Cash use by country varies enormously. While its use has been falling on both sides of the Atlantic, Europeans use considerably more cash than Americans. Higher taxes and greater tax avoidance, culture, and lower consumer incentives to use electronic payment systems, contribute.

The ECB’s “Study on the payments in the euro area 2022” reported that 59% of consumer payments in the euro-zone at the physical point of sale were made in cash. Seventeen percent of payments in the euro-zone in 2022 were online. Assuming they were largely electronic, roughly 49% of consumers’ payment transactions in the euro-zone were in cash. Across the Atlantic, the Federal Reserve’s “2024 Findings from the Diary of Consumer Payment Choice” reported that only 18% and 16% of all US consumer payments in 2022 and 2023, respectively, were made in cash.

People do more of what they’re rewarded for and less of what they’re penalized for. Incentives in the EU and the U.S. differ.

The Tax Foundation’s Center for Global Tax Policy’s “International Tax Competitiveness Index 2023” scores U.S. consumption taxes as lower than every EU country in the Organization for Economic Cooperation and Development. And, the U.S. has lower individual income taxes than most major EU countries. One of the reasons more Europeans than Americans pay in cash is to avoid higher taxes.

Every country has an informal economy of activities hidden from government to avoid taxes and regulation, or for institutional reasons. If people want to avoid paying sales, value-added, and income taxes, they don’t pay with or accept credit and debit cards. They pay in cash.
With the exception of Switzerland, Europe’s shadow economies are larger than America’s, most far larger.

Economists Leandro Medina and Friedrich Schneider’s fascinating research “Shedding Light on the Shadow Economy” estimated the size of informal economies in countries worldwide. There’s enormous variation. They estimated that at the extremes, Switzerland’s and Bolivia’s shadow economies in 2017, were 5.4% and 55.8%, respectively, of the total.

Medina and Schneider estimated that in 2017 America’s shadow economy was 5.7% and, in the euro-zone, Belgium’s, Greece’s, Italy’s, Portugal’s, and Spain’s shadow economies were 16.5%, 24.8%, 19.8%, 16.1%, and 20.3%, respectively, of the total. Northern European countries’ grey economies while larger than America’s, aren’t as much larger.

Cultural attitudes matter. Francis Fukuyama in Trust: The Social Virtues and The Creation of Prosperity observed most countries are “low-trust,” meaning that people don’t trust those outside their families or inner circles. Cheating on taxes is more culturally acceptable in low-trust societies. America is a high-trust society. Much of southern and eastern Europe is low-trust.

When tax avoidance is widespread, law-abiding taxpayers have to pay more. Making the use of electronic payment systems more attractive, would make it more difficult for individuals and firms to operate in the shadow economy, and, thereby, potentially, enable law-makers to reduce tax rates.

Irrespective of the relative tax burdens, incentives to use electronic payment systems are greater in the U.S. than in Europe. American cardholders are richly rewarded for paying with credit cards. A more robust revolving-credit market and market interchange fees funding a buffet of benefits and rewards make credit cards a more compelling consumer proposition in the U.S. Consumers pay with cards for convenience, record-keeping, and because often they’re rewarded handsomely for doing so. In 2023, 57.3% of US general-purpose card payments value and 40.3% of transactions were credit. Whereas in the first half of 2023, only 8.8% of EU general-purpose card payments value and 8.1% of transactions were credit.

The EU has reduced people’s incentives to pay electronically. Interchange fees paid by merchants fund cardholder rewards and benefits, and fee-free accounts. Brussels imposed punitive price caps on credit and debit interchange fees of 30 and 20 basis points, respectively. In 2022, the average US market debit-interchange fees for politically sympathetic bank issuers with under $10 billion in assets of Discover, Mastercard, and Visa debit cards were 141, 137, and 143 basis points, respectively – roughly 600% higher than the EU’s di minimis price control. Some U.S. premium-credit interchange rates are 800% higher.

Because of interchange price controls, European programs rewarding card use, to the extent they exist at all, are stingy. That accounts, at least in part, for why credit-card use is much less prevalent and cash use is higher in the EU.

Enabling the payments industry to more richly incentivize Europeans to make card payments won’t eliminate cash or the grey economy, but it would reduce both.

Capital One is the trailblazer that larger banks like BofA, Chase, and Wells Fargo should follow to move their debit businesses to a freer market enabling enormous value creation for their customers and shareholders. With Capital One’s $35 billion all-stock acquisition of Discover, it will own two national debit networks and thereby free itself from value-stifling debit-interchange price controls.

Interchange fees are the principal revenue source for debit cards and DDAs. They fund fee-free accounts, a range of benefits and rewards, and issuer and fintech innovation. They’re neobanks’ lifeblood.

The 2010 Dodd-Frank Act’s “Durbin Amendment” subjects politically unsympathetic banks with over $10 billion in assets that “route” transactions over third-party debit networks like Mastercard and Visa, to punitive debit-interchange price controls. All banks using third-party debit networks are required to provide at least two unaffiliated networks on each card for merchants to choose between. Lawmakers’ idea was to force down merchants’ debit-card-acceptance costs. But one has to consider the entire payment system end-to-end. The unacknowledged consequence was higher consumer fees for debit cards and DDAs, the elimination of benefits and rewards, and suffocating innovation.

