Central Banking for All: A Public Option for Bank Accounts

Among the perks of being a bank is the privilege of holding an account with the central bank. Unavailable to individuals and nonbank businesses, central bank accounts pay higher interest than ordinary bank accounts. Payments between these accounts clear instantly; banks needn’t wait days or even minutes for incoming payments to post. On top of that, central bank accounts are pure money—economically equivalent to dollar bills—meaning they are fully sovereign and nondefaultable no matter how large the balance. By contrast, federal deposit insurance for ordinary bank accounts maxes out at $250,000—a big problem for institutions with large balances.
The time has come to end this special privilege of banks. We propose giving the general public—individuals, businesses, and institutions—the option to have a bank account at the Federal Reserve. We call it a FedAccount. FedAccounts would offer all the functionality of ordinary bank accounts with the exception of overdraft coverage. They would also have all the special features that banks currently enjoy on their central bank accounts—including unlimited secure balances, instant in-network payments, and a higher interest rate—as well as some additional, complementary features.
The FedAccount program would bring genuinely transformational change to the monetary-financial system, in ways both obvious and unexpected. Perhaps most obviously, it would foster financial inclusion. Today, millions of “unbanked” and “underbanked” households are partially or fully excluded from bank accounts, leading them to rely on costly and inconvenient service providers like check cashing outlets. FedAccounts, properly structured, would be a money-and payments safety net for such households, lessening their reliance on expensive and subpar alternatives.

Morgan Ricks, John Crawford, and Lev Menand

The Great Democracy Initiative

June 2018

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