Central banks across the world – including those of the Arabian Gulf countries – are considering launching digital currencies. America’s tumultuous monetary history provides many useful lessons for central bankers as the transition away from paper money accelerates. One of the most important is that while unregulated digital currency is unstable, regulated digital money is prone to political capture.
For more than a century, Americans lived without a central bank. During the 1800s, money was issued by thousands of competing financial institutions and more or less anyone was free to throw their monetary hat into the ring, constituting a banking analogue to the Wild West.
Counterintuitively to those who have grown up in the era of strong central banks, this system somehow worked, though it certainly sputtered on more than one occasion. As we debate digital currencies today – centralised digital currencies versus decentralised crypto – we are replaying a very old argument.
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To be more precise, prior to the establishment of the Federal Reserve, the nascent American nation’s federal nature meant that there was no national monetary authority. Anyone could issue currency, and the value associated with those notes stemmed from the trust that people had in the issuing institution.
Critically, competition played a decisive role in the sys
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