Americans already conduct most of our monetary transactions with cards and computers instead of cash, just as our predecessors paid with paper money long before the Civil War. But the digital money we use today comes from privately run banks instead of the U.S. Mint (which emits coins) or the Federal Reserve (which issues paper bills).
Though they are often described as go-betweens, which transfer funds from depositors to borrowers, banks actually create the money they lend. When you borrow $1,000, the bank simply records a $1,000 deposit in your name, which the federal government enables you to use as you would coins or bills. The Treasury accepts deposit dollars from taxpayers and operates the electronic clearinghouse through which deposits move from bank to bank, whether by check, credit card or online platforms like PayPal and Venmo. The Federal Deposit Insurance Corporation also makes deposits as secure as cash by insuring them against bank default, and the Federal Reserve exchanges cash for banks’ deposits to meet their customers’ demands.
Yet, though enabled by governmental support, banks control the deposit dollars they generate. Their focus on profits means they provide grossly unequal access to financial services essential for earning, spending, saving and surviving. Now the Fed is considering creating a public virtual currency that would come from offering accounts to the general public at the central bank itself. Instead of private bankers, public officials would decide how much of the digital money to generate and how to lend or spend it into circulation.
The debate over the digital dollar is ultimately about whether the production of money should be a business run for private profit or a resource owned and operated by the public. Recent proposals mark a revival of the contest between these contrasting visions, which actually began 100 years before the federal government and American banking were born.
Starting in the 1690s, the British colonies issued the first paper currencies controlled by elected legislatures, unlike in England, where bankers took command of the pound sterling. By paying for public services with “bills of credit,” lending them to colonists at low interest rates and accepting them for tax payments, colonial assemblies made and managed their own money. They treated currency and credit as collectively controlled public utilities rather than private assets, staving off extortion of farmers and shopkeepers by merchants and moneylenders. And when the British government cracked down on the provincial currencies and imposed taxes that had to be paid in scarce sterling instead, the colonies rose in revolt.
In the face of demands for a popularly controlled paper currency, the U.S. Constitution decreed that only the federal government could “coin money” and only “gold and silver coin” could serve as legal tender. But amid a chronic scarcity of metallic currency, the states authorized hundreds of newly chartered banks to lend out paper notes that passed from hand to hand as freely as coin and could be exchanged for coin on demand.
As working people came to rely on monetary transactions for their livelihood as never before, bankers’ control over the main means of payment made them the new gatekeepers of the market economy, shaping the fortunes of households, towns and regions. The proliferation of bank notes became an increasingly urgent political question, fueling the fierce “bank wars” of the 1820s and ’30s over the publicly granted privileges and powers of privately run banks.
When the federal government finally created a national paper currency of U.S. Treasury notes during the Civil War, it also introduced a short-term income tax to be paid with the “greenbacks.” The twin powers to make money widely accessible and to take it back in progressive taxes formed the financial pillars of what Abraham Lincoln called “government of the people, by the people, and for the people.” But Congress also founded a new National Banking System that issued its own bank-note currency of, by and for financiers.
The simultaneous circulation of Treasury notes and bank notes reignited political conflict as the government gradually contracted the supply of greenbacks after the war. Bankers kept a tight rein on the nation’s paper currency as well as deposit dollars, and the scarcity of money contributed to the deep economic depressions of the late 19th century.
In the 1890s, debt-driven farmers formed the largest third-party movement in American history, demanding a “people’s money” issued solely by the federal government “without the use of banking corporations,” along with a progressive income tax. “A government violates its most sacred obligation,” said the Farmers’ Alliance leader Charles Macune, “when it delegates to a certain class of its citizens the right to issue money” and makes money so scarce “that the inadequate volume may possess the power to oppress all other classes.”
Though it lost the battle for popular control of money and credit, the agrarian movement won vital measures of access and equity, including a Federal Reserve System established in 1913 with heightened government oversight of the banking industry and a constitutional amendment for a federal income tax, ratified the same year. Related restructuring begun during the Progressive Era and the New Deal — including federal loan programs for farmers and homeowners, federal deposit insurance and a gradual departure from the gold standard — sought to enhance the fairness and flexibility of the monetary system.
But the Fed also insulated banking from popular politics and public accountability in ways that proved increasingly problematic as debt became a big business in the late 20th century, driving the decisions of households, workers, businesses and local and state governments. In recent years, the financial meltdown of 2008 and the covid-19 crisis have thrown into stark relief the inequality built into the structure of bank money.
The Fed — charged with ensuring the public good — serves as a bank for the banks, offering them deposit accounts (interest-bearing since 2008), low-interest loans and funds transfers at minimal cost, and it buys mortgage-backed securities and other assets to boost banks’ business. But the banks then decide how much to lend, to whom, for what purpose and on what terms, all in pursuit of private profit. They also charge lucrative fees for maintaining deposit accounts, processing checks and card payments and covering overdrafts. Millions of Americans who cannot afford these fees and minimums are left to depend on exploitive check-cashing services, payday lenders, pawnshops and prepaid cards to receive income, borrow money and pay bills.
Today, the Fed has emerged as the platform of a resurgent movement demanding “banking for all,” focused on the introduction of a new digital dollar. Such a publicly created currency would allow all Americans to bank at the Fed itself. As a bank for the people rather than for profit, it might offer accounts with no minimums or fees, and it could pay interest and offer loans to households and businesses as it now does to banks. The Fed could then modulate and allocate the deposit money that sustains the American economy directly, instead of simply seeking to encourage or discourage banks’ lending. More far-reaching designs call for further reforming the Fed so it could invest new funds in public infrastructure, cash-strapped cities and struggling industries.
Underlying the campaign for a new form of federal currency is the enduring struggle for democratic control of finance, the leading industry of the U.S. economy in the 21st century. Much as early American politics was preoccupied with debates over what money was made of — gold or silver, coins or bills — current discussions focus on the promise and peril of cybercurrency, mobile banking and other electronic means of payment. Yet what is really at stake is not financial technology but financial democracy.