more electronic
reserves to meet settlement or regulatory demands, while others may want to
offer electronic reserves in excess. As in any borrowing transaction, the
counterparty lending electronic reserves will charge the borrower a premium.
Electronic reserves are then traded among banks at a cost, the “overnight
interbank rate,” which in the United States is known as the “federal funds
rate.” 188 This rate represents the interest rate banks charge when making
overnight uncollateralized loans of reserves to each other.189 Because banks
are the main providers of money and tend not to make loans at a rate lower
than the rate they could charge or would have to pay for electronic reserves,

185
On the IFRS accounting standard, see Martin Hoogendoorn, International
Accounting Regulation and IFRS Implementation in Europe and Beyond –
Experiences with First-time Adoption in Europe, 3 ACCT. IN EUR. 23 (2006),
https://doi.org/10.1080/09638180600920087.
186
See McLeay et al., supra note 104, at 18–19.
187
On the connection between bank deposits and electronic reserves in the
payments system and how the central bank uses this connection to implement
policy, see id. at 18–21.
188
On the federal funds rate, see, for example, CECCHETTI & SCHOENHOLTZ, supra
note 7, at 482–90.
189
See id. at 430–34.
206 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

banks’ base cost affects all other interest rates in the economy.190
In a stylized situation, a bank will consider two aspects: the return rate
of new loans to the public and the cost to finally settle transactions in the
interbank market. New loans create a corresponding amount of bank deposits
that may eventually be transferred through the payments system when the
borrower makes a payment. And when the borrower transfers bank deposits
from the lending bank to someone that keeps an account with another bank,
this transaction requires an interbank settlement inside the central bank with
electronic reserves. As all banks are taking part in this process of granting
loans and creating deposits, bank deposits are in a constant two-way flow
among banks inside the payments system. This arrangement allows banks to
exchange electronic reserves based on the net effect of the two-way flow,
instead of continuously transferring electronic reserves in the same amount
of the bank deposits transferred—even in RTGS systems.191 “Normally, if a
loan of £100 is issued, a bank will know that in net, it only needs to pay a
fraction of that amount in reserves to other banks.”192
A bank, therefore, sends electronic reserves when it creates more bank
deposits than it receives from other banks and receives reserves when it
creates fewer bank deposits relative to the other banks. Electronic reserves,
in turn, have a cost to be borrowed in the interbank market. This cost is borne
by the banks originating more loans and related bank deposits, since these
banks will need more electronic reserves to settle transactions within the
central bank. So, if the return on originating new loans is lower than the cost
of borrowing additional electronic reserves to finally settle the bank deposits
created with these loans, banks will have no incentive to make the loans in
the first place.
The central bank, on the other hand, following the trades happening in
the interbank market for reserves, will manage the total level of reserves
available to regulate their cost. To that end, the central bank will use different
techniques, from reserve requirements and a base discount rate to open-
market operations, which has been the predominant monetary tool in most
developed and developing markets.193 In open-market operations, the central

190
See McLeay et al., supra note 104, at 15, 20–21. Highlighting that loans of
electronic reserves in the interbank market are “generally titanic, short-term, and
uncollateralized—except when a financial crisis exists or is looming,” see CENCINI
& ROSSI, supra note 183, at 239.
191
“Over the years, distinctions [between DNS and RTGS systems] have been
blurred and hybrid systems have emerged.” Geva, supra note 33, at 515.
192
Dyson & Hodgson, supra note 123, at 29. “[O]n statistical average, the total
reserves the banks need for carrying out all current payments amount to only about
1.25% of the stock of bankmoney in the UK, about the same in the USA, and 1.5%
or slightly more in the euro area.” HUBER, supra note 110, at 71.
193
Other instruments of monetary control, like credit and interest rate controls,
could also be used by the central bank. But those instruments were typical of a
period when domestic money markets and secondary markets for government
securities were lacking or not sophisticated enough. See, e.g., LASTRA, supra note
42, at 44–45.
2021] MONEY IN THE TWENTY-FIRST CENTURY 207

bank purchases or sells government securities, either outright or for a short-

term, in this case through repurchase agreements, or repos, at an interest rate
close to the target rate.
With repos, the central bank exchanges electronic reserves for securities
with a bank, and the counterparty offering the securities has the obligation to
repurchase them the next day or soon after and pay some interest. When the
central bank receives securities, the operation is a repo transaction; when,
instead, the central bank offers securities, a reverse repo transaction. At any
point of settlements, therefore, if transactions surge and the demand for
electronic reserves increases, the central bank can issue more electronic
reserves (buying securities or engaging in repo transactions) to lower the cost
of reserves or to keep it stable. On the contrary, if settlement transactions
decline, the central bank will buy electronic reserves (selling securities or
engaging in reverse repo transactions) to increase or stabilize the cost of
reserves.194
In this setting, if the cost of reserves steadily rose in the interbank market,
banks’ natural reaction would be to increase the cost of lending for their
customers. Costlier loans would reduce credit expansion, reducing the
volume of bank deposits entering the payments system and, as a
consequence, the balances against banks at settlement time. With credit
expansion slowing down, and fewer bank deposits circulating in the
economy, spending would also be constrained. If, however, the central bank
believed, according to its policy framework, that the economy would benefit
from more instead of less spending, the central bank would act to put more
electronic reserves in the banking system, lowering their cost. Opposite
effects would take place if electronic reserves were abundant and losing
value. Reserves are, thus, supposed to be relatively scarce, so that the central
bank can timely influence their cost by trading low amounts of reserves. This
is the process through which central banks have managed the money supply
and transmitted monetary policy to the economy—at least until the Global
Financial Crisis.195
3. The Troubles of the Monetary System Built Around Banks
With this arrangement, based on bank deposits connected with electronic
reserves inside the payments system, the central bank found a way to control
money supply and growth in the economy. At the same time, the central bank
handed over much of the monetary powers to the banks. If during the gold
standard the central bank’s power over money was limited by the mining
industry’s productivity, under a fiat-money regime this power became
dependent on the banks’ initiative. Again, despite the radical change in the
monetary regime, the central bank would not be able to lead the processes of

194
About repo and reverse repo transactions performed by the central bank, see
Keister & McAndrews, supra note 170.
195
For a critical view about the transmission mechanisms of modern monetary
policy, questioning the capacity of the central bank to influence bank and market
rates by managing the base interest rate, see HUBER, supra note 110, at 125–29.
208 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

money creation and management; the central bank would once more react to
the actions of an external source.196
As the monetary system is designed, the central bank may lose monetary
control if electronic reserves are abundant for an extended period, a situation
that is already happening in the biggest economies.197 Excess reserves in the
banking system are now the norm in countries that resorted to quantitative
easing, or QE, and are still facing deflationary pressure. 198 In these
economies, the cost of electronic reserves is all but irrelevant for the
interbank market. When all or at least most banks have more electronic
reserves than they need or are required to hold, the cost of reserves tends to
zero, and the interbank market for reserves proves futile. If the central bank
cannot influence the cost of electronic reserves, the central bank has
difficulties in transmitting monetary policy and adjusting the price of money
in the economy.
One option for the central bank to avoid the irrelevance of electronic
reserves is to pay interest on the reserves in excess, a tool that started to be
used in the United States in October 2008. It was an attempt to set a floor to
short-term interest rates. In theory, banks would not have incentives to lend
money below the interest rate paid on excess reserves by the Federal Reserve.
Loans to corporations or households, even for the shortest term, would have
a cost above the interest rate paid on reserves. So, by tweaking the interest
rate paid on reserves, the Federal Reserve could still influence other interest
rates in the economy.199
But paying interest on reserves was not designed because of the Global
Financial Crisis or to deal with the problem of excess reserves. Paying
interest on reserves had appeared as a policy tool in the United States and the
United Kingdom back in 2006 before the crisis hit. In the United States, the
Financial Services Regulatory Relief Act of 2006 authorized
the Federal Reserve Banks to pay interest on balances held
by or on behalf of depository institutions at Reserve Banks,
subject to regulations of the Board of Governors, effective
October 1, 2011. The effective date of this authority was

196
With a similar view about the dependence of the central bank on the banks in
the monetary process, see id. at 57–64, 123–24.
197
Discussing different threats to the efficacy of monetary policy if reserves
become irrelevant, see Friedman, supra note 169.
198
Discussing the purpose and mechanics of QE, see Adam Hayes, Challenges
Confronting Central Bankers Today, (MARIO EINAUDI CTR. FOR INT’L STUD.,
Working Paper No. 4-16, 2016), https://ecommons.cornell.edu/handle/1813/55058.
199
About interest on excess reserves as a monetary tool, see David Bowman et al.,
Interest on Excess Reserves as a Monetary Policy Instrument: The Experience of
Foreign Central Banks, BD. OF GOVERNORS OF THE FED. RES. SYS.,
INTERNATIONAL FINANCE DISCUSSION PAPERS NO. 996, 2010,
http://www.federalreserve.gov/pubs/ifdp/2010/996/ifdp996.pdf.
2021] MONEY IN THE TWENTY-FIRST CENTURY 209

advanced to October 1, 2008, by the Emergency Economic

Stabilization Act of 2008.200
In the United Kingdom, the Bank of England started paying interest on
reserves in May 2006 and overhauled the related framework in March
2009. 201 The plan was to reduce the dependence of the central bank on
government securities to implement monetary policy, not to find an
alternative because banks were holding more electronic reserves than they
needed—which they were not.202
Paying interest on reserve balances is, in fact, a policy tool that has yet
to prove its value in a scenario of abundant reserves.203 So much so that the
Federal Reserve had to develop an additional tool named “overnight reverse
repurchase agreements program,” or ON RRP, to help keep the base interest
rate inside the target range. The program, which began being tested in late
2013 as a temporary tool but is still used, was devised to widen the Fed’s
reach beyond the banking system when implementing monetary policy.204
Because only banks that keep reserve accounts with the Federal Reserve can
hold electronic reserves and, in turn, receive the related interest payments,
other institutions that also act as cash lenders, like money-market mutual
funds, were left out. As these institutions were not receiving any interest
payments on their cash holdings, they would lend cash to earn interest that
would be lower than that paid by the Federal Reserve to banks on electronic
reserves.205
These non-bank institutions pushed the short-term interest rate down,
making the base cost of money drop below the floor created by the Federal
Reserve with the payment of interest on excess reserves. The base interest
rate of the economy was being influenced not by the cost of interbank
transactions anymore. Instead, the base interest rate was informed primarily
by the cost of transactions in the money market, in which money and highly