Congress tasked the Fed with implementing its debit-interchange price controls. Under the Fed’s proposed reduced cap, covered debit issuers would earn 17.7 cents in interchange on the average $50 transaction or 35.4 basis points.

In 2022, the average market debit-interchange fees for Discover, Mastercard, and Visa were 141, 137, and 143 basis points, respectively, which is 300% higher than the new proposed ceiling. Brand-neutered traditional pin-debit networks have lower interchange fees. Average market debit interchange fees for Accel, Jeanie, NYCE, Pulse, and Star in 2022 were 57, 44, 75, 74, and 49 basis points, respectively.

Banks unfettered by the cap would earn vastly more interchange revenue.  Plus, banks owning their own debit network would earn roughly 16 basis points in network fees from merchants. On the cost side, they would save a few basis points in network-issuer fees currently paid to third-party networks. The economic lift would be compelling and banks’ shareholders and customers would be the chief beneficiaries.

J.P. Morgan Chase looked at acquiring Discover, but passed. Perhaps Chase wasn’t interested in some of Discover’s nonnetwork businesses.

In 2023, BofA, Wells Fargo, and Chase debit cardholders did $468.1 billion, $467.6 billion, and $467.3 billion of purchase volume, respectively.  Capital One debit cardholders did considerably less – only $66.7 billion. By acquiring its own debit network, each of America’s three largest retail banks, therefore, has an opportunity to realize incremental revenue and cost savings roughly seven times greater than the Capital One/Discover combination’s gain.

Other than Mastercard and Visa, Discover has the best debit network in terms of acceptance and a trusted brand that a debit-issuing titan could acquire to free itself of the Durbin Amendment’s shackles.

There are, however, other debit networks they could try to buy. Processors Fiserv and FIS own the Accel and Star debit networks, and the NYCE and Jeanie networks, respectively.  Alternatively, banks might seek to buy and build out a smaller cooperative debit network such as Shazam or Co-op Pay.

The tier-two debit networks have interrelated weaknesses, all of which a BofA, Chase, or Wells Fargo could fix. Their brands are near worthless; they have weaker merchant acceptance than Discover, Mastercard, and Visa; they do little to incent incremental cardholder use; and they have lower interchange than the leading debit networks, making it more difficult to fund cardholder benefits.

In retail payments, brands convey the promise of acceptance and guaranteed payment. Tier-two debit networks ride in the slipstream of Visa’s and Mastercard’s brands. For instance, if Star’s enabled on a Visa-branded debit card, its brand is rarely on the card. At best it’s displayed with a small bug on the back of the card. When transactions are routed over Star, cardholders and merchants assume it’s a Visa transaction.

BofA, Chase, and Wells Fargo have powerful, trusted brands. Using their brands on their networks’ debit cards and as acceptance would strengthen the network. A stronger network brand begets greater acceptance, spend, and interchange revenue.

Traditional pin-debit networks Accel, Jeanie, NYCE, and Star don’t enjoy ubiquitous acceptance in-person, much less online. Nevertheless, each of them has acceptance at most of the nation’s largest retailers.  Critically, banking giants would boost their networks’ acceptance, directly and through partners.

BofA, Chase, and Wells Fargo in a joint venture with Fiserv, have acquiring businesses that provide payment acceptance to merchants. They would use their own and third-party acquirers to expand their debit networks’ acceptance and thereby their debit volume reaping market interchange revenue. Greater acceptance begets greater use and interchange revenue, and bolsters the brand.

Retail-bank colossi have the wherewithal to create rich reward-and-loyalty programs boosting use. Greater cardholder spend increases acceptance, enables higher interchange, and strengthens the brand.

And, broader acceptance, a brand consumers and merchants recognize and trust, and meaningful rewards and greater spend, enable higher interchange, which enables richer rewards. There are powerful flywheel effects.

Debit-issuing giants would only earn market interchange where their network is accepted. Elsewhere they’d be subject to Congress’s interchange cap and have to support a second unaffiliated debit network. Initially banks with their own debit network would have to cobrand debit cards with Discover, Mastercard, or Visa to ensure maximum acceptance, while investing to build acceptance parity.

While the U.S. debit-network market is the most competitive in the world, it’s dominated by global payment networks Visa and Mastercard. Nonetheless, if several major debit issuers owned their own debit network, competition would intensify. It would drive a stake into the heart of the Durbin Amendment’s manacled market. They’d slash or eliminate retail-banking and debit fees and offer consumers a rich buffet of rewards. That’s pro-consumer. Being pro-consumer is a good growth strategy.

America’s retail-banking behemoths don’t have to continue to be straitjacketed by the Durbin Amendment. They haven’t put their political shoulders behind repealing it. They owe their customers and shareholders more. Capital One is showing them there’s another path to escape its restrictions and create value for customers and shareholders.

