A Public Option for Bank Accounts (Or Central Banking for All)

Abstract

We are on the cusp of a new monetary era. Central bankers around the world are increasingly worried that privately controlled digital currencies will relegate them to the sidelines of monetary affairs. To avoid this fate, central banks have been studying, and in some cases actively pursuing, issuing digital currencies of their own: so-called central bank digital currency (CBDC). Although this is one of the hottest topics in macroeconomics and central banking today, the discussion has all but overlooked the most straightforward and, we argue, most appealing strategy for implementing a U.S. dollar-based CBDC: expanding access to the bank accounts the Federal Reserve already offers to a small, favored set of clients. These accounts consist of entries in a digital ledger—just like other digital currencies—and are extremely desirable, offering high interest, instant payments, and full government backing no matter how large the account balance. But U.S. law restricts these accounts to an exclusive clientele consisting primarily of banks. Privileged access to these accounts creates a striking asymmetry at the core of our monetary framework: government-issued physical currency is an open-access resource, available to all, but government-issued digital currency (in the form of central bank accounts) is not. In the current digital era, there is no respectable justification for this dichotomy. Congress should authorize the Federal Reserve to give the general public—individuals, businesses, and institutions—the option to hold accounts at the central bank, which we call FedAccounts. Unlike the CBDC approaches currently under discussion, which would use complicated and inefficient distributed ledger technology and would be walled off from the existing system of money and payments, the FedAccount CBDC would be seamlessly interoperable with the mainstream payment system and would rely on technologies that the Federal Reserve has used successfully for decades. The FedAccount CBDC would offer an astonishing range of benefits that other CBDC proposals—not to mention privately controlled digital currencies—cannot match, including a much more inclusive financial system, better consumer protection, faster and more efficient payments, greater financial and macroeconomic stability, improved monetary policy transmission, reduced payment tolls (interchange fees), streamlined regulation and regulatory structures, and increased fiscal revenue arising from the recapture of economic rents from the financial sector.