200
BD. OF GOVERNORS OF THE FED. RES. SYS., MONETARY POLICY. POLICY TOOLS.
INTEREST ON REQUIRED BALANCES AND EXCESS BALANCES, (Sep. 19, 2016),
https://www.federalreserve.gov/monetarypolicy/reqresbalances.htm
[https://perma.cc/V7U7-5BWL].
201
See BANK OF ENGLAND, Statistics. Explanatory notes – Wholesale (Sep. 20,
2016),
http://www.bankofengland.co.uk/statistics/pages/iadb/notesiadb/wholesale_baserat
e.aspx [https://perma.cc/4LNY-HJM6].
202
See id.
203
For a debate over the effectiveness of paying interest on reserves when the
reserves are abundant, see Bowman et al., supra note 199, at 5; Stella, supra note
174, at 9–12.
204
For an overview of the new monetary tools used by the Federal Reserve after the
Global Financial Crisis, see Jane Ihrig & Scott Wolla, How Does the Fed Influence
Interest Rates Using Its New Tools?, OPEN VAULT BLOG (Aug. 5, 2020),
https://www.stlouisfed.org/open-vault/2020/august/how-does-fed-influence-
interest-rates-using-new-tools [https://perma.cc/4BQB-YCAA].
205
See BD. OF GOVERNORS, supra note 160, at 50–52.
210 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

liquid assets (like government securities) are traded for a short-term, notably
overnight. The Fed could not ignore this reality.206 So, to avoid completely
losing influence over short-term interest rates, the Fed had to reach out to the
shadow-banking sector, extending its open-market operations to non-bank
institutions holding large quantities of money. In early 2021, 90 non-bank
institutions, basically money-market funds, were eligible to transact in the
ON RRP facility alongside government-sponsored enterprises and
commercial banks. In comparison, the list of “primary dealers,” which are
the traditional counterparties of the Federal Reserve in open-market
operations, included only 24 institutions, mostly securities traders.207
In ON RRP operations, the Federal Reserve usually pays an interest rate
0.25 percentage points below the interest it pays on electronic reserves,
setting a second and lower floor that creates a range, instead of a single target,
for the benchmark rate. The Fed wants to lure these non-bank institutions into
lending out their money only for a return higher than the return these
institutions receive if they deposit their cash holdings overnight with the Fed
in exchange for securities. By doing so, the Fed tries to regain control over
the base cost of money and, in turn, over the availability and price of money
in the economy so that the short-term interest rate remains close to the official
target.208
The point I want to underscore with this illustration is that some of the
unconventional measures adopted by central banks after the Global Financial
Crisis might have been more a sign of desperation than of power. With the
ON RRP operations, the Federal Reserve acknowledged that conducting
transactions only with banks to implement monetary policy was no longer
effective. With the banking system holding electronic reserves in excess, the
alternatives were straightforward: either the Fed broke free from banks and
broadened its operational reach or risked losing its capacity to transmit
monetary policy. As the Fed opted for the former, the Fed signaled, perhaps
unintentionally, that the centuries-old structure of the monetary system is ripe
for a rethink. In the next part, I explore the alternatives to the current model,
focusing on how technology can open up new perspectives on money.
III. THE NEW POSSIBILITIES FOR MONEY
On Halloween 2008, a month and a half after Lehman Brothers’
spectacular collapse, Satoshi Nakamoto published Bitcoin’s white paper—
and changed money forever. 209 Bitcoin showed that, with technology,

206
See id.
207
For a list of all the Fed’s counterparties either in open-market operations
(“primary dealers”) or in reverse repos, see FED. RES. BANK OF N.Y.: MKT. &
POL’Y IMPLEMENTATION, Counterparties, (Jan. 17, 2021),
https://www.newyorkfed.org/markets/counterparties [https://perma.cc/7MSG-
UXFK].
208
See Ihrig & Wolla, supra note 204.
209
See Satoshi Nakamoto, Bitcoin: A Peer-To-Peer Electronic Cash System,
BITCOIN (2008), https://bitcoin.org/bitcoin.pdf.
2021] MONEY IN THE TWENTY-FIRST CENTURY 211

different monetary arrangements are possible: money does not need to be

controlled by a government or limited to a sovereign territory anymore.
Bitcoin and the thousands of cryptocurrencies that followed are still battling
against issues of scale and trust. But they pose a threat to the traditional
monetary system based on a sovereign currency because of two main reasons.
First, many cryptocurrencies aim to build monetary arrangements apart from
the current monetary system and without the sovereign currency. They have
their own unit of account and infrastructure to process payments, allowing
users to complete transactions among themselves regardless of banks’
intermediation or the participation of a central bank. Second,
cryptocurrencies have appeared in a time when confidence in the capacity of
central banks to manage money has been declining. After the Global
Financial Crisis, more people seem willing to support monetary alternatives
like those proposed by cryptocurrencies.
How should central banks react to this threat? Central banks could favor
solutions that would impose a ban on cryptocurrencies. From a legal
perspective, a general ban on cryptocurrencies is a real possibility. The U.S.
Supreme Court, for example, has long ago ruled:
Having thus, in the exercise of undisputed constitutional
powers, undertaken to provide a currency for the whole
country, it cannot be questioned that Congress may,
constitutionally, secure the benefit of it to the people by
appropriate legislation. To this end, Congress has denied the
quality of legal tender to foreign coins, and has provided by
law against the imposition of counterfeit and base coin on
the community. To the same end, Congress may restrain, by
suitable enactments, the circulation as money of any notes
not issued under its own authority. Without this power,
indeed, its attempts to secure a sound and uniform currency
for the country must be futile.210
The option for a general ban, however, would be criticized for stifling
innovation and would face practical difficulties, as transactions with
cryptocurrencies are typically processed and recorded in multiple computers
around the world with no single issuer or manager. Central banks could,
instead, welcome the monetary competition and engage in the technological
race to offer their view on the future of money. A central-bank digital
currency, or CBDC, as it became known, would be a strong response because
CBDCs are not just about making money digital. What is new about CBDCs
is creating the possibility for anyone to open a basic checking account at the
central bank, an option that would have profound implications for
governments, central banks, financial institutions, and regular people.

210
Veazie Bank v. Fenno, 75 U.S. 533, 549 (1869) (emphasis added). See also
Virtual Currency Schemes – A further analysis, EUR. CENT. BANK 30-32 (2015),
www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf.
212 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

A. Private Money and the Crypto Promises

1. The Cryptocurrency Attack
One option for structural monetary reform would be to make extensive
use of privately issued cryptocurrencies. This option would follow in the
steps of the free-banking system’s advocates, for whom a monetary system
made solely of private and competing currencies, with no government
intervention or even a central bank, would be more efficient and stable.211
Bitcoin, for example, replaces the central database of monetary transactions
that is guarded by a trustworthy authority, the central bank, with an open
distributed ledger protected not by one or more trusted parties but by
collaboration, consensus, and cryptography.212 Yet, when it comes to money,
trustworthiness can still be an issue tipping the balance in favor of
government-issued currencies.
2. Trust Matters
Take Bitcoin and its promise of a monetary system that does not require
trusted central counterparties to work, just computational power and
advanced mathematics. Payments using bitcoins are processed and settled in
a decentralized way through computerized nodes and miners solving
mathematical problems. 213 But “decentralized” does not mean
“disintermediated,” as these nodes and miners are nothing but intermediaries
operating between the payer and the payee to complete and record each
Bitcoin transaction. In theory, the people behind the computers used to keep
copies of the blockchain records (nodes), make the payments system function
(miners) or design Bitcoin’s software (developers) should not matter.214 In
practice, who these people are and how many of them take part in the network