The Cato Institute’s Nicholas Anthony warned that the Biden administration is waging “a war on (payment industry) prices.” The payments industry provides services funded by a range of fees paid by consumers and businesses. Demagogic regulators and politicians pillory industry fees as exploitative, as “junk fees” and “a tax.” These assaults are made in a steadily worsening political climate. Despite the increasing number and severity of attacks, the payments industry has been reactive, resisting each assault it occurs, and treating it as a one-off.

Whoever frames the terms of the debate has the high ground. It’s imperative that the payments industry get off its backheels and make an affirmative case in the public square for the value it delivers and for the freedom to compete and innovate. Consumers and businesses need to be reminded of that value and alarmed about the threat Washington mandarins imposing restrictive regulations and price controls pose to payments value and innovation that they take for granted.

Finance charges are the credit-card industry’s largest source of revenue. Introducing the Capping Credit Cards Interest Rate Act Republican Senator Josh Hawley declared “exploiting people through high interest rates is wrong.” Hawley’s bill would limit credit-card interest rates to 18%, which would reduce the number of Americans approved for credit cards and average credit limits. While Hawley would piously trumpet his good intentions, in what universe would this help Joe and Sally Sixpack?

Singing from the same hymnal, the CFPB accusatorily reported that large credit-card issuers’ median interest rate for cardholders with good credit was 28.2% compared with 18.15% for small issuers and said large issuers were three times more likely to charge an annual fee. The CFPB is trying to socialize the introduction of credit-card price controls. It blamed higher rates on a “lack of competition.” One would be hard-pressed, however, to find an industry where consumers and businesses have more choice than with credit cards.

Vilifying the payments industry makes for strange bedfellows. Progressive CFPB Director Rohit Chopra and populist Republican Hawley both threaten the payments industry and credit cardholders

Credit cards are a fabulous product providing most Americans with a convenient, secure means to pay worldwide in-person and online, access to cash, record keeping, rewards, and the option to instantly access credit.

If a national cap was imposed on credit-card interest rates, revolving credit would become less available, particularly to riskier consumers with less access to financial services, consumers many industry critics say they want to help.

Interchange fees paid by merchants are the credit-card industry’s second largest revenue source and debit cards’ and neobanks’ primary revenue source.

The 2010 Dodd-Frank Act imposed price controls on debit interchange fees for politically-unsympathetic large issuers. The Fed was charged with implementing interchange caps reasonable and proportional to debit issuer’s incremental processing costs. In 2011 debit interchange revenue for covered issuers was cut by over 50%.

Debit-issuer processing costs have fallen by roughly 50% since the Durbin Amendment was implemented. The Fed is, therefore, going to slash the debit-interchange price cap by ~ 28%.

Lower debit-interchange price caps will further advantage programs where community banks enjoying market interchange have partners with the resources and reach to fully capitalize on their massive revenue edge. PayPal’s Venmo card, the Cash App card, and Chime’s debit card, are well-positioned to take debit share from Goliath banks like BofA, Chase, and Wells Fargo, which are shackled by debit-interchange price controls. Further cutting giant debit issuers’ debit economics will also ensure a huge advantage for Capital One’s debit cards and DDAs, which would also enjoy market interchange fees, if it acquirers Discover.

Senators Durbin, Hawley, Welch, Reed, Vance, and Marshall’s Credit Card Competition Act targets Mastercard and Visa and politically-unsympathetic credit-card issuers with more than $100 billion in assets. It aims to make credit-card networks invisible utilities and enable merchants to ratchet down network and interchange fees.

Like Americans, Canadians love their credit-card rewards. Like in America, they’re at risk. The Canadian government jawboned Mastercard, Visa, and Canadian banks into slashing credit-card interchange and disingenuously declared that credit-card rewards wouldn’t be affected. As interchange fees fund rewards, the only way they won’t be affected is if Canadian banks introduce new fees or accept lower profits.

Penalty fees also provide revenue for credit and debit issuers and encourage consumers to behave responsibly.

An absolutist CFPB plans to slash late and overlimit fees.

Late fees encourage cardholders to pay their obligations on time and compensate issuers for risk and servicing costs. The Card Act directed the Fed to ensure that late fees were “reasonable and proportional” to the violation. A fee that is fully disclosed and accepted by the buyer is reasonable.

The bureau proposes capping late fees at $8 and eliminating inflation adjustments. That will cost credit-card issuers more than $10 billion in lost revenue, increase delinquency, boost revolve rates, cause issuers to tighten credit underwriting criteria and reduce credit lines, and ultimately hurt consumers the CFPB claims to want to help.

The U.S., Fort Worth, and Longview chambers of commerce, the American Bankers Association, the Consumer Bankers Association, and the Texas Association of Business are suing the CFPB to stop it from slashing late fees, charging its proposal is lawless and asking the court to issue a preliminary injunction to keep its proposed $8 late fee from taking effect.

The CFPB also proposes gutting overlimit fees for banks with over $10 billion assets by treating them as finance charges. Paraphrasing George Orwell, in the CFPB’s view, all banks are equal, but some banks are more equal than others. It’s curious and rawly political that the CFPB views overlimit fees assessed by large banks as harmful, but not those assessed by community banks.

