The Fed should give everyone a bank account

The case for Fed Accounts

This is not especially newsy, but ever since I first heard of the idea a year ago I’ve been obsessed with universal Fed Accounts.

On the Federal Reserve’s website they have an FAQ which, among other things, debunks some kind of fraud which is based on saying that everyone can get a bank account with the Fed based on their Social Security number:

A recent hoax circulating on the internet asserts that the Federal Reserve maintains accounts for individuals that are tied to the individual's Social Security number, and that individuals can access these accounts to pay bills and obtain money. These claims are false. The Federal Reserve does not maintain accounts for individuals, and individuals should not attempt to make payments using Federal Reserve Bank routing numbers or false routing numbers. Individuals who attempt to pay bills or conduct other transactions using a Federal Reserve Bank routing number may face penalty fees from the company they were attempting to pay, or the suspension or closure of their commercial bank or payment service provider accounts. Law enforcement, including the Federal Bureau of Investigation (FBI), is aware of this scheme, and individuals who participate in such schemes could also face criminal charges.

So to be clear: It is not true that the Fed maintains basic checking accounts for all Americans that can be used to pay bills and obtain money, with the accounts numbered after your unique Social Security number.

But shouldn’t it be true?

Once upon a time, governments didn’t issue paper currency, and instead banknotes were printed privately by banks. But over time, we came to see this as a worthwhile public service. Paper money still exists, obviously, but for most people most of the time electronic transactions are the predominant form of currency. When we say “stimulus checks” we are mostly talking about direct deposits, not literal checks, and we are definitely not talking about envelopes full of $100 bills.

The Fed should provide everyone with access to electronic currency on an equitable basis by giving everyone a bank account. You can read a detailed treatment of the issue from Morgan Ricks, John Crawford, and Lev Menand if you’d like, but honestly the basic idea is exactly the myth the Fed debunked. Everyone would have an account; everyone would be able to deposit checks or accept direct deposits into the account; everyone would be able to pay bills through the account; and you could use the Post Office to provide the retail branches of the system.

Commercial banks will obviously hate this idea.

But to be fair to them, I think the Fed accounts should pay no interest and offer no services beyond basic deposits, payments, and ATM withdrawals. The idea is to solve the social problem of the unbanked, not to get into the full panoply of financial services — because the benefits of universal banking are considerable, even if the accounts themselves don’t have any bells and whistles.

Helping the unbanked

In a direct sense, the big benefit here is that a universal banking initiative would help out the “unbanked” — people who don’t have bank accounts — typically because they don’t have enough money to meet the minimum balance thresholds. This is only about 5% of households in the most recent data (which was from before the pandemic), but as you can see in the FDIC’s chart, this looks to be a somewhat cyclical phenomenon where people lose their bank accounts when the economy is bad.

Life as one of the unbanked is full of annoying fees to check-cashing joints or providers of prepaid debit cards.

A public bank would do away with all that, which is good.

But the issue of the unbanked is, in some ways, bigger than it looks.

Oftentimes you might look at a scummy banking practice charging people huge overdraft fees instead of simply not processing excess payments and think to yourself “why doesn’t Congress just ban that?”

Well, bank lobbyists are part of the answer. But what the lobbyists will tell you is that administering checking accounts is not very lucrative. That’s why the minimum account balances that push people out of banking exist in the first place. The harder you make it to rip people off, the higher the minimum balance needs to be to make the business make sense. If that sounds shitty to you, well — it’s shitty! And public bank accounts are the solution. But the even broader benefit is that solving the problem of the unbanked will supersede the need to find other solutions for the problems of the unbanked.

Toward a cashless tomorrow

Back 10 years ago when cities were first setting up bikeshare systems, how to make them accessible to the unbanked became a constant source of tension, because actually fixing the underlying problem of people not having bank accounts wasn’t on the table.

This comes up basically any time a progressive jurisdiction wants to roll out something new that involves paying fees — you can’t just ignore the unbanked minority, so you need a complicated workaround.

And it’s now spreading to the private sector. Philadelphia was the first city to ban cashless stores back in 2019, and New York City did it last year. D.C.’s cashless ban is so new I didn’t even realize it had passed, but after a unanimous D.C. Council vote in December, it will be taking effect soon.

The cost of these kinds of bans can be sneakily high precisely because cashless retail is so rare. You’re not taking away anything that most businesses are actually familiar with, so opposition is muted and the consequences are hidden. But cashlessness seems like a promising idea for a world where the vast majority of the customer base can pay electronically over your smartphone. Most immediately, you don’t need to worry about theft or handling of cash. The checkout line moves faster.

Down the road, though, cashlessness lets you try to reimagine the entire flow of the business to raise productivity. Maybe your coffee place or fast-casual lunch spot doesn’t need cashiers at all — ordering is just done on your phone and then you pick it up. Most companies probably aren’t interested in rethinking their whole operation along those lines right now. But if we do the right thing on fiscal and monetary policy, get full employment and see wages start rising, then increasing your productivity with a combination of new technology and new business processes will be huge. But not if we make it standard to legally require the use of legacy payment methods.

On the other hand, I sincerely sympathize with what these cities are trying to accomplish. If I were on the D.C. Council, I might’ve voted for the cashless ban. My point is just that requiring cash is not a real solution to this problem — what we need to do is give everyone bank accounts. It’s a fairness issue, but it’s also an infrastructure and innovation issue. Creating a uniform, reliable, national currency was a huge step forward in its day. But people want cards and electronic transactions. Making the private sector the sole provider of those services is holding the whole country back, even though most people have them.

