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Give Everyone Government Bank Accounts

A radical new idea from two former Obama officials could revolutionize the way Americans manage their money.

Mario Tama/Getty Images

Last summer, a widespread scam convinced thousands of America that the government had created a “secret” bank account for them that could be tapped to pay bills. Would-be customers used Federal Reserve routing numbers over 100,000 times, attempting to execute transactions. “The Federal Reserve provides banking services only for banks,” the Federal Reserve Bank of Atlanta was compelled to announce in a statement. “Individuals do not have accounts at the Federal Reserve.”

But a new report co-authored by two Treasury Department veterans, “Central Banking for All: A Public Option for Bank Accounts,” argues that Americans should have an account at the Federal Reserve, just as banks do. They believe this would solve a vast array of problems at once, ensuring that everyone is included in the financial system, driving down retail costs for businesses and consumers, and even making recessions less likely.

Morgan Ricks and Lev Menand, who worked in the Obama administration, and John Crawford, a law professor at UC-Hastings, call their idea FedAccount. These personal accounts would operate like the accounts that commercial banks already have with the Fed—with all the attendant privileges. Whereas the average checking account draws 0.05 percent, federal reserve accounts earn interest equivalent to the federal funds rate—currently 1.75 percent. Americans wait up to two days for a check to clear, but thanks to the Fed, banks can instantly transfer money to each other. And while personal bank accounts are only guaranteed through the FDIC up to $250,000, Fed accounts can never default, no matter how large the account balance, because it’s the central bank that prints America’s money.

“The time has come to end this special privilege of banks,” the authors write. Every American, every business, every institution would have the option of a FedAccount, with all the functionality of a normal bank account, like debit cards, direct deposit, online bill pay, and mobile banking, and no chance of default. The authors see the U.S. Postal Service’s 31,000 locations nationwide as a good place to locate ATMs and provide teller services for deposits and withdrawals.

This would be offered as a free public service; nobody could be turned away for a minimum balance or any other reason. That means the 33.5 million Americans with little or no access to the financial system would suddenly have a stable bank account, which is critical to modern life. This would eliminate the need for check-cashing stores or prepaid debit cards, services that often charge exorbitant fees. Everyone would enjoy higher interest rates, transferring an enormous windfall from banks to the people. Americans wouldn’t have to subject themselves to banks with predatory sales practices such as signing them up for fake accounts, which, as federal bank regulators revealed last week, was not limited to Wells Fargo.

Real-time payments, in which transactions clear immediately, would revolutionize the payment system (as it did for Japan in … 1973). Think Venmo, but with no intermediate step of linking of your Venmo account to a bank account or credit card; the transfer goes right from one FedAccount to another. That eliminates one middleman with access to your personal financial data and a desire to monetize it.

Transfers would also work between people and businesses with a FedAccount, with no transaction fees, saving billions for retailers. If your employer had a FedAccount, it could instantly deposit your salary. The government could instantly transfer your benefits or tax refunds. This functionality would push more people and businesses into FedAccounts and make them more powerful. Think of it as a substitute for cash, and cheaper to use than a debit card.

The Federal Reserve would get more accurate means to deploy monetary policy. Right now, the Fed raises or lowers interest rates to influence macroeconomic policy—an inexact tool. With FedAccounts, individuals would receive that interest on their balances, impacting their lives far more directly. Financial stability could increase too, as FedAccounts eliminate the possibility for a run on the bank and eat away at the big banks’ giant deposit bases, reducing the banks’ size and potentially their risk to the financial system.

And far from overburdening the Fed, the FedAccounts would likely generate hundreds of billions of dollars. Right now, the Fed adds $95 billion to the Treasury every year, thanks to profits from investing the trillions of dollars that it holds. If millions of people carry FedAccounts, the Fed’s balance sheet would grow, as would the earnings, even after factoring in the cost of account maintenance and fraud prevention.

Obviously, there’s the small matter of what this might do to the entire commercial banking system. Opening up Federal Reserve accounts to individuals and non-banks, which would require new legislation, would draw fierce opposition. Banks use deposit accounts to establish customer relationships—they’re not going to give that up willingly. And they certainly have the money to mount a massive lobbying campaign against such legislation.

The study’s authors note, however, that not only would individuals benefit from FedAccount, but powerful industries like retailers, too. It would make money for the government, which could help sway deficit hawks on Capitol Hill. Plus, FedAccounts wouldn’t loan money, so banks and credit card companies would still have a big business in lending. Banks wouldn’t have as many deposits as a cheap source of funds, but they can always borrow cheaply from … the Federal Reserve.

Banks are already fending off financial-tech firms, which are offering all kinds of bank account and payment services to “disrupt” the industry. Even Goldman Sachs has trotted out a consumer-account product called Marcus. FedAccounts would introduce another disruptor—the government, which already has the scale and scope to give better terms without needing to profit from customers. Banks could always compete; they’d just have to offer higher interest rates and more attractive services than the public option. That competition will benefit all consumers.

This isn’t an idea that the Republican Congress will pass tomorrow. But it’s well worth debating. Americans are stuck with a decrepit payment system, predatory banks, and interest-bearing accounts that bear no interest. That’s why cryptocurrencies like Bitcoin inspire such frenzy; people are looking for an alternative to a broken financial system.

But the architecture for a better system already exists through the Federal Reserve. FedAccount would implicitly change the central bank’s mission, from catering to bankers to serving the public, which might help ameliorate another crisis: a lack of faith in government institutions. Americans often take for granted the tools of public infrastructure that make a difference in their lives—schools, roads, libraries. But they’d take note of a government program that made their money work for them.