There are two challenges to the administrative state before the Supreme Court that bear watching that might curb absolutist financial agencies’ power.

The Community Financial Services Association contends that the CFPB self-appropriating from the Fed is unconstitutional.

And herring fishermen (Relentless versus the Department of Commerce and Loper Bright versus the Department of Commerce) are challenging the Chevron Doctrine and thereby the enormous deference the CFPB and other agencies regulating financial services enjoy and exercise.

It’s tempting but short-sighted for payments firms not to worry about price controls they’re not directly impacted by or that in the short-term they may profit from.  In the face of hostile politicians and regulators, the payments industry needs to heed Benjamin Franklin’s admonition to hang together or, assuredly, risk being hung separately.

Capital One’s $35.3 billion acquisition of Discover will be a thunderclap for the debit-card, retail-banking, and payment-network markets. The Discover network has long been the number five retail-payment network in the US, after Visa, Mastercard, American Express, and PayPal, and since its acquisition of Diners Club from Citi in 2008, has struggled as a weak, aspiring global payment network. Capital One’s acquisition of Discover will improve its prospects.

Economic activity and innovation move away from price controls and prescriptive regulation to freer domains.  With Discover, Capital One has a signal opportunity to disrupt Senator Durbin’s shackled US debit market

In 2011, Durbin’s price controls were imposed on debit-interchange fees politically-unsympathetic large banks earn. Price controls reduced fee-free banking, debit rewards, and innovation. Politically-sympathetic but resource-and-reach-constrained community banks enjoy market interchange but have had difficulty capitalizing on their advantage. However, collaborating with players with greater resources and reach, like PayPal, Block, and neobank Chime, they’ve enjoyed some success taking debit-payment share. Threatened, large banks lobbied the Fed to extend debit-interchange price caps to these programs, thus far unsuccessfully. They should instead put their shoulders four-square behind repealing Durbin’s price controls.

When Capital One’s debit-card portfolio is converted from Mastercard to the Discover network, it will benefit from higher market interchange and not have to offer merchants one of its network competitors. Operating as a three-party debit network routing transactions to itself as an issuer, Capital One will be exempt from the Durbin Amendment. Assuming all its debit transactions are Discover (some will be Pulse), its debit-interchange revenue will increase roughly 300% for a $50 payment. Capital One Mastercard-branded debit cards would earn 17.7 cents per payment under the Fed’s proposed debit cap of 14.4 cents per transaction, 4 basis points, and 1.3 cents for fraud-prevention recovery. Capital One Discover debit cards will earn 71 cents per transaction reaping interchange of 110 basis points and 16 cents per transaction.

Fueled by higher interchange, it will offer consumers richer value propositions than behemoths like BofA, Chase, and Wells Fargo, fettered by Illinois’s senior senator’s handiwork, can.

Capital One has an online and bricks-and-mortar retail bank, which will be bulked up by Discover’s digital bank. With its prowess crafting and executing strategies to originate cardholders and incent use, honed since its days as an aggressive monoline credit-card issuer, it will win share from banks straightjacketed by Durbin’s price controls.

America already has the world’s most competitive debit-network market. Competition will intensify. Bolstered by Capital One, Discover will become a more formidable competitor for Visa, Mastercard, Fiserv’s Star, and FIS’s NYCE.

Progressive heartthrob and financial-services-industry nemesis Senator Warren hyperbolically warns the merger “threatens our financial stability, reduces competition, and would increase fees and credit costs for American families,” is “dangerous” and “will harm working people.” Joe and Sally Sixpack, however, might not view fee-free banking and richer debit rewards – say 1% cashback, as harmful.

In 2021 56.2% of U.S. debit transactions were subject to interchange price controls. The percentage of debit transactions subject to price caps will fall precipitously, which will be good for consumers.

Debit-network and DDA competition and value for consumers will increase because of Capital One’s acquisition of Discover.

Strengthening Discover’s credit-card network will be more challenging.

Notwithstanding a patchwork of reciprocal-acceptance relationships with foreign payment networks, Discover has much weaker acceptance than Mastercard and Visa, and paltry issuance, abroad. Its reciprocal-acceptance network is handicapped by a lack of co-branding and co-signage at the pos.

While Capital One will keep a huge portfolio of Mastercard and Visa credit cards, tens of millions of credit cards it migrates will add heft to the Discover network.

Capital One will earn network acceptance licensing and processing fees instead of paying them to Mastercard and Visa. And, it will no longer pay issuer licensing and processing fees on cards converted to Discover.

In many countries issuers enable a national network for domestic payments and Mastercard or Visa for payments abroad. Chinese banks often co-brand CUP cards with Mastercard or Visa. French issuers co-brand all Cartes Bancaires cards with Mastercard or Visa. Capital One might seek a similar arrangement to provide acceptance worldwide. However, Capital One, Mastercard, and Visa would all have reservations. For Capital One a hybrid card might hamper enhancing Discover’s brand. And for the global networks while they’ve done it with CUP, they’d have reservations about strengthening a competitor.

