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Forget Checks, How About Giving Everyone a Federal Reserve Account?

This is no frivolous proposal. If the banks get access to trillions in U.S. dollars, why not you?

Amid the catastrophe of the Coronavirus crisis, the Trump Administration is moving toward the previously unthinkable resort of sending money directly to the people, reportedly mulling (clearly inadequate) payments of $1000 per adult.

The problem now arises: how to deliver the cash? Under current plans, it will certainly take a while. The Treasury plans to stagger the payments, with the first tranche going out on April 6, and the second on May 18, small solace to millions out of work or shuttered businesses.

[Editor’s Note: This story, originally published in our March/April  issue, has been updated to reflect current events.]

Even then, the problems multiply, since the job of distributing the money has been assigned to the IRS. Past experience is not encouraging: George W. Bush signed a law authorizing a similar cash distribution in February, 2008, but no one got any money ($600 per adult on a means-tested basis) until April. Under sustained attack from Republican lawmakers, the IRS has shrunk by 23 percent in the intervening years. 

Nor can the IRS simply mail checks to each and every citizen, because the government can no longer print checks on a mass basis. True, the Social Security Administration routinely already sends out millions of dollars to those eligible, directly depositing the money in their bank accounts, but what about people (surely those most in need during the crisis) who don’t have bank accounts? Furthermore, this will amount to yet another subsidy to the banks, already, as we shall see, deep in another crisis of their own making. 

Fortunately, there is a solution ready to hand, a fundamental and long overdue reform: give everyone an account with the Federal Reserve. Once implemented, the money could be available to account-holders with the click of a computer mouse. Unlike with banks, our money would be safe, because the Fed itself creates money with another click on a computer keyboard and can always make more of it when needed. Most importantly, this could all be done instantly, rather than the weeks and months required under current plans.  

Lest all this sound alarmingly novel, even revolutionary, bear in mind that the Fed has plenty of experience in handing out money to account-holders, specifically banks. In fact, before the virus crisis buried all other news, just such a distribution had been under way for months as Wall Street careened toward a cliff-edge, again. Since the middle of September, the Federal Reserve had quietly pumped at least $5 trillion into Wall Street banks and other financial institutions. We were not allowed to know which trading houses required this gigantic infusion, or why, presumably on grounds that the public might begin to worry about the stability of the financial behemoths that dominate the economy. 

A decade ago, as the global financial system tottered on the brink of disintegration, the Fed operated a similar money-spigot to Wall Street that ultimately disgorged a staggering $29 trillion to the lucky recipients, a secret bailout that was assiduously concealed from the rest of us. Only thanks to the dogged persistence of the late, great, Bloomberg News reporter Mark Pittman and his colleagues, who sued for details under FOIA, did we belatedly learn who got the money, and how much. (Bloomberg, apparently embarrassed at having exposed the trillion-dollar panhandlers, has recently purged the story of Pittman’s coup from its website.)  Such shenanigans should evoke concern as well as disgust among the citizenry given that these people hold our money in the form of deposits in our accounts.   

Now more than ever, therefore, we need an alternative to entrusting our security to institutions so prone to disaster, which is why Fed accounts for all is a proposal that is not only attractive and practical, but also urgent.  Bankers can tell you that the Fed is an enviably indulgent loan-officer, charging minimal interest rates – currently 2.5 percent—on loans which, when passed on to customers in the form of credit card debt, carry hefty (17 percent!) profitable interest rates. So why shouldn’t the rest of us get in on the act?

This is no fringe proposal, having been advanced by a number of responsible authorities and even in a paper published last year by the eminently orthodox Federal Reserve Bank of St. Louis. The authors, two Swiss economists, proposed “central bank electronic money for all” allowing “all households and firms to open accounts at central banks, which then would allow them to make electronic payments with central bank money instead of commercial bank deposits.” 

Our modern banking system, after all, is descended from the days when money existed only in the form of actual cash (gold and silver) held in a securely protected space for security. The bulk of today’s money exists only in electronic form, data in banks’ computers, so we the account holders depend on them to make sure it doesn’t disappear. Banks in turn rely on the Fed to come up with the necessary funds if their own improvidence, such as led to disaster in 2008, puts these deposits at risk. But money in a Fed account would be absolutely secure, as good as gold in fact.

Meanwhile, banks themselves would still offer deposit accounts, but to attract business they would need to offer better interest rates than the Fed to offset the additional risk. Furthermore, if they put customers’ money at risk through irresponsible behavior, our deposits could be instantly transferred to the safety of a Fed account.

Another exponent of Fed accounts for all, Vanderbilt Law Professor and former Treasury advisor Morgan Ricks, has outlined further benefits, including no fees or minimum balances, the same interest rates that banks get, instant check clearance (as opposed to the two or more days that banks like to take.) Millions of people who are presently excluded from the banking system thanks to minimum balances and fees would have access and could thus avoid costly burdens such as check cashing and money transfer businesses.