211
See, e.g., SELGIN, supra note 93; VERA SMITH, THE RATIONALE OF CENTRAL
BANKING AND THE FREE BANKING ALTERNATIVE (reprint 1990) (1936),
http://files.libertyfund.org/files/1413/0100_Bk.pdf. For a skeptical view on free-
banking systems, see Milton Friedman & Anna Schwartz, Has Government Any
Role in Money?, 17 J. MONETARY ECON. 37 (1986); GOODHART, supra note 105, at
29–83. Contending that “[t]he notions that banking systems can arise
spontaneously, or that they could function efficiently without active government
involvement, are utopian fantasies,” see CALOMIRIS & HABER, supra note 92, at
491.
212
See Allen, supra note 54, at 900–06; He et al., Virtual Currencies and Beyond:
Initial Considerations 18–21 (Int’l Monetary Fund, Staff Discussion Note No.
16/03, 2016), http://www.imf.org/external/pubs/cat/longres.aspx?sk=43618.
213
For an overview of the decentralized ledger technology ecosystem and its inner
workings, see Carla Reyes, Moving Beyond Bitcoin to an Endogenous Theory of
Decentralized Technology Regulation: An Initial Proposal, 61 VILL. L. REV. 191,
196–202 (2016).
214
About the different actors and their roles in cryptocurrencies’ networks, see
Angela Walch, Deconstructing ‘Decentralization’: Exploring the Core Claim of
Crypto Systems, in CRYPTOASSETS: LEGAL, REGULATORY, AND MONETARY
PERSPECTIVES 39, 47–51 (Chris Brummer ed., 2019).
2021] MONEY IN THE TWENTY-FIRST CENTURY 213

are relevant information. Satoshi Nakamoto, the pseudonym used by Bitcoin

creator, underlined the perils of a “51% attack.”215 If a person or group seizes
more than 50% of the computing resources used to process and settle Bitcoin
transactions, they can control how the cryptocurrency works from that point
on—and even create and process fraudulent transactions.216
Even without an attack or fraud, the people operating the cryptocurrency
infrastructure and the place where the operations are happening can influence
its functioning, especially because of the relatively small size of the Bitcoin
market. 217 In 2016 and early 2017, most of the Bitcoin trading and
transactions processing occurred in China—until Chinese regulators stepped
in. In late 2017, Chinese authorities decided to restrict the buying or selling
of bitcoins and then, in early 2018, to order the shutdown of miners, which
process transactions and create new bitcoins. 218 Even for Bitcoin, a
decentralized and borderless currency, what happened in the Chinese market
and regulatory system during this period affected the price and availability
of the cryptocurrency everywhere else.219 And the actions of governmental
authorities can also positively influence Bitcoin’s performance. In Japan, a
law was enacted in April 2017 making Bitcoin a legal method of payment,
news that contributed to the subsequent surge in the price of the
cryptocurrency in the second half of 2017.220

215
See Nakamoto, supra note 209, at 4.
216
About the “51%” or “50%+1 attack” and how, despite being improbable, it
represents a considerable vulnerability of Bitcoin, see Robleh Ali et al., Innovations
in Payment Technologies and the Emergence of Digital Currencies. 54 BANK OF
ENG. Q. BULL. 262, 271–74 (2014); PAUL VIGNA & MICHAEL CASEY, THE AGE OF
CRYPTOCURRENCY: HOW BITCOIN AND DIGITAL MONEY ARE CHALLENGING THE
GLOBAL ECONOMIC ORDER 145–159 (2015). Giving the example of a 51% attack
that happened in January 2019 on the cryptocurrency Ethereum Classic, see Walch,
supra note 214, at 57–58.
217
See Walch, supra note 214, at 52–58.
218
See, e.g., Gabriel Wildau, China Probes Bitcoin Exchanges Amid Capital Flight
Fears, FIN. TIMES (Jan. 10, 2017), https://www.ft.com/content/bad16a88-d6fd-
11e6-944b-e7eb37a6aa8e (reporting that “Renminbi transactions accounted for 98
per cent of global bitcoin trading volume over the past six months”). About the
shutdown of miners in China, where almost 80% of bitcoins were mined, see Chao
Deng, China Quietly Orders Closing of Bitcoin Mining Operations, WALL ST. J.
(Jan. 11, 2018), https://www.wsj.com/articles/china-quietly-orders-closing-of-
bitcoin-mining-operations-1515594021.
219
Stating that “despite the talk of a borderless currency, a handful of Chinese
companies have effectively assumed majority control of the Bitcoin network,” so
that “China’s clout is raising worries about Bitcoin’s independence and
decentralization,” see Nathaniel Popper, How China Took Center Stage in Bitcoin’s
Civil War, DEALBOOK. N.Y. TIMES (June 29, 2016), https://nyti.ms/2k7L5lg.
220
See Enda Curran et al., Central Banks Can’t Ignore the Cryptocurrency Boom,
BLOOMBERG MARKETS (Aug. 30, 2017, 12:00 AM),
https://www.bloomberg.com/news/articles/2017-08-30/cryptocurrencies-are-new-
barbarians-at-the-gate-of-central-banks.
214 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

Finally, the governance model and rules of the cryptocurrency—as much

as that of any currency—also matter. Who controls the underlying software
code of the cryptocurrency and how changes to the code are made can either
build or erode trust in the cryptocurrency. Reuben Grinberg, a lawyer at
Davis Polk law firm, contends that not only the “developers,” a five-member
developing team working on Bitcoin software, but also a “convincing
coalition” formed by an influential group of programmers, can change how
Bitcoin functions.221 For the change to be implemented, though, any of these
groups have to convince a majority of users to adopt the software updated by
the “developers” or switch to a compatible yet new version of the Bitcoin
software made by the “convincing coalition.” 222 “Such an exercise of
discretion, even if done with good intentions and supported by a majority of
Bitcoin users, may nevertheless cause many individuals to lose confidence in
Bitcoin.”223
These trust issues are not exclusive to Bitcoin or other cryptocurrencies
and do not imply that sovereign currencies necessarily deserve a higher
degree of credibility. But they show that private cryptocurrencies, as much
as any sovereign currency, can only enjoy credibility if they are properly
designed and managed. If, however, confidence is lost in the way the
currency is governed, affecting its stability, market participants will swiftly
find a monetary substitute, be it a foreign currency, a parallel currency, or
another cryptocurrency. Argentina in the early 2000s provides a recent
example of the rapid rise of substitute money in the face of monetary mischief
that undermined trust in the official currency. Following the introduction, in
December 2001, of strict limits on the amount of cash that could be
withdrawn from bank accounts, Argentinians responded quickly, as
recounted by economist Felix Martin:
Provinces, cities, and even supermarkets chains started to
issue their own IOUs, which rapidly began to circulate as
money—in open defiance of the government’s attempts to
keep liquidity tight to support the peso. By March 2002, such
privately issued notes made up nearly a third of all the
money in the country.224
3. The Bright Side of Monetary Competition
If monetary incompetence can affect both sovereign and private
currencies, either traditional or crypto, how best to organize the monetary
system in a digital age? As a first step, countries should enact rules adopting
the narrowest sense of the concept of “legal tender”—which is already the

221
See Reuben Grinberg, Bitcoin: An Innovative Alternative Digital Currency, 4
HASTINGS SCI. & TECH. L.J. 159 (2012).
222
For concrete examples of concentration of power among developers, see Walch,
supra note 214, at 52–56.
223
Grinberg, supra note 221, at 175–76.
224
MARTIN, supra note 43, at 68.
2021] MONEY IN THE TWENTY-FIRST CENTURY 215

norm in the more developed economies.225 This framework would favor a

system of monetary competition, allowing contracting parties to use and
accept as payment any media of exchange other than the sovereign currency.
As a consequence, private currencies could legitimately offer alternatives to
the sovereign monetary system. In turn, the government and the central bank
would have enough incentives to avoid monetary mischief.
People should have the freedom to adopt monetary alternatives at any
time, particularly if the government failed to supply and manage the
sovereign currency adequately. The central bank should hold a monopoly
only on creating and managing the sovereign currency denominated in the
official unit of account, issued in physical or digital format. The central bank
should not, however, hold a monopoly on money in general and not even
over the means of payment used in the sovereign territory, as private parties
should be legally allowed to decide what currencies to use in their contractual
relations.226
4. Creating Private Currencies
In this context, digital or cryptocurrencies denominated in their own unit
of account and not backed by any sovereign currency would be just another
monetary instrument privately issued and not guaranteed by the
government.227 And the more a private instrument was used and accepted for
making payments and transfers, the closer this instrument would be of
serving as money. The distinction, though, between the theoretically more
stable sovereign currency, even if digital, and the private monetary
instruments should remain clear to avoid misconceptions that could imply
governmental support of non-official currencies.
Issuers of private currencies would have to be careful, thus, not to present
their currency in a way that could lead the public to mistake a competing
currency for the sovereign money. The risk for private currencies would be
raising the question of counterfeiting and, in turn, constituting a statutory
violation. Two recent cases in the United States illustrate this risk. In March
2011, Bernard von NotHaus, the creator of a private currency known as
Liberty Dollar, was convicted by a federal jury for “making coins resembling
and similar to United States coins; of issuing, passing, selling, and possessing

225
See supra Part I discussing the scope of the concept of “legal tender.”
226
Arguing that “[a] benign use of monetary prerogatives by the government would
be the definition of a monetary regime with no forced tender, allowing competitive
supply of money,” see LEÔNIDAS ZELMANOVITZ, THE ONTOLOGY AND FUNCTION
OF MONEY: THE PHILOSOPHICAL FUNDAMENTALS OF MONETARY INSTITUTIONS
203–04 (2016).
227
“Monetary instruments,” as used in the text, purport to include not only short-
term debt issued by an identifiable person or entity but also cryptocurrencies that
have no issuer and are not a liability of anyone, like Bitcoin. See, e.g., He et al.,
supra note 212, at 9, 25. The goal is to highlight the difference between the central-
bank digital currency and all other currencies that might become generally used and
accepted despite not having governmental support.
216 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