To boost its value the Discover credit-card network most needs third-party issuance and greater acceptance abroad. If Capital One’s converted portfolio prospers, giants issuing Mastercard, Visa, and American Express cards will be easier, albeit still difficult, to persuade to offer Discover as well.

Community banks currently issuing Pulse and retailers with co-branded credit cards may be easier prospects for Discover than a U.S. Bank or Citi.

Capital One’s acquisition of Discover can only increase competition. Consumers, Capital One and Discover shareholders, and policymakers, should applaud the deal.

Some spheres of activity like defense and law enforcement are naturally provided by the state. They’re public goods. Most goods and services, however, are best supplied by the private sector.

Payment systems like Visa, Mastercard, American Express, PayPal, Discover, Zelle, Cash App, Swift, Fedwire, and cash are essential for commerce, indeed for modern life. People take them for granted. They can be operated by government, the private sector, or both.

The US payment system is mixed. Retail, person-to-person, and bill payment systems are run by the private sector. The Fed plays an important albeit less visible role serving banks.  It operates interbank payment systems such as ACH and Fedwire, which compete with banks’ cooperative processor The Clearing House, which, ironically, is regulated and supervised by the Fed. It also issues cash (Federal Reserve Notes) distributed by commercial banks.

In 2023 the U.S. central bank will launch an instant-payments system FedNow, which will compete with TCH’s RTP, Visa, Mastercard, Zelle, Fiserv, FIS, and Discover. The Fed’s offering banks up to 2,500 fee-free payments per month to incent use. The Monetary Control Act requires the Fed to recover its costs “over the long run,” but the long run is whatever the Fed decides it is. While the Fed has typically measured long-run cost recovery for mature services to be over ten years, it declared “it expects FedNow “to achieve its first instance of long run cost recover” beyond 10 years.  Private capital doesn’t enjoy that kind of luxury.

If a private-sector payment system offered free payments to build network critical mass, all well and good. However, unlike private payment networks the Fed enjoys unlimited resources and can’t become insolvent.

Nobody assumes government should make wine, mobile phones, airplanes, or movies, or run restaurants, gyms, and hotels. While a case can be made for it to operate payment systems, the bar should be set high. The Fed should only play roles that the private sector cannot, and it shouldn’t be permitted to use unlimited government resources to unfairly subsidize its offerings in competition with the private sector.

Concerns over national security, systemic importance to the financial system and economy, efficiency, or needs the private sector can’t address, might be used to justify government running payment systems.

No government wants to rely on payment systems subject to control by potentially hostile powers. Governments may, therefore, operate critical payment networks, insist they’re run by national players, or if they’re foreign networks, that they process in-country.

After Putin’s 2014 Ukraine invasion, Russia was subjected to limited financial sanctions including US-domiciled Mastercard, Visa, and PayPal cutting off Crimea, but not Russia. Reminded of its vulnerability Moscow mandated foreign networks process domestic payments in-country and its central bank launched a national card network Mir.

China and India mandate foreign payment systems process in-country. China’s payment policies are baldly autarkic.  Notwithstanding Beijing’s 2001 WTO commitment to open up its domestic payments market by 2006, the Middle Kingdom’s prevented global networks like Mastercard and Visa from competing in its domestic market. While Delhi favors national players, its payments market is open and competitive.

Greater efficiency may be an excuse for a public payments utility. The idea a single well-designed state system would be more efficient than multiple competing private-sector systems with redundant costs is superficially appealing. Policymakers are more likely to argue greater efficiency justifies a single government or regulated private payment-system for core infrastructure. Even core payments infrastructure, however narrowly defined, benefits from competition-driven innovation and market discipline and intelligence.

Central planners can’t match the market’s vast dynamic distributed intelligence. Competing systems’ inherent dynamism, innovation, and continuous reallocation of resources to players delivering better value, have enormous benefits.

A monopoly card network or digital wallet run by the post office or the Fed wouldn’t deliver better value, be more innovative and accountable to customers than Visa, Mastercard, American Express, Discover, PayPal, Apple Pay, or Google Pay.  The market is the most ruthless regulator of value, not enlightened government bureaucrats superintending payment systems.

Where scale advantages are significant, markets will naturally consolidate. A monopoly, however, is never optimal. But, private-sector monopolies are rarely if ever sustainable unless privileged by the state.

The contention some payment systems are so systemically important government must run them doesn’t bear scrutiny. Critical national payments infrastructure owned and operated by the private sector can be regulated as such, subject to prudential reviews of capital adequacy, ownership, and management. Bank-owned The Clearing House, operates an ACH system, an interbank large0value funds transfer system, CHIPS, and an instant-payment system RTP. The Clearing House is regulated as a systemically-important financial market utility.

Central banks’ contention only they can deliver certain payment systems should be viewed through the lens of Nobel Laureate James Buchanan’s Public Choice Theory which holds self-interested public bureaucrats act to maximize their own utility, prestige, and power. They are rarely the indispensable actor.

The Fed insists only it can and will equitably serve all banks. The ECB on its own prerogative decided to build an instant-payment system TIPS, on the premise only it could adequately provide instant payments across the euro-area. And Brazil’s central bank contended only it could provide instant-payments ubiquity. Yet the private sector provides instant payments in the US, EU, and Brazil.

