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, the bank has been open only for other banks—not people or businesses.

Vanderbilt Professor of Law Morgan Ricks, a former U.S. Treasury Department adviser, 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 a plan in their new paper, “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 co-authors 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 potential 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 nondefaultable since central bank accounts are pure money, economically equivalent to dollar bills,” Ricks said. “The perks of central banking would greatly increase the efficiency of transactions for businesses.”

BANKING FOR ALL
The group argues that eliminating fees and minimum balances would remove obstacles that push millions of Americans out of our banking 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 20 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 said. He added that these accounts would generate revenue for the federal government while also reducing public subsidies to the banking system.

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,” the authors write. “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.”

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,” the authors write. “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

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WATCH Ricks explain how Wall Street should change to prevent another economic crisis.