The Federal Reserve is the central bank of the United States and the place where money is most secure. But since its creation in 1913, it has been closed to people or businesses that aren’t banks.
Vanderbilt law professor and former U.S. Treasury Department advisor, Morgan Ricks and his co-authors argue that the general public, businesses and institutions should have the option to have an account at the Fed. They map out their plan in “Central Banking for All: A Public Option for Bank Accounts.”
“FedAccounts would be a public option for the unbanked and underbanked while also providing financial stability and other substantial benefits to businesses and our economy as a whole,” writes Ricks, along with John Crawford, a professor with the University of California Hastings College of the Law, and Lev Menand, a former Treasury senior adviser now with the U.S. District Court for the Southern District of New York. “People would experience this organ of the federal government working directly for them.”
Some benefits from the plan:
- No fees or minimum balances
- Same interest rate that commercial banks receive on their Fed accounts (currently 1.95%)
- No interchange fees for debit card payments
- Payments between FedAccounts would clear in real time
Though the accounts would not have overdraft coverage, Ricks adds that there would be no need for federal deposit insurance.
“FedAccount balances would be sovereign and non-defaultable since central bank accounts are pure money, economically equivalent to dollar bills,” said Ricks. “And the perks of central banking would greatly increase the efficiency of transactions for businesses.”
BANKING FOR ALL The group argues that the lack of fees and minimum balances would remove obstacles that push millions of Americans out of our financial system and into payday loans and check-cashing outlets.
“Seven percent of U.S. households are currently ‘unbanked,’ meaning that no individual in the household has a bank account. Another twenty percent of U.S. households are ‘underbanked,’ meaning that, despite having a bank account, they rely to some degree on expensive nonbank
services such as nonbank money orders, check cashing, and payday loans.”
Ricks adds that these accounts would also generate revenue for the federal government while also reducing public subsidies to the banking system.
CAN THE FED HANDLE IT?
Ricks and his coauthors argue that the Fed is already fully qualified to manage a system like FedAccount and is experienced with the processes for debiting and crediting balances.
“Today the Fed maintains account liabilities totaling about $2.5 trillion, and it has vast and longstanding expertise in transaction processing,” write the authors. “and The U.S. Treasury Department processes over one billion payments per year and disburses benefits to millions of Social Security and pension recipients each month.”
MAKING IT HAPPEN
Although the Fed is already authorized to maintain accounts for banks, creating personal and business transaction accounts would require legislation.
“Big changes in financial architecture are politically challenging,” write the authors. “But we see reason for optimism in this case. Aside from banks and certain shadow banking institutions whose existing business models FedAccount would disrupt, practically every other segment of
the American economy is likely to benefit.”
Read other research by Morgan Ricks here:
- Panic-proofing, not preventing bubbles, should be focus of U.S. financial policy
- WATCH Ricks explain how Wall Street should change to prevent another economic crisis.
Media Note: Vanderbilt has a 24/7 TV and radio studio. The studio is free for Vanderbilt experts, other than reserving fiber time.]
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