The Fed regulates and supervises TCH and also competes with it. The EU central bank oversees EBA Clearing’s shareholding banks and payment systems like RT1 with which it competes.

Central banks aren’t subject to the same financial constraints and often can use regulation to privilege themselves.

Brazil’s central bank used its authority to kneecap a competitor. Facebook has roughly 147 million WhatsApp users in Brazil.  In June, 2020 it launched WhatsApp Pay. It was fee-free for P2P payments and charged merchants 3.99%. The central bank put the kibosh on it. And, Brazil’s antitrust regulator Cade blocked WhatsApp’s partnership with processor Cielo because of competitive concerns.

Lo, in November, 2020 Brazil’s central bank launched its instant-payments system Pix. It mandated that large payment service providers participate, a prerogative for building network critical mass and therefore value and relevance that no private-sector payment system enjoys.

In less than two years Pix enrolled 126 million individuals and 11 million businesses, and surpassed the number of debit-card transactions.

After Pix had picked up a head of steam, in March, 2021 the central bank greenlighted WhatsApp Pay, but only for P2P not retail payments.

The central bank competing with the payments industry (and further regulating and supervising that very same industry) is a bald conflict of interest and a deterrent to private-sector investment. Nobody wants to compete with their regulator or a central bank with unlimited resources.

The National Payments Corporation of India, owned by state and private-sector banks, and guided by the central bank, operates a national card network Rupay and the major national interbank payment systems including real-time payment systems IMPS and UPS.

China’s central bank (PBOC) forced private payment systems like Alipay and WeChat Pay to use its clearing system Netsunion. Protected monopoly card network UnionPay is owned by state and commercial banks, run by PBOC alumni, and takes direction from the central bank.

Payment systems run by the Fed, ECB, Banco Central do Brasil, and PBOC aren’t subject to the same financial constraints as even private-sector titans, which can fail and go bankrupt. Central banks print money and can’t become insolvent.

Central banks’ electronic payment systems could be spun off with regulatory guardrails.

Private-sector payment systems have enormous advantages.

While individual players may disappoint, private sector payments systems must ultimately satisfy the market to remain in business. And even if individual players fail, the self-correcting private payment system continuously improves.

The payments industry is more adaptive than public utilities. The most brilliant central planners can’t design a perfect payment system, much less adapt it to changing conditions.

There’s no payments infrastructure that wouldn’t benefit from genuine competition, and ruthless regulation by the market rather than by the administrative state or politicians.

Private-sector systems dynamically self-correct.

In competitive free markets incumbents and challengers vie for share by trying to deliver better payments. The market continually votes on what’s better. Resources are allocated away from payments enterprises that don’t satisfy or delight their users, to those that do.

Payment systems run by central banks, no matter how thoughtfully-engineered and successful out of the gate, aren’t subject to the same market discipline, nor enjoy private systems’ innovative vigor. Underperforming government systems often get more resources.

Most payments innovation comes from the private sector, which invented cash, checks, interbank clearing, credit cards, global bankcard networks, electronic bill and P2P payment systems, e-wallets, and digital currencies.

In the 9^th century Chinese merchants invented paper money. In the 19^th century Scottish banks created two-sided banknotes.

In 1950 NYC financier Frank McNamara invented the general-purpose payment card Diners Club. US banks created global bankcard networks Mastercard and Visa. In 1981 fitness club operator Pete Kight launched what became America’s leading electronic bill payment system Checkfree. In 1998 Peter Thiel started PayPal. In 1999 radio DJ Steve Streit created the first general-purpose prepaid card.

Computer scientist David Chaum invented the first digital currency Digicash. Entrepreneurs Jeremy Allaire and Sean Neville with Circle and Brock Pierce and Craig Sellars with Tether, were stablecoin pioneers.

Pony Ma’s Tencent developed digital currency Q Coin and WeChat Pay. Jack Ma’s Alibaba created Alipay. Competing against stodgy state banks and state-protected monopoly card network China UnionPay, given latitude by Chinese regulators, such as liberalizer PBOC governor Zhou Xiaochuan, Tencent and Alibaba revolutionized payments in China. While the Sino-liberalization window is closed, Alipay and WeChat Pay are well-established and many outside China seek to emulate their “super-app” model.

It’s assumed central banks issuing cash is the natural state of affairs, notwithstanding historically in many countries competing commercial banks issued banknotes (cash). While cash issuance could be returned to commercial banks, in most countries it would be politically difficult.

Digital fiat currencies bring the issue of state versus private-sector payment systems to the fore. More than a hundred central banks are working on digital currencies. Central banks are predisposed to issue CBDCs, have vast resources, and often regulate potential private-sector issuers of digital cash.

There’s a danger central bank digital currencies will stifle development of and innovation in private digital currencies by banks and fintechs.  A Fed digital dollar would reduce if not eliminate banks’ and fintechs’ appetite for issuing and innovating in stablecoins – effectively digital banknotes.