 “The Fed has maintained bank accounts for banks and other financial institutions for a long time,” Ricks pointed out to me. “They love them. These accounts work great, offer high interest, real time payments, and no possibility of default. So they’re very attractive.”

Currently, federally chartered banks are blessed with a guarantee from the Fed—recall those bailouts—justified by the need to protect customers’ deposits. In addition to the explicit government guarantee of deposit insurance, there is an even more valuable implicit guarantee. This amounts to a subsidy, allowing them to take greater risks, hold fewer capital reserves and, thanks to their privileged status, act as a cartel. Regulated by the perennially bank-friendly Office of Control of the Currency, they are allowed to claim federal pre-emption of state usury laws limiting interest rates and instead apply the local rate of the headquarters location of their State of incorporation on loans anywhere in the country. 

Delaware and South Dakota place no limits on interest rates, thus rendering them the favored choice of official domicile for banks even while gouging customers from Maine to Hawaii. But if customers were given the opportunity to hold deposits directly in Fed accounts, the need for that guarantee would disappear. After all, allowing consumers the risk-free alternative of holding their money in the Fed makes it difficult to justify printing trillions of dollars just to bailout the lifestyle of Wall Street executives on the grounds that consumers would suffer without such charity.  In which case, the business of lending would be done on a truly competitive basis- anyone interested in the ancient enterprise of loaning capital for interest would be able to compete on an equal footing with banks, thus inspiring competition and lower rates.  

The ongoing campaign by the finance industry to induce us to phase out cash for any and all transactions provides yet another powerful argument for Fed accounts for all.  A “cashless society”, as author Brent Scott has nicely observed, “is a euphemism for an ‘ask-your-banks-for-permission-to-pay society,'” thanks to the enforced requirement  to use a credit card or an iPhone app anytime someone wants to buy a cup of coffee, thereby paying a fee to a bank for the privilege of using one’s own money. Fed accounts would at least eliminate the profit-seeking incentive pushing the trend.  (With Fed accounts for all ATMs, we might also be freed of the extortionate charges levied by banks for the privilege of accessing our own cash.) 

It can of course be argued that Fed accounts for all would serve as an unwelcome extension of government surveillance, with any and all financial activity immediately visible to government scrutiny.  But as anyone who has read the Patriot Act could tell you, the authorities can already help themselves to our financial records pretty much anytime they want.  Similarly, the Fed already sets interest rates to manage the economy, via the rate it charges banks, but the ability to set the interest paid on individual accounts would obviously be a more effective means of achieving the same end.

A further objection to Fed accounts for all was pithily expressed to me by Pam Martens, co-editor of the indispensable newsletter Wall Street on Parade: “Pretty much nobody in America trusts the Fed,” she responded when I queried her on the idea, “so good luck with people wanting to place their savings with them in a bank account.” 

It is true that people don’t trust the Fed (though they do use Federal Reserve notes, AKA dollar bills.) On the other hand, people don’t trust banks either. In fact, the most commonly cited reason for not having a bank account, according to an FDIC survey, is “dislike or distrust of banks.”  It is worth bearing in mind that under the current system the Fed exists to serve the banks.  This is unsurprising, given that the regional branches, most importantly the New York Fed, are controlled by the banks.  But the various subsidies and privileges enjoyed by the banks on the justification that they ultimately protect our deposits could be discarded once customers were offered the security of a Fed account.  

“There should be little reason for the federal government to subsidize these institutions, as there would be a government option that is inherently insured they could choose instead,” a former Treasury official commented to me. “So presumably JP Morgan et al would be able to devote themselves to gambling full-time.”

 Finally, this necessary reform would pave the way for an equally useful innovation: universal basic income. The notion of assuring everyone of a guaranteed income with no strings attached has been gaining increasing attention and support around the world in recent years, and in the presidential campaign of Andrew Yang.  It has indeed been implemented in a number of locales with striking success. One notable example, the Alaska Permanent Fund, distributes up to $2,000 to every Alaskan citizen every year.  When the fund was inaugurated (by a Republican governor) in 1976 the state ranked highest in poverty rates in the country. Twenty years later, Alaska had the lowest. When the British Labour Party proposed a move toward UBI in its election manifesto prior to last year’s election, the proposal elicited a predictably choleric response from some, with the Financial Times sputtering that “rewarding people for staying at home, is what lies behind social decay”.  Given that we are all now encouraged or forced to stay at home, the complaint seems ironic in the extreme.  

Andrew Cockburn is the Washington editor of Harper’s Magazine and the author and co-author of five books, including Kill Chain: The Rise of the High-Tech Assassins (2016). He has written for The New York Times, The New Yorker, Playboy, Vanity Fair, and National Geographic, among other publications.