Liberty Dollar coins; . . . issuing and passing Liberty Dollar coins intended
for use as current money; and conspiracy against the United States.”228 The
evidence presented in the trial showed that “the Liberty coins were marked
with the dollar sign ($); the words dollar, USA, Liberty, Trust in God (instead
of In God We Trust); and other features associated with legitimate U.S.
coinage.”229
The press release issued in the case by the U.S. Attorney’s Office stated
that “[i]t is a violation of federal law . . . to create private coin or currency
systems to compete with the official coinage and currency of the United
States.” 230 Despite the press release’s hostile tone, von NotHaus was not
convicted simply for issuing private coins and currency but for issuing coins
and currency that resembled official U.S. currency.231 So much so that von
NotHaus’s indictment and later conviction were based on charges and counts
under federal statutory rules that deal with conspiracy and counterfeiting.232
In the end, “the Liberty Dollar government action is best understood as an
attack on counterfeiting and fraud rather than as the first salvo in a war
against private currencies.”233
Another federal criminal rule that could, at least theoretically, be used
against issuers of private currency is Section 2 of the Stamp Payments Act of
1862. This rule provides:
Whoever makes, issues, circulates, or pays out any note,
check, memorandum, token, or other obligation for a less
sum than $1, intended to circulate as money or to be received

228
Press release, Fed. Bureau of Investigation, Defendant Convicted of Minting His
Own Currency (Mar. 18, 2011), https://www.fbi.gov/charlotte/press-
releases/2011/defendant-convicted-of-minting-his-own-currency
[https://perma.cc/4J9K-ECGK]. For a detailed factual background of the case, see
United States v. von NotHaus, No. 5:09CR27-RLV, 2014 WL 5817559 (W.D.N.C.
Nov. 10, 2014).
229
Fed. Bureau of Investigation, supra note 228.
230
Id.
231
See Grinberg, supra note 221, at 191–94.
232
18 U.S.C. §§ 371, 485, 486 (2018). As later summarized in United States v. Von
NotHaus, No. 509CR00027RLVDCK, 2017 WL 1396043, at 2 (W.D.N.C. Apr. 18,
2017), “[a] jury convicted von NotHaus of conspiracy to defraud the United States
by making, uttering, and passing counterfeit coins in violation of 18 U.S.C. § 371
(2006), falsely making and forging counterfeit coins in violation of 18 U.S.C. §§
485, 2 (2006), and uttering and making coins of silver intended for use as current
money, in violation of 18 U.S.C. §§ 486, 2 (2006).”
233
Grinberg, supra note 221, at 192. In November 2014, the United States District
Court, W.D. North Carolina, found “no appealable defect in the indictment or the
jury instructions” and denied von NotHaus’s Motions for Post-Conviction Relief.
United States v. von NotHaus, No. 5:09CR27-RLV, 2014 WL 5817559 (W.D.N.C.
Nov. 10, 2014). In turn, in December 2014, von NotHaus was sentenced to “be on
probation for a term of THREE (3) YEARS,” to “serve SIX (6) MONTHS home
detention,” and to pay $300 in criminal monetary penalties. U.S. v. NotHaus, 2014
WL 7505580 (W.D.N.C.).
2021] MONEY IN THE TWENTY-FIRST CENTURY 217

or used in lieu of lawful money of the United States, shall be

fined under this title or imprisoned not more than six
months, or both.234
The scope of the rule tends to be limited, though. The statutory provision
would hardly apply to any currency that “does not resemble official U.S.
currency and is otherwise unlikely to compete with small denominations of
U.S. currency.”235 More than that, “there has been no published court opinion
interpreting the Act since 1899,” which is an indication of how remote the
use of this rule to stop the issuance of private currencies may be.236
The second case about the risks for issuers of private currencies involves
a “digital currency system” named e-gold that operated from the mid-1990s
to 2007. The institution behind e-gold allowed any person to visit its website
and open an account denominated in some amount of gold, the e-gold
account. The registered user could then deposit dollars or other currencies in
this account to create e-gold balances, transfer these balances to other e-gold
account holders around the world, and cash out e-gold balances when making
withdrawals. Despite being depicted as a digital currency, e-gold was closer
to an exchange offering services to investors willing to have exposure to gold.
But the e-gold system operator was not licensed or registered with state or
federal authorities and had not implemented procedures to prevent money
laundering. The directors of e-gold were, therefore, charged with conspiracy,
money laundering, and operating a money-transmitting business without the
proper license.237
In July 2008, the directors of e-gold entered a plea agreement.238 Later
that year, in November, e-gold director and CEO was sentenced to three years
of supervised release—with six months of electronically monitored home
detention—to perform 300 hours of community service, and to pay a $200
assessment. The other two e-gold directors were sentenced to probation for
three years, to complete 300 hours of community service, and to pay a $2,500
fine and a $100 assessment.239 As in the von NotHaus case, e-gold directors
were not criminally liable for issuing a private currency. Here, the currency
creators and managers faced punishment for failing to follow anti-money

234
18 U.S.C. § 336 (2018).
235
Grinberg, supra note 221, at 185.
236
Id. at 190.
237
18 U.S.C. §§ 1956, 1960 (2018). For details on the e-gold case, see Grinberg,
supra note 221, at 204–06; Lawrence White, The Troubling Suppression of
Competition from Alternative Monies: The Cases of the Liberty Dollar and E-gold,
34 CATO J. 281, 288–97 (2014).
238
See Press Release, U.S. Dep’t of Just., Digital Currency Business E-Gold Pleads
Guilty to Money Laundering and Illegal Money Transmitting Charges (July 21,
2008), http://www.justice.gov/opa/pr/2008/July/08-crm-635.html
[https://perma.cc/WT5X-B3YN].
239
See Stephanie Condon, Judge Spares E-Gold Directors Jail Time, CNET (Nov.
20, 2008), https://www.cnet.com/news/judge-spares-e-gold-directors-jail-time/
[https://perma.cc/DKW8-2UNG].
218 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

laundering rules and to obtain the required license of money transmitter.

Private digital currencies can thus be legitimately issued under the current
federal legal framework in the United States—they are not outright illegal.240
The difficulty lies in designing the currency to avoid violating related, even
if not closely connected, laws.
At the state level, the issue of private currencies, digital or not, has also
been gaining greater legal support. In California, Section 107 of the
Corporations Code provided that “[n]o corporation, social purpose
corporation, association, or individual shall issue or put in circulation, as
money, anything but the lawful money of the United States.”241 On June 28,
2014, however, Section 107 was repealed by Assembly Bill No. 129, which
opened the way for the development, issuance, and circulation of private
currencies in the state of California.242 The relevant federal law has still to be
observed, but the less hostile state legislation makes it easier for alternative
currencies to appear.
The Court of Justice of the European Union also hinted at a more
permissive approach to privately issued currencies in the Hedqvist case.243
Although the case focused on debating whether exchanging bitcoins for
sovereign currencies as a commercial activity would be subject to the value-
added tax, the Court signaled that a private currency could be legitimately
issued and used in the European Union. In doing so, the Court defined the
basic characteristics of private, “non-traditional currencies”: “currencies
other than those that are legal tender in one or more countries, in so far as
those currencies have been accepted by the parties to a transaction as an
alternative to legal tender and have no purpose other than to be a means of
payment.” If, therefore, a privately issued instrument meets these
characteristics, it can be considered “currency”—at least for tax purposes.
5. Private Currencies as a Check on the Government and the
Central Bank
Despite some headwinds, private digital currencies could, if properly
designed and managed, create incentives for the government and the central
bank to preserve the stability of the sovereign digital currency. The risk for
the sovereign currency, if private digital currencies became widespread,

240
With a similar view, see Allen, supra note 54, at 900. See also Julie Hill, Virtual
Currencies & Federal Law, 18 J. CONSUMER & COM. LAW 65, 66–67 (2014). But
cf. White, supra note 237, at 288–97 (arguing that the cases of Liberty Dollar and
e-gold demonstrate that the government has used the legal system to throttle
monetary competition).
241
California’s Corporations Code is available at
http://leginfo.legislature.ca.gov/faces/codesTOCSelected.xhtml?tocCode=corp
[https://perma.cc/6C9J-W9HC].
242
See Assemb. B. 129 ch. 74 (2014) http://www.leginfo.ca.gov/pub/13-
14/bill/asm/ab_0101-0150/ab_129_bill_20140628_chaptered.htm
[https://perma.cc/FT93-PPDY].
243
See Judgment of 22 October 2015, Hedqvist, C‑264/14, EU:C:2015:718.
2021] MONEY IN THE TWENTY-FIRST CENTURY 219

“would be analogous to the dollarisation issue. Domestic monetary policy is

weakened the greater the dollarisation of the economy.”244 The government
could, thus, be more diligent in preventing monetary mischief or breach of
trust relative to the sovereign currency if private monetary alternatives
existed and were readily available. Banks, for example, could take advantage
of their extensive client base and geographical dispersion to offer a private
digital currency, perhaps globally, as a service to their customers. The same
could be done by big tech companies, like Google or Apple, or even by
influential retailers, like Amazon, looking to build a more efficient network
for cross-border payments.
The separation of banking and commerce, statutorily consolidated in the
United States with the Bank Holding Company Act of 1956, would not create
a problem here.245 Although today the separation has been diluted by many
exemptions, it still lingers based on the historical fear that large corporations
and influential banks accumulate too much power—as demonstrated by the
backlash against Wal-Mart trying to acquire a financial-institution charter in
2005. 246 As, however, corporations issuing private digital currencies
denominated in their own unit of accounts would not be acting like a
“bank”—basically, an entity that both accepts demand deposits and makes
loans247—the statutory prohibition would not reach the corporate issuance of
currencies.
Securities laws, on the other hand, might apply if these corporate
currencies were considered not just tokens that could be used to pay for some
service or good (“utility tokens”), but investments with the expectation of
profits (“securities”). A private currency may be characterized as “security”
under the “Howey test,” a framework developed by the U.S. Supreme Court
to help identify when an investment is considered “security” for regulatory
purposes. As the Supreme Court held in this precedent that influenced
securities laws across the world,
[A]n investment contract for purposes of the Securities Act
means a contract, transaction or scheme whereby a person
invests his money in a common enterprise and is led to
expect profits solely from the efforts of the promoter or a
third party, it being immaterial whether the shares in the