New government payment systems should bear a high burden of proof. Existing state-run payment systems should be privatized, unless there’s a compelling national interest not to.

Ronald Reagan said “There are no limits to growth and human progress when men and women are free to follow their dreams.” In Superabundance: The Story of Population Growth, Innovation, and Human Flourishing on an Infinitely Bountiful Planet the Cato Institute’s Marian Tupy and Brigham Young professor Gale Pooley make a cogent, empirically-grounded case for Reagan’s full-throated optimism.

For the last several centuries affluence and lifespans have been increasing. The authors enthuse “we have accumulated a store of knowledge that has allowed us to reach escape velocity from scarcity to abundance somewhere toward the end of the 18^th century.” In the 20^th century with a massive increase in population, abundance has exploded worldwide.

Yet notwithstanding mankind’s enormous and continued progress, an almost religious pessimism persists.

In “Essay on the Principle of Population”, Malthus argued resources were finite, and, consequently, population growth would bring ruin on mankind. The Club of Rome’s  The Limits to Growth and Paul and Anne Ehrlich’s The Population Bomb, picked up the doomsaying baton. Their contention that limited natural resources meant more people were an existential threat to humanity today holds sway among the Davos set.

In the 1970s grim Malthusianism informed Communist China’s brutal program of one-child-per-family and forced abortions. The authors persuasively assert China would be massively more prosperous today with 400 million more “somewhat free” people. Faced with a demographic crisis of its own making, the CCP has reversed course and relaxed restrictions on having children.

Many Western elites still view people as a liability rather than as an asset. Climate-change and Malthusian apocalyptists thunder more people will exhaust limited resources and attendant economic activity increasing atmospheric CO2 will cause climate catastrophes.

Yet more affluent societies are better able to deal with Mother Nature. Since 1920, with higher atmospheric CO2 levels from increased fossil-fuel use, climate-related disaster deaths have plummeted by 98%.  Pious Greens virtue-signal by not having children. While not having children is a choice couples are free to make, it won’t help humanity.

Tupy and Pooley persuasively contend knowledge not physical stuff drives ever-increasing abundance. People free to innovate and increase the stock of knowledge are, therefore, an asset.

Natural physical resources haven’t limited growth.  “The Earth’s atoms may be fixed, but the possible combinations of those atoms are infinite.”   What matters isn’t our planet’s physical limits but rather people’s freedom to experiment, reimagine, and improve use of existing resources.  More knowledge and people beget more knowledge, producing ever-greater abundance.

Economist Tom Sowell observed cavemen had the same natural resources as 21^st-century men. Greater knowledge is why we enjoy more prosperous and longer high-quality lives than cavemen.

When resources increase faster than population, it’s “superabundance.”  Viewed through the lens of “time prices” the world is enjoying an era of superabundance.

Tupy and Pooley use time prices rather than the more familiar measures of real GDP and PPP per capita, to document global superabundance. Time prices calculate the hours and minutes needed to earn the money to buy goods and services. They’re universal true prices.

The time price to acquire rice as food for a day in India dropped from about seven hours in 1960 to under an hour today. The time price of wheat for a day in Indiana dropped from an hour to 7.5 minutes. The Indian has gained 6 hours and 2 minutes and the Hoosier 52 minutes.

From 1850 to 2018 US blue-collar workers’ average nominal hourly compensation rose from $.06 to $32.06. Using nominal prices, the average time price of 26 commodities like sugar, nickel, corn, steel, and coal, fell by a whopping 98.3%. “Personal resource abundance” (PRA) measures how much people can buy in time prices. The average PRA increased by 5,762% during this 168-year period.

Between 1919 and 2019 US blue-collar workers’ average nominal hourly compensation rate rose from $.43 to $32.36 while the time price of 42 food items fell 91.2%. The average PRA increased by 1,032%.

Turning to information processing, the authors calculate for the same amount of work a blue-collar worker had to do in 1969 to perform a slide-rule-based calculation, using an iPhone12 in 2020 he could buy 1.574 trillion calculations.

Superabundance can and should continue indefinitely. Reversing course would be a choice, a choice for malaise over a world of plenty.

The limits to human flourishing are self-imposed anti-growth policies whether animated by millenarian climate-change apocalyptists or imposed by oppressive regimes like North Korea and Venezuela.

Innovation relies on population growth and the freedom to exchange goods and ideas. The larger the population, the larger the market and the more specialized people can become. In the book’s forward futurologist George Gilder rhapsodizes “everywhere entrepreneurs are free to create and market their inventions, time prices fall.”

“Economics prosper to the extent that knowledge, intrinsically dispersed through the system in the minds of individuals, is complemented by a similar dispersion of power.” Combinations of government and business frustrate it.

Prices guide capital – human, intellectual, financial, social, cultural, and physical, to address problems and opportunities. Doomsayers underestimate or ignore motivated men’s capacity to solve problems and improve the human condition.

Superabundance is an eminently-readable antidote to dour Malthusian and Green-fundamentalist dogma. The bigger and freer the global network of people, the greater superabundance.

