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Yes, the Fed Should Give Everyone a Bank Account
But with some imagination, we can do even better
Here's a little-discussed idea: the Federal Reserve should offer free basic checking accounts to all. While I am normally cautious of advocating the centralization of anything, I do feel that the merits of universal banking make any potential trade-offs worthwhile. And with a little imagination, we could expand upon this idea, redefining how governments and their citizens interact.
A Tax on the Poor
Roughly five percent of households still lack even a basic checking account. There are various reasons for this, but the most likely cause of the “unbanked” is an inability to meet minimum balance requirements. Indeed, the unbanked are disproportionately among the poorest in the nation.
To make it the modern world of digital payments, the unbanked have to live a life of extra fees paid to providers of prepaid debit cards or check-cashing joints. These fees can be very steep. Indeed, in the spirit of the Sam Vimes "Boots” theory of poverty, being poor is paradoxically very expensive. We should change that.
To solve this, thinkers like Matthew Yglesias have proposed that the Federal Reserve could launch an online portal where anyone can get a free checking account through the government. For those without a computer and for in-person transactions, postal offices would serve as built-in brick-and-mortar retail locations.
Commercial banks will not like this idea of course, but their opposition should be limited. The Fed accounts will come with features limited to making deposits, paying bills, and ATM withdrawals. Commercial banks could easily “upsell” on the Fed accounts, easily linking their own better margined- products, such as CDs and savings accounts. If anything, commercial banks may be happy to unload the least “lucrative” part of their business…boring checking accounts.
At a comparatively small cost to the taxpayer, we could “bank the unbanked,” making the lives of the poor a bit easier while giving them another tool needed to begin the trudge out of poverty. But universal banking wouldn’t only aid the poor, it would have a profoundly positive impact on everyone.
A Future of Convenience
To imagine these benefits, we needn’t look far. In the face of bank recent bank failures, an (often) irrational fear of losing one’s deposits has triggered bank runs that unnecessarily sank multiple banks. A universal Fed account would come with an implicit guarantee from the sovereign government; it couldn’t fail.
On the contrary, in times of economic distress, universal banking could give us an edge. Recall in the early days of the pandemic how long it took for Congress’s stimulus checks to be printed and mailed before reaching those in need. A universal banking portal solves this. The government could literally wire stimulus funds almost instantly, saving the time and cost of mailing millions of physical checks.
Similarly, should you lose your job and apply for unemployment, there would be no need to wait for the physical check or debit card to arrive. Your money would be deposited instantly. In addition, should we ever adopt a UBI-like system with monthly payments to citizens, the payments would conveniently be deposited automatically. Further, when you file your taxes, your refund would be deposited directly into your account the moment after clicking “submit.”
But why stop there? The same online portal could also enable citizens to do their taxes for free. Americans spend 6.5 billion hours and tens of billions of dollars every year filing their taxes: that is beyond farcical. It should be as simple as opening the app or website, checking the figures, and clicking “confirm.” Boom, your refund arrives in seconds. This isn’t impossible either, in Estonia, individuals can freely file their income taxes in under five minutes online.
But why stop there? It is well established that the public is generally rather ignorant as to how their tax money is used. The online portal could easily have a separate tab with a pie chart showing a distribution of their tax money in direct relation to how it is actually spent. Indeed, a greater awareness of the relative cost of government programs will help voters make informed choices at election time.
But universal accounts need not be limited to finances. With a little imagination, such an online banking portal could serve as a universal touchpoint between the sovereign and its citizens.
Granted, in the “Protopian” society that I envision, one wouldn’t be taxed on their labor at all. Regardless, a universal portal would still make a great deal of sense. Besides banking, the portal could also contain digital copies of your ID and passport, perhaps with scannable QR Codes. Education and healthcare vouchers could also be distributed and redeemable directly from the portal. Even your pension payments/investments could be managed directly from the portal, as I described here.
Should the government want to hold an informal referendum on a proposed new law or regulation, the portals could be used to issue voting credits to survey public opinion. Hundreds of millions could easily cast their vote (perhaps using Quadratic Voting) online within seconds, providing officials a better finger on the pulse of the nation.
There is really no limit to the utility of a universal portal. When we look beyond banking, such an app or website has the potential to transform our relationship with the government. Transforming it from a burden that must be dealt with, into a partner that empowers citizens with the tools they need to better manage their lives.