244
FIN. STABILITY BD., Financial Stability Implications from FinTech. Supervisory
and Regulatory Issues that Merit Authorities’ Attention 53 (June 27, 2017),
http://www.fsb.org/wp-content/uploads/R270617.pdf [https://perma.cc/LCV8-
3BH3].
245
Currently, the separation of banking and commerce appears in 12 U.S.C. § 1843
(2018).
246
See Omarova & Tahyar, supra note 82, at 167–69.
247
See 12 U.S.C. §§ 1841(c)(1)(A)–(B) (2018). About the evolution of the statutory
definition of “bank” in the United States, see generally Omarova & Tahyar, supra
note 82.
220 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

enterprise are evidenced by formal certificates or by nominal

interests in the physical assets employed in the enterprise.248
The misfortunes of Initial Coin Offerings, or ICOs, are illustrative. In
late 2017, with the surge in Bitcoin’s price, ICOs launching new digital or
cryptocurrencies that could serve a variety of purposes became popular. As
ICOs that were not outright fraudulent looked a lot like public offerings of
securities to raise funds from investors in search of profits, the Securities and
Exchange Commission started following coin issuance more closely to
enforce securities laws.249
The so-called “stablecoins,” like Facebook’s Libra-Diem, could also be
viewed as securities.250 Stablecoins are cryptocurrencies pegged to one or
more sovereign currencies to make their market price more stable. They want
to create an alternative to the excessive volatility of Bitcoin, which is not
backed by any assets. The promise is that the money the stablecoin issuers
receive from their users will be kept on reserve so that it will always be
possible to convert the stablecoin into the reference sovereign currency at a
1:1 rate. Or “basically PayPal, except on a decentralized database instead of
a centralized one.”251 This reality pushes stablecoins away from the currency
realm and into the securities territory. They closely resemble shares in a
money market mutual fund, which reflect the value of a portfolio of assets
selected by the fund manager and are expected to be freely redeemable at no
significant price loss.252 Stablecoins seem to go beyond typical mutual fund’s
shares since they can be transferred to other participants. But the difference

248
S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298–99 (1946). For more on the
“Howey test” and how it has been applied in the case law, see JAMES COX ET AL.,
SECURITIES REGULATION: CASES AND MATERIALS 27–90 (7th ed. 2013).
249
For an overview of ICOs, their complicated relations with securities regulation,
and the Securities and Exchange Commission’s actions, see Joshua Morgan, What I
Learned Trading Cryptocurrencies While Studying the Law, 25 U. MIAMI INT’L &
COMP. L. REV. 159, 191–94, 202–15 (2017). See also U.S. Sec. and Exch.
Comm’n, Spotlight on Initial Coin Offerings (ICOs) (Jan. 7, 2020),
https://www.sec.gov/ICO [https://perma.cc/4G2G-JF5P].
250
For a detailed account of why stablecoins, and Libra-Diem in particular, could
be considered securities, see Marcelo Prates, Deconstructing Facebook’s Libra,
YALE J. ON REG.: NOTICE & COMMENT (Oct. 29, 2019), [https://perma.cc/89L9-
44ZG]. See also Douglas Arner et al., Stablecoins: Risks, Potential and Regulation
(Bank for Int’l Settlements, Working Paper No. 905, November 2020),
https://www.bis.org/publ/work905.pdf (discussing the status of Facebook’s Libra
and principles for regulating stablecoins).
251
J.P. Koning, 18 Things About Tether Stablecoins, MONEYNESS (Aug. 26, 2020),
http://jpkoning.blogspot.com/2020/08/18-things-about-tether-stablecoins.html
[https://perma.cc/R9DR-ZGUG].
252
Also likening Libra to shares in a money market mutual fund, see Robert
Hockett, Facebook's Proposed Crypto-Currency: More Pisces Than Libra For
Now, FORBES (June 20, 2019),
https://www.forbes.com/sites/rhockett/2019/06/20/facebooks-proposed-crypto-
currency-more-pisces-than-libra-for-now/ [https://perma.cc/ES52-X7N8].
2021] MONEY IN THE TWENTY-FIRST CENTURY 221

is only apparent. Unless resale restrictions apply (e.g., because of holding

period requirements), securities are also transferable, either on an exchange
or through a contractual agreement.253
Even if they can escape the securities characterization, stablecoins will
hardly avoid the fate of being just a fancy name for e-money. Electronic
money, or simply e-money, is defined in the Community Law of the
European Union as “electronically, including magnetically, stored monetary
value as represented by a claim on the issuer which is issued on receipt of
funds for the purpose of making payment transactions (. . .) and which is
accepted by a natural or legal person other than the electronic money
issuer.”254 This definition also appears, with minor adjustments, in the laws
of the United Kingdom255 and Brazil.256 E-money is traditionally issued by
fintech companies in exchange for funds and stored on prepaid cards or pre-
funded digital wallets that can be later used for making payments.
So, in all jurisdictions that regulate e-money, stablecoin issuers have to
apply for authorization before they can start operating. The United States is
the outlier, with no federal law on e-money but 50 “different” state money
transmission laws that may have to be observed by stablecoin issuers—at
least when the issuer is an identified institution and holders have the right to
redeem the stablecoin for dollars.257 Remaining under or unregulated is not,
therefore, an option for institutions that issue stablecoins since stablecoins
will likely fall into the category of securities or e-money in most jurisdictions.
Despite all the private options available, if the sovereign currency,
physical or digital, remains the most used unit of account, privately issued
digital currencies will face a competitive disadvantage. When most prices are
denominated in a currency, say euro, making payments in a different
currency, say dollar, can be not only inconvenient, but it can also create
additional transaction costs: the contracting parties have, at least, to agree on
an exchange rate to settle the transaction. In any event, private parties are free
to decide on the unit of account they will use, an option that can facilitate
adopting alternative units of account created with private currencies.
As with legal tender, private entities are not typically required by law to
use the unit of account statutorily set for the sovereign territory. The

253
About resale of securities in the United States, see, for example, Rutheford
Campbell, Jr., Resales of Securities Under the Securities Act of 1933, 52 WASH. &
LEE L. REV. 1333 (1995).
254
Directive 2009/110, of the European Parliament and of the Council of 16
September 2009 on the taking up, pursuit and prudential supervision of the
business of electronic money institutions. 2009 O.J. (L 267) 7-17, Art. 2(2).
255
See FIN. CONDUCT AUTH., PAYMENTS SERVICES AND ELECTRONIC MONEY—
OUR APPROACH (2019), https://www.fca.org.uk/firms/emi-payment-institutions-
key-publications [https://perma.cc/UQS5-FZKA].
256
See Lei No. 12.865, de 9 de outubro de 2013, D.O.U. de 10.10.2013.
257
For an overview of state money transmission laws in the United States, see
Carol R. Goforth, The Case for Preempting State Money Transmission Laws for
Crypto-Based Businesses, 73 ARK. L. REV. 301 (2020).
222 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

American law of the monetary system, for example, currently provides that
the “United States money is expressed in dollars, dimes or tenths, cents or
hundredths, and mills or thousandths. . . .” 258 It is a merely descriptive
provision, which does not prescribe any particular action that should be
observed by the public. The original text of this provision, from 1792, was
more prescriptive, but the 1982 amendment eliminated or omitted words that
were considered “unnecessary” or “surplus.”259 The text stated: “The money
of account of the United States shall be expressed in dollars or units, dimes
or tenths, cents, or hundredths, and mills or thousands, . . . ; and all accounts
in the public offices and all proceedings in the courts shall be kept and had
in conformity to this regulation.”260
A similar provision is found in the euro area, where Article 320 of the
Treaty on the Functioning of the European Union stipulates: “The
multiannual financial framework and the annual budget shall be drawn up in
euro.” Council Regulation nº 974/98, issued by the Council of the European
Union to regulate the introduction of the euro, also prescribes that “the
currency unit shall be one euro. One euro shall be divided into one hundred
cent” (Article 2).261 But this Regulation adds in its Article 4 that “the euro
shall be the unit of account of the European Central Bank (ECB) and of the
central banks of the participating Member States,” without placing the same
burden on private parties. Only government institutions have to keep their
financial and accounting records denominated in the official unit of account.
Nothing in the law prevents persons or corporations from creating or
adopting their own unit of account—practicality may be the biggest
limitation.
B. The Central Bank Back in Charge of the Monetary System
Central banks can take advantage of the recent technological progress
achieved in the cryptocurrencies’ world to challenge banks’ monetary
dominance and finally exert direct control over money creation and
management. Do they need to use blockchain to do so? On the face of it,
central banks using blockchain technology seems contradictory. Blockchain
is a technology developed to prevent the same digital currency from being
spent twice (double-spending) in a system that does not rely on a central
database managed by a trusted authority to record and keep track of monetary
transactions. Central banks, on the other hand, are the quintessential trusted
central counterparty in money matters, holding and guarding the central
ledger used to manage all monetary information. Even if not adopting the
blockchain technology, central banks could still benefit from the Bitcoin