Inflation is scourging the land. In January it hit 7.5%, a forty-year high. The Fed is failing in its mandate to maintain “stable prices” and suffers the dangerous conceit enlightened central bankers can direct the economy better than the market. President Biden’s Fed appointees aren’t the cavalry, far from it.

Many Americans are too young to have experienced the scourge of inflation that roiled the country in the seventies. Inflation is too much money chasing too few goods. Thanks to Washington’s binge of money-printing and spending, suffocating regulation suppressing production, and Fed complacency, inflation is back. It’s a stealth tax punishing saving, creditors, and the working poor, and rewarding debtors, the biggest of whom is Uncle Sam.

Congress and the administration look to the Fed to bail them out of destructive fiscal and regulatory policies. Many at the Fed believe they can and should manage the economy. That’s beyond its ken. The Fed does, however, have tools to rein in inflation. That’s what it should focus on. The FOMC needs to find its inner Paul Volcker. If it hikes interest rates and reduces its bloated balance sheet sufficiently, it will curb inflation.

But Biden’s Fed appointees won’t bring a hawkish voice or narrow its focus. They’ll expand and further politicize the central bank and paramount financial-system regulator’s role, raise the fossil-fuel industry’s cost of capital, and racialize credit.

Biden renominated Jay Powell Chairman and nominated Governor Lael Brainard Vice Chairman, law professor and former governor Sarah Bloom Raskin Vice Chair of Supervision, and economists Lisa Cook and Philip Jefferson governors.

Powell has been a dove’s dove and willfully blind to the looming threat of inflation, which were preconditions to Biden reappointing him. On his watch, gorging on Treasuries and mortgage-backed securities, the Fed’s balance sheet doubled, and the money supply increased 403%. When the Fed buys assets it creates money, suppresses interest rates, and, thereby, fuels inflation.

In January yoy gas was up 40% and used cars 40.5%. In 2021 the median existing-home price rose 15.8%. As inflation picked up a head of steam, the Fed played make-believe, stubbornly maintaining it was “transitory.” Joe and Sally Sixpack are paying dearly for the Fed’s dereliction of duty.

Brainard is just as dovish as Powell, supports more punitive bank regulation endearing her to progressive heartthrob and financial-industry foe Senator Elizabeth Warren, and is socializing introducing climate-change considerations into the Fed’s prudential regulation, setting the stage to punish banks financing oil, gas, and coal producers.

Raskin is a climate-change fundamentalist. In “Why Is the Fed Spending So Much Money on a Dying Industry?” she trumpeted her Green faith and desire to preference credit for job-intensive – i.e. less productive, renewables over fossil fuels, decried “surging carbon dioxide,” and warned of the looming “catastrophe of an unlivably hot planet.”

Fossil fuels provide 79% of America’s energy. If the Biden Fed starves the fossil-fuel industry of capital, it will increase energy costs, making consumers poorer and businesses less competitive. Even if it wasn’t horrendous policy, it isn’t the Fed’s place to decide to engage in a Green holy war against fossil fuels. That folly is the politically-accountable Congress’s prerogative.

Cook served in the Obama White House, has a NYT guest column, contributes to CNBC, MSNBC, and NPR, served on the Biden-Harris financial-regulator-agency-review-transition team, and supports “reparations” for black Americans. Cook was nominated not because she’s an estimable monetary economist but rather because she’s a she, she’s black, and she’s a brass-collar Democrat, none of which is a good reason.

By reputation economist Philip Anderson is apolitical. Preternaturally sunny Hoover economist, National Review contributor, and former Trump adviser Kevin Hassett sings his laurels declaring he’s the kind of economist he would’ve been happy with and President Trump could’ve appointed. That may be naïve. Anderson’s commentaries in PBS NewsHour, NPR, CNBC, and Bloomberg Radio suggest comfort in the establishment left. The Biden administration wouldn’t knowingly nominate a man Hassett would be comfortable with.

The Fed’s statutory monetary mandate is stable prices, i.e. zero inflation, maximum employment, and moderate long-term interest rates. Stable prices support maximum sustainable long-term employment and wealth creation.

The central bank takes an expansive view of its remit. In 2012 the Fed on its own prerogative declared it would target 2% inflation, prices doubling every 35 years. While lawless, there was nary a peep of protest from Congress. In 2020 the Fed went a step further, announcing it would inflation-average,” allow inflation higher than 2% to catch up for prior inflation below its target.

Interest rates are the economy’s most important price, the price of present versus future consumption and investment. The Fed influences them. Its real benchmark interest rate is now a mind-boggling negative 7.5%. Keeping interest rates artificially low causes systemic malinvestment and risk.

Milton Friedman warned concentrated power, no matter how well-intentioned, is dangerous. The Fed embodies unchecked concentrated power at the heart of the financial system.

Who’s on the Fed board matters so much because of the enormous power it wields and license it takes. Until Congress circumscribes its mission, the Senate must be extra-vigilant ensuring hawks with a narrow view of its role, run the central bank, rather than partisans keen to use the Fed’s monetary, regulatory, and operating powers to try to manage the economy, preference credit for favored sectors, and advance a political agenda.