Meanwhile, Fed accounts could be the basis for further public sector innovation.

“Checks” for everyone

One of the great policy innovations of the Trump years was the idea of the government sending out flat stimulus checks that, though not truly universal, did go to the vast majority of the population, phasing out only for the affluent.

These checks had two big upsides. One is that they seemed genuinely very popular, curing the problem that bedeviled us in the 2009-13 period when it seemed hard to get a political consensus on how to stimulate. The other is that they hit the pockets of greatest need — nobody was excluded on the basis of spotty work history or anything like that.

The problem with this sort of loosely targeted approach is you get very little bang for your buck. Plenty of money went to people who were just employed continuously throughout the pandemic and who, while surely glad to have some extra money, were not in any particular distress. Aggregate statistics show that caught between extra cash from the Treasury and health warnings from the CDC, these people mostly just built up a savings cushion or paid down old credit card debt. There’s nothing wrong with that, but to the extent that your concern is only with stimulating the economy, it’s better to spend the money in more targeted ways. But targeted spending inevitably becomes politically controversial because it creates some winners and some losers. It’s much more tractable to give the money to everyone, even if that involves more spending than is strictly necessary.

As far as I’m concerned, the solution is obvious — do completely untargeted checks, and just make them really big. In effect, you’d be taking debt off of private balance sheets and putting it on the public sector, which has an easier time bearing it.

But just accumulating public sector debt willy-nilly frightens a lot of people. Even when interest rates are super-duper-low, you can always worry that they might rise in the future, creating rollover risk.

I think reasonable people can disagree as to how much sense it makes to worry about that versus how much debt stock is a purely political problem. But Fed Accounts solve the problem. If Congress wants to make $2,000 materialize in everyone’s account, they can just pass a law that makes that happen. The money doesn’t have to “come from” anywhere or add to the debt stock. And rather than doing it through one-off appropriations, Congress could follow Claudia Sahm’s suggestion and make disbursements automatic based on labor market conditions. Alternatively, if Congress doesn’t feel like taking responsibility for making policy choices, they could give the Fed’s Open Market Committee (the people who make monetary policy decisions) the authority to make drops into everyone’s Fed account as a stabilization tool.

Now to be clear, just because you can print unlimited sums of money without accumulating debt doesn’t mean you can just print unlimited sums of money without consequence. But the Fed accounts do eliminate two specific concerns — that stimulus is distributionally unfair, and that stimulus creates a debt overhang. Sending out too much in “checks” would be, at worst, inflationary, which means it is effective at curing demand shortfalls. There are other kinds of economic problems besides demand shortfalls, but we could solve that one once and for all.

Simplifying everything

These are distinct ideas, but the notion of money just arriving in one’s Fed Account is a reminder that we could be using this kind of infrastructure to greatly improve the user experience of dealing with the federal government.

One example that’s going to be very salient in March and April is taxes. In order to figure out whether you’ve paid the taxes that you owe (or whether you are entitled to the refund you are claiming), the IRS needs to calculate how much you owe. In a sensible world, the IRS would do that and then send you a bill, leaving it up to your discretion as to whether you want to dispute their calculation. But instead, an evil alliance between the tax prep industry (TurboTax, H&R Block, etc.) and anti-tax rightwingers conspires to make this something that you need to do yourself.

But the way the government ought to work is that Social Security (and in the future, Child Allowance) and stimulus check benefits just automatically materialize in your Fed Account. Then once a year you should get a pop up about your tax situation, and 80% of people will just scan it gently and click “okay.”

A universal system of bank accounts would also greatly strengthen the case for doing away with the SNAP/EBT card system and just giving poor families some extra cash. A few means-tested social assistance programs — Medicaid especially — are different enough from cash to be worth preserving in their current form. But SNAP, WIC, Section 8, and LIHEAP are all needlessly complicated ways of defraying the cost of basic universal needs.1 We should just make money appear in poor people’s accounts, and then debate around exactly how much money and phase-out schedules and the like.

A better world is possible!

Obviously, bank lobbyists and the sketchy check cashing industry and a few others won’t like this idea.

But it really is worth underscoring that this isn’t like a wild-eyed “let’s nationalize all the banks” kind of proposal. The whole reason we have unbanked people in the first place is that providing commodity basic checking services is not very lucrative. Banks would still have all their higher-margin products. And unlike the Fed Accounts, they’d be able to compete for customers by offering interest to people able to meet minimum deposit standards.

In exchange, we could deliver concrete help to millions of people, increase the scope for innovation and experimentation across the retail sector, and bring all future recessions to an end quickly.

And yes, that’s all with a few rather modest technocratic changes.

I can’t tell you how frustrating I find it that we see so little of that genre of thinking big in American politics today. It sometimes seems like everyone wants to either do nothing or else totally overthrow capitalism or something. But the best way to shore up sensible politics is for establishment-minded people to show that basically technical improvements can in fact deliver large improvements in people’s lives. That goes for non-leftist Democrats, but also for Republicans who don’t want to be totally plowed under by QAnon fanatics. Having large, bipartisan majorities crush narrow interest groups to make things better is the way to marginalize extremists.

1

The idea of a program that genuinely targets healthy eating doesn’t seem crazy to me; we could have Universal Basic CSA Boxes or something. But SNAP is flexible enough to be general assistance, not real nutrition (you can use it for soda) while still restrictive enough to still cause real hardship if you, for example, really need diapers or tampons.