258
31 U.S.C. § 5101 (2018).
259
Pub. L. No. 97-258, 96 Stat. 980 (1982).
260
Law of April 2, 1792, ch. 16, § 20, 1873 first ed. of the Revised Statutes of the
United States 1, 707 (emphases added).
261
Council Regulation 974/98, art. 2, 1998 O.J. (L 139) 1-5 (EC).
2021] MONEY IN THE TWENTY-FIRST CENTURY 223

experience with transferring and using digital currency with cryptographic

protection. How, then, could a central bank move toward a digital currency?
1. A Model for the Central-Bank Digital Currency
As the possibilities for a CBDC are multiple, and the related taxonomy
is becoming increasingly confusing,262 CBDC in this Article refers to a type
of money with at least three features:
• unlike bank deposits or e-money stored in prepaid cards, it is a
liability of the issuing central bank that can be held directly by any
person, not a liability of an intermediary between the central bank
and the money user;
• unlike electronic reserves held by banks at the central bank, it is
available to any person or business, not just to selected
counterparties; and
• unlike cash, it exists in electronic form, not as a physical token.
The CBDC is, thus, a conceptual type of money that has not yet been created,
except for some limited prototypes.263
Against this backdrop, I propose a model of CBDC that allows any
person or institution to hold deposits directly with the central bank through a
digital wallet. With this model, I want to show how wildly different a CBDC
can get from both the current monetary system and the options offered by
private cryptocurrencies. I prefer the term “digital wallets” in this context to
emphasize that the central bank would not be offering to the public full-
service digital accounts like those now provided by commercial banks. The
central bank digital wallets would simply allow users to hold the digital
currency and make or receive payments, much like cash in a physical wallet.
Other services that today can be connected to bank accounts, especially those
involving the supply of credit, like overdraft or credit cards, would not be
rendered by the central bank. Financial intermediation should remain with
financial institutions.
To avoid losing its characteristics of monetary authority, the central bank
should not get involved in credit allocation. 264 Credit supply would,

262
For an overview of other models of CBDC, see Raphael Auer & Rainer
Boehme, The Technology of Retail Central Bank Digital Currency, BIS Q. REV.
(Mar. 1, 2020), https://www.bis.org/publ/qtrpdf/r_qt2003j.htm
[https://perma.cc/8FRJ-7Q2K].
263
For a useful survey on different types of CBDCs and the related projects around
the world, see John Kiff et al., A Survey of Research on Retail Central Bank Digital
Currency (Int’l Monetary Fund, Working Paper No. 20/104, 2020),
https://www.imf.org/en/Publications/WP/Issues/2020/06/26/A-Survey-of-
Research-on-Retail-Central-Bank-Digital-Currency-49517 [https://perma.cc/SN66-
BXZX].
264
With a similar argument, see Klaus Löber & Aerdt Houben, Central Bank
Digital Currencies 14 (Bank for Int’l Settlements, joint report submitted by the
224 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

therefore, stay as a service rendered by banks and other financial

intermediaries. The distance from credit allocation would prevent the central
bank from turning into a dominant development or state bank that could use
its monopolistic capacity to issue digital currency for financing projects
based on political considerations or pressure.265 The goal should not be to
transform the central bank into a central planner, allocating resources and
dictating investments, but to assert central bank’s authority over the
sovereign money.266
Under the new model, payments would not have to go through the
banking system, as the central bank would settle them in real time through
the digital wallets. However, in favor of a market-driven approach that
encourages innovation, the central bank digital wallets should be developed
and operated by the private sector—from banks to telecom or technology
companies—not directly by the central bank. In any case, the central bank
would be able not only to pay interest on currency—positive or negative—
but also to trade assets with any market participant, controlling the amount
of money in the economy without depending on banks’ intermediation. In
extreme circumstances, the central bank could even issue small amounts of
digital currency directly into all or selected digital wallets, thus stimulating
the economy through the unconventional tool known as “helicopter
money.”267
2. Radicalizing the Central-Bank Digital Currency Model
But why propose this seemingly extreme model for a CBDC, prioritizing
the possibility of opening up the central bank for all? Because models for a
sovereign digital currency that do not allow the central bank to connect
directly with the public will prove futile. If the central bank were to start
issuing cash digitally with no significant change to the monetary
intermediation provided by banks, little would change since banks would
remain the primary providers of money to the economy. Most dollars
circulating in the economy today are already digital and made available

Comm. on Payments & Mkt. Infrastructures, 2018),

https://www.bis.org/cpmi/publ/d174.pdf.
265
On the perils of the central bank becoming a development or state bank, see
Stephen Cecchetti & Kermit Schoenholtz, Fintech, Central Banking and Digital
Currency, MONEY AND BANKING (June 12, 2017),
http://www.moneyandbanking.com/commentary/2017/6/11/fintech-central-
banking-and-digital-currency [https://perma.cc/EWS4-6FE8]; Paul Tucker, The
Political Economy of Central Banking in the Digital Age 9–10 (SUERF Policy
Note No. 13, 2017), https://www.suerf.org/policynotes/1105/the-political-
economy-of-central-banking-in-the-digital-age [https://perma.cc/6HZU-7P8L].
266
This goal of keeping the control over money with the central bank while leaving
the lending of money for the banks was also at the core of the Chicago Plan, as
underscored by Irving Fisher, 100% Money and the Public Debt, ECON. F. 406, 413
(1936).
267
For an overview on “helicopter money,” see Dyson & Hodgson, supra note 123,
at 2, 8, 22–24.
2021] MONEY IN THE TWENTY-FIRST CENTURY 225

through regulated intermediaries: the balances from bank accounts used to

make payments and transfers. Worse still, the indirect model would leave for
banks the job of providing every person—no matter how poor, uneducated,
or old they may be—with the digital sovereign money.268 Depending on how
banks handled this massive need for financial inclusion, the transition to a
CBDC could give rise to segregation or even outright discrimination,
depriving many of essential services.
For a CBDC to be transformative, the central bank has not only to issue
the sovereign money digitally but to establish a direct relationship with
persons and institutions, receiving their deposits and processing payments
among them. This kind of “central bank for all,” with the central bank and
the banks competing for deposits, could end up increasing rather than
reducing instability. As deposits held with the central bank, the ultimate
issuer of the sovereign digital currency, would be safer than deposits kept
with banks, depositors would have an increased incentive to move their funds
to the central bank. Banks could still compete with the central bank by
offering an additional return to depositors willing to stay. But, at the first sign
of trouble, the remaining depositors would probably flee from banks to the
central bank. This flight to safety is a hallmark of crises and a common trigger
of bank runs, asset fire sales, and financial panic.269
If banks lost much of their deposits to the central bank, they would have
to find other sources to fund lending operations and remain in the business.
That is why banks, under the CBDC model proposed here, should be able to
borrow CBDC from the central bank against a broader range of collateral and
for longer periods. The additional CBDC liquidity would provide banks with
stable and inexpensive funding that could be used to meet the demand for
credit in the economy, thus avoiding credit freeze and spikes in interest rates.
As an incentive, especially in times of crisis or persistent deflation, favored
borrowing conditions based on the volume of bank loans to specific
segments, like small businesses or green projects, could apply. This type of

268
See Ben Broadbent, Deputy Governor, Bank of Eng., Speech at the London Sch.
Econ.: Central Banks and Digital Currencies (Mar. 2, 2016),
https://www.bankofengland.co.uk/speech/2016/central-banks-and-digital-
currencies [https://perma.cc/6TJW-KW54].
269
Arguing that a CBDC competing with bank deposits could increase the risk of
bank runs, see Aleksander Berentsen & Fabian Schär, The Case for Central Bank
Electronic Money and the Non-Case for Central Bank Cryptocurrencies, 100 FED.
RES. BANK OF ST. LOUIS REV. 97, 101–102 (2018),
https://doi.org/10.20955/r.2018.97-106 [https://perma.cc/LQU7-XC9S]; Cecchetti
& Schoenholtz, supra note 265; Löber & Houben, supra note 264, at 16–17. But
see Jack Meaning et al., Broadening Narrow Money: Monetary Policy with a
Central Bank Digital Currency 14 (Bank of Eng. Staff Working Paper No. 724,
2018), https://www.bankofengland.co.uk/-/media/boe/files/working-
paper/2018/broadening-narrow-money-monetary-policy-with-a-central-bank-
digital-currency.pdf (arguing that the risk of runs from bank deposits to the
sovereign digital money would be manageable depending on the model of CBDC
adopted).
226 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

liquidity assistance is nothing new in central banking. The ECB has been
offering targeted longer-term refinancing operations since 2014. The
TLTROs, as they are known, allow banks that lend more to non-financial
corporations and households to borrow more and at a lower interest rate from
the ECB.270
3. Legal Limits of the Monetary Mandate
Under the model of CBDC proposed, the central bank would face three
immediate legal questions from the monetary perspective. First, would the
central bank have the authority to issue currency in digital form? Second,
could the central bank offer the digital currency directly to any person or
institution and even hold deposits? And third, how would the central bank
put the digital currency in circulation? The current legal framework of central
banking in different jurisdictions does not allow much room for a rapid
transition to a CBDC. Except for the European Union, the legal monetary
mandate tends to connect the central bank’s actions with the intermediation
of the banking system, limiting the central bank’s capacity to interact directly
with the public at large. Let’s compare what the central bank could do by
itself and how the transition would play out in some selected jurisdictions.271
4. Issuing the Currency Digitally
The language of monetary mandates is, in general, silent about a digital
form of currency, as digital currencies for general use are a more recent
possibility. It will be hard to find today a monetary mandate explicitly
authorizing the central bank to issue currency digitally. The legal question
has to be turned instead to examining whether a monetary mandate could still
be construed to accommodate the possibility of a sovereign digital currency
or whether the mandate somehow limits this possibility. In the United States
and Brazil, the language of the monetary mandate is broad enough to back
the view that the sovereign currency could take a digital form. The U.S.
Constitution gives Congress the mandate, which was delegated to the central
bank in the Federal Reserve Act of 1913, to “coin money [and] regulate the

270
About TLTROs and their costs and benefits, see Eric Lonergan & Megan
Greene, Dual Interest Rates Give Central Banks Limitless Fire Power, VOXEU
(Sep. 3, 2020), https://voxeu.org/article/dual-interest-rates-give-central-banks-
limitless-fire-power [https://perma.cc/4EFP-2J2K].
271
For a detailed discussion about the legal questions facing central banks that are
willing to issue CBDC, see Wouter Bossu et al., Legal Aspects of Central Bank
Digital Currency: Central Bank and Monetary Law Considerations (IMF Working
Paper No. 2020/254, Nov. 20, 2020),
https://www.imf.org/en/Publications/WP/Issues/2020/11/20/Legal-Aspects-of-
Central-Bank-Digital-Currency-Central-Bank-and-Monetary-Law-Considerations-
49827. [https://perma.cc/H8PG-T76Q].
2021] MONEY IN THE TWENTY-FIRST CENTURY 227

value thereof.”272 Likewise, the Brazilian Constitution grants the central bank
the power to “issue currency.”273
At the statutory level, moreover, the law stipulates that “United States
coins and currency (including Federal reserve notes and circulating notes of
Federal reserve banks and national banks) are legal tender for all debts, public
charges, taxes, and dues.” 274 The word “including” hints that the list that
follows “currency” is illustrative, allowing other formats of currency to be
legal tender. Similarly, the Brazilian law only requires two characteristics for
a currency to be considered legal tender in the sovereign territory: it has to
be issued by the central bank and denominated in the legally defined unit of
account.275 Nothing is said about the format of the sovereign currency. As no
constitutional or statutory rule determines the form the money or the currency
should have, both central banks could use the existing mandate to issue a
CBDC—or even to abolish cash altogether and substitute it for digital
currency.
The ruling of the U.S. Supreme Court in the Legal Tender Cases of the
late 19th century supports this line of interpretation.276 In 1870, the Supreme
Court examined the limits of the power of Congress to “coin money and
regulate its value thereof.” Back then, some advocated that this reference to
“money” should be understood as a reference to “metallic money,” such as
gold and silver coins, especially because the word “money” was closely
associated with the verb “coin.” As only metallic money could be “coined”—
in the sense of striking a coin by cutting it from metal—the conclusion should
be that the Constitution did not authorize the issuance of money in other
formats, like paper money.277
The Supreme Court, however, did not accept the argument that
because certain powers over the currency are expressly
given to Congress, all other powers relating to the same
subject are impliedly forbidden . . . [S]uch is not the manner
in which the Constitution has always been construed. On the
contrary it has been ruled that power over a particular subject
may be exercised as auxiliary to an express power, though
there is another express power relating to the same subject,
less comprehensive.278

272
U.S. Const. art. I, § 8, cl. 5.
273
C.F. art. 21, VII, and art. 164.
274
31 U.S.C. § 5103.
275
Lei No. 8.880, de 27 de maio de 1994, D.O.U. de 28.5.1994, art. 2º, caput, and
Lei No. 9.069, de 29 de junho de 1995, D.O.U. de 30.6.1995, art. 1º, caput.
276
See Legal Tender Cases, 79 U.S. 457 (1870). The decision in the Legal Tender
Cases was later abrogated in part by Tahoe-Sierra Preservation Council, Inc. v.
Tahoe Regional Planning Agency, 535 U.S. 302 (2002), although on other grounds,
related to the Court’s takings jurisprudence.
277
Legal Tender Cases, 79 U.S. at 464–73.
278
Id. at 544–45.
228 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

The Court reasoned that “the gift of power to coin money and regulate the
value thereof, was understood as conveying general power over the currency,
the power which had belonged to the States, and which they surrendered.”279
In the end, the majority of the Court ruled that the power to “coin money”
included the power for Congress to declare treasury notes, not only “metallic
money,” legal tender.280
Despite this legal flexibility at the federal level toward the sovereign
money format, some local and state governments in the United States started
enacting legislation to prohibit businesses from limiting only to cards the
payment of in-person transactions. 281 But these state and municipal laws
mandating cash acceptance would become futile if the Federal Reserve
stopped issuing physical money and opted instead for a sovereign digital
currency. Since federal law does not prescribe the format the sovereign
currency must have, abolishing cash should not present a legal problem, as
long as the central bank issues some other type of sovereign currency.
In the European Union, on the other hand, the plain language of the
monetary mandate is more restrictive, complicating an outright expansive
interpretation. According to the Treaty on the Functioning of the European
Union (TFEU), the ECB has “the exclusive right to authori[z]e the issue of
euro banknotes,” while “Member States may issue euro coins.”282 This binary
distinction between paper currency and coins may hinder the creation of a
“digital euro” if the legal framework is not adjusted.283 As the legal rules
characterize the two forms of money that can be issued, adding a third one
(the digital form) through interpretation could face pushback. This view is
reinforced by another legal provision in the TFEU, underscoring that euro
banknotes “shall be the only such notes to have the status of legal tender
within the Union.” 284 In consequence, it could be even harder to justify
eliminating cash in favor of a sovereign digital currency in the Eurozone. The
explicit legal reference to euro banknotes and coins seems to constrain the
ECB more tightly when it comes to the format of the euro.
The language of the TFEU, however, has not prevented the ECB from
using digital money—in the form of electronic reserves—in its transactions
with the banking system to process payments and to conduct open-market or

279
Id. at 546.
280
Id. at 546–47.
281
The city of Philadelphia and the state of New Jersey passed laws in early 2019
prohibiting some retail businesses, notably restaurants, from refusing to accept cash
as payment from their customers. See Olga Kharif & Krista Gmelich, As Amazon
Leads Cashless Charge, States and Cities Push Back, BLOOMBERG (Mar. 29, 2019,
5:00 AM), https://www.bloomberg.com/news/articles/2019-03-26/who-is-banning-
cashless-stores-amazon-go-could-be-next [https://perma.cc/RET6-KEJG].
282
TFEU, art. 128(1)–(2), 2016 O.J. (C 202).
283
In Brazil, the binary distinction, despite not present in the language of the
Constitution, appears in the federal law that created the Central Bank of Brazil and
organizes and regulates the financial system: Lei No. 4.595, de 31 de dezembro de
1964, D.O.U., art. 10, I, de 31.1.1965.
284
TFEU art. 128(1).
2021] MONEY IN THE TWENTY-FIRST CENTURY 229

credit operations. In the Eurozone, both settlement and reserve accounts are
kept by commercial banks with a National Central Bank participating in the
European System of Central Banks. These accounts are denominated in euro,
and transactions are processed and settled using “central bank money,” in the
language of the related regulation. “Central bank money,” according to this
regulation, means electronic reserves kept in settlement and reserve accounts
in opposition to banknotes and coins, which, when used in payments, would
lead to a “cash settlement” through a “dedicated cash account.”285
More than that, as long as the ECB can frame the issuance of a “digital
euro” as a measure related to “price stability,” the ECB’s decision could be
met with a more favorable reception. First, because the ECB’s Governing
Council—comprised of the members of the Executive Board of the ECB and
the governors of the national central banks of the Member States whose
currency is the euro—is statutorily authorized to “decide upon the use of
[other instruments of monetary control] as it sees fit.”286 With a majority of
two-thirds of the votes cast, the ECB’s Governing Council could decide on
the adoption of a “digital euro” to achieve the objective of price stability.
Second, because the Court of Justice of the European Union, in the leading
case Gauweiler, signaled that it is willing to show more deference to the
ECB’s decisions related to ensuring price stability.287
5. Making the Digital Currency Widely Available
When it comes to making the digital currency available to the public, the
legal situation in those selected jurisdictions is quite the opposite: the
prospects are brighter in the European Union than in the United States or
Brazil. Central banks from these two countries are statutorily authorized to
establish relations only with a limited set of institutions, not with people or
corporations. In the United States, a Federal Reserve Bank may receive
deposits from its member banks, from the government, from other Federal
Reserve Banks, and from foreign banks. 288 A Federal Reserve Bank may
even receive deposits from “any nonmember bank or trust company or other
depository institution,” but “solely for the purposes of exchange or of

285
About the different accounts kept with the National Central Banks and the
nature of their balances, see Council Guideline 2015/510, of the European Central
Bank of 19 December 2014 on the Implementation of the Eurosystem Monetary
Policy Framework, art. 2(91), 54, 2015 O.J. (L 91) 3; Council Regulation
1745/2003, of the European Central Bank of 12 September 2003 on the Application
of Minimum Reserves, art. 6(1), 2003 O.J. (L 250) 10; Council Guideline 2013/47,
of the European Central Bank of 5 December 2012 on a Trans-European
Automated Real-time Gross Settlement Express Transfer System, art. 1(1), 1a,
2(51), (57), (59), 2012 O.J. (L 30) 1.
286
Statute of the European System of Central Banks and of the European Central
Bank, 2016 O.J. (C 202) [hereinafter ECB Statute] art. 10.1, 20.
287
See Case C-62/14, Gauweiler v. Deutscher Bundestag, 2015 EUR-Lex
62014CJ0062 (June 16, 2015).
288
Federal Reserve Act § 13(1),(14) (1913); 12 U.S.C.A. §§ 342, 347d (West
1913).
230 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

collection.” 289 Both of these purposes are related to the processing of

payments and transfers of funds that occurs daily among banks within the
payments system based on their clients’ monetary activities.
If, however, the Federal Reserve Banks could eventually provide digital
wallets for regular people, they might have to charge all depositors for
offering this service. Under section 11A(b)(8) of the Federal Reserve Act,
“any new services which the Federal Reserve System offers, including but
not limited to payment services to effectuate the electronic transfer of funds,”
shall be covered by a fee schedule.290 And the schedule of fees is fixed by the
Board of Governors based on pricing principles defined in section 11A(c).291
Section 11A(a) of the Federal Reserve Act, on the other hand, restricts the
charging of fees to services rendered by the Reserve Banks to “depository
institutions”—which again indicates that, under current law, the Federal
Reserve cannot interact with the public at large.292
The legal structure in Brazil is similar, as the Central Bank of Brazil, or
BCB, can receive and hold deposits from financial institutions.293 A more
recent statute authorized the BCB to receive and hold deposits from non-
financial institutions that are part of the Brazilian Payments System (SPB).
These institutions are typically fintech companies offering prepaid cards and
pre-funded digital wallets that allow their customers to hold and transfer e-
money.294 Even so, no legal authorization exists today for the BCB to receive
deposits from individuals or businesses that are not financial institutions or
participants in the SPB. The Brazilian Constitution, moreover, explicitly
prohibits the BCB from giving loans to any person or institution,
governmental or private, other than financial institutions. 295 Although not
directly related to the possibility of the BCB opening accounts for regular
people, this constitutional rule reinforces the idea that the BCB cannot have
relations beyond the financial system. In these two jurisdictions, thus, the
central bank does not find in the current legal rules the required authority to
accept deposits from individuals and corporations.
It would be legally easier for the ECB to offer “digital euros” directly to
the public, as “the ECB and the national central banks may open accounts for
credit institutions, public entities and other market participants.” 296 The
current statutory language would thus suffice to allow the ECB to offer a
“digital euro” to the public through digital accounts or wallets if it so chooses.
The related regulation, however, points in a different direction. Guideline
2015/510, edited by the ECB in late 2014 to regulate the Eurosystem
monetary-policy framework, prescribes that only “institutions” can be

289
Federal Reserve Act § 13(1); 12 U.S.C.A. § 342.
290
12 U.S.C.A. § 248a(b) (West 1913).
291
Id. § 248a(c).
292
Id. § 248a(a).
293
Lei No. 4.595, de 31 de dezembro de 1964, D.O.U., art. 10, IV, de 31.1.1965.
294
Lei No. 12.865, de 9 de outubro de 2013, D.O.U. de 10.10.2013, art. 14.
295
C.F. art. 164, § 1º (Braz.).
296
ECB Statute, 2016 O.J. (C 202) art. 17.
2021] MONEY IN THE TWENTY-FIRST CENTURY 231

eligible to take part in monetary-policy operations with the ECB. 297 The
question here is whether depositing digital currency in digital wallets
provided by the central bank and making payments and transfers would come
under “monetary-policy operations.”
6. Putting the Digital Currency into Circulation
Finally, regarding the question of how to put the digital currency in
circulation, central banks might find difficulties in using the existing tools to
this end. The traditional open-market operations, in which the central bank
trades electronic reserves for securities to adjust the price and availability of
money in the economy, may not be the ideal tool. The central bank conducts
open-market operations today not directly with individual investors or
institutions but through auctions restricted to selected dealers. These dealers
are known as “primary dealers,” which are big banks and securities traders
ready to buy or sell government securities, helping to keep liquid the market
for these securities. This procedure, however, is more a result of practice and
regulatory activity than of statutory command. In consequence, the central
bank could broaden its audience for open-market operations, if needed or
desired.
In the United States, the Federal Reserve Banks may buy and sell in the
open market government and agency securities.298 The situation in Brazil and
the Eurozone is similar since no statutory rule compels the central bank to
deal with selected counterparties.299 The only condition is that the operations
happen in the “open market,” in the sense that the central bank does not
transact directly with the treasury, but rather trades government securities in
the secondary market to avoid monetary financing. If this condition is
observed, the central bank is free to choose its counterparties—unless the
related regulation stipulates otherwise, as illustrated by the ECB’s Guideline
2015/510 setting that only “institutions” can be eligible counterparties with
the ECB. Even so, if the regulation were adjusted, the statutory language
would support an expansive interpretation of the counterparties eligible to
engage in open-market operations with the central bank.
The current system of “primary dealers” is used, though, to facilitate
open-market operations. All the payments the central bank makes or receives
are processed with electronic reserves, and, today, only banks holding
reserve accounts have access to electronic reserves. Given, moreover, the
volume transacted in open-market operations, the counterparties trading with
the central bank must be able to handle the transactions in a reliable and
timely fashion. The high nominal values these transactions can reach makes
it difficult for individuals, corporations, and smaller financial institutions to

297
See Council Guideline 2015/510, of the European Central Bank of 19 December
2014 on the Implementation of the Eurosystem Monetary Policy Framework, art.
55–57, 2015 O.J. (L 91) 3.
298
See Federal Reserve Act § 14(2)(b) (1913); 12 U.S.C. § 355 (1971).
299
In Brazil, see Lei No. 4.595, de 31 de dezembro de 1964, D.O.U., art. 10, XII de
31.1.1965. In the Eurozone, see ECB Statute art. 18.
232 OHIO STATE BUSINESS LAW JOURNAL [Vol. 15:1

participate in open-market trades consistently.300 But then again, nothing in

the examined legal frameworks prevents the central bank from trading
directly with counterparties other than the “primary dealers” or some selected
institutions.
7. Testing the Legal Limits of Monetary Change
From a legal standpoint, it is unlikely that any of these central banks
could opt for a digital currency without first seeking from the legislature a
revamp of the law of the monetary system. In the jurisdictions surveyed, the
monetary mandate does not grant the central bank clear authority to issue
currency in a digital form or establish a direct relationship with persons
willing to use or hold the currency. Even when the language of the monetary
mandate seems flexible enough to authorize the issue of currency in digital
form, the central bank does not have sufficient legal authority to offer
accounts or wallets to the public.
CONCLUSION
At this point, some structural reform of the monetary system seems not
only desirable but inevitable. The technology available can speed up the
process, creating new possibilities for money that would change the life of
governments, central banks, financial institutions, and regular people. From
allowing the privatization and decentralization of money to enabling central-
bank digital currencies (CBDCs), options abound. More than that, with many
private players entering the monetary game, from creative start-ups to
ambitious big tech firms, the interest in transforming money is now
widespread. Among all these possibilities, what does the future hold for
money, and what type of money will prevail?
Bitcoin offers by far the best solution for cross-border payments. Two
characteristics help the reigning cryptocurrency receive this recognition:
Bitcoin has no issuer, so it is not connected to a jurisdiction, and it has its
own unit of account, without any reference to or backing by a sovereign
currency. A bitcoin in a Japanese wallet can be transferred to a Brazilian
wallet and then to an American wallet seamlessly and in no time. The main
trouble with Bitcoin appears at the national level, when someone wants to
use Bitcoin as money to pay for basic goods and services. As few places
accept bitcoins for everyday payments, the holder has to exchange bitcoins
for the sovereign currency whenever she wants to buy groceries or take a bus.
For domestic use, a CBDC could prove more useful and even vital. In
the increasingly digital world, not having access to digital money means not
being a full citizen. A CBDC will not promote financial inclusion by itself.
Digital currencies may be useless for those who do not have regular access
to smartphones, connectivity, or even electricity. But if central banks do not

300
For an up-to-date view on the typical size of open-market operations, see
Markets Data Dashboard, FED. RES. OF N.Y.,
https://www.newyorkfed.org/markets/data-hub (last visited Jan. 28, 2021).
2021] MONEY IN THE TWENTY-FIRST CENTURY 233

offer a stable and inexpensive public option for digital money and payments,
many persons and small businesses that cannot afford the private alternatives
could be deprived of an essential service in the modern economy. A CBDC
would also provide a public choice for those who would still prefer to have a
government-issued digital currency despite the many options offered by the
private sector, from bank deposits and e-money to cryptocurrencies and
stablecoins.
Among the private options, a digital currency issued by one of the big
tech companies could rapidly become dominant. These companies can take
advantage of their extensive user base and geographical dispersion to create
a digital currency that would facilitate not only local transactions but also
cross-border payments. Facebook’s Libra, now Diem, was the initial step in
this direction, although its future is still unclear. But we should not overlook
that, with a 2.4 billion user base, Facebook can eventually offer its digital
currency to more than 1/3 of the world’s population. Rich or poor, old or
young, educated or illiterate, if these users can already access Facebook, they
could use its coin as well.
In the end, no matter how fanciful the monetary alternatives look like,
finding the money of choice comes down to answering one old question. Who
do you trust the most (or the least) to take care of your money: the
government, Bitcoin’s developers and miners, or Facebook?