(Bloomberg Opinion) — The federal government is poised to send checks to Americans within weeks as part of a stimulus package to address the economic fallout from the spread of COVID-19. But lawmakers have said nothing about what the millions of people without bank accounts will do with these checks once they receive them.
The answer: They will visit check-cashing outlets and similar financial businesses, where turning the checks into cash will cost them up to 3.5% of face value — money that they could otherwise use to meet pressing needs.
This is not a problem for only these households. From the government’s standpoint, mailing physical checks to individuals is costly and inefficient. In a crisis, time is of the essence. And when physical distancing is paramount, reducing the need to hand deliver items — like checks and dollar bills — would be good for everybody.
The solution: We need a digital dollar, a currency that all Americans can use to transact in the 21st century economy. And this crisis offers an ideal opportunity to create it.
How? Congress can give all U.S. citizens the option to receive their stimulus money by opening digital accounts or wallets directly with the Federal Reserve — a proposal House Democrats have adopted in their coronavirus response bill. The basic infrastructure already exists, because the central bank already offers accounts to banks and various government entities. These accounts pay attractive interest, averaging about 1.5% over the past two years compared with less than 0.1% for ordinary checking accounts. Payments between them clear instantly. And they’re extremely safe: The Fed cannot default, so deposit insurance is superfluous for small and large balances alike.
To quickly sign up retail customers (and businesses) for the new “FedAccounts,” Congress should enlist the help of private sector banks that already have the necessary online systems and customer service (as well as their own accounts at the central bank). The Fed can reimburse the banks for acting as intermediaries until it has time to develop its own website and support staff.
FedAccounts would have a wide range of long-term benefits.
Most obviously, they would foster financial inclusion. Nearly 7% of U.S. households lack a bank account, and another 19% are “underbanked,” meaning they have a bank account but still rely to some degree on expensive nonbank service providers — such as check cashing outlets — for payments and other financial needs. FedAccounts would bring such households into the financial mainstream, with no fees or minimum balances. The U.S. money-and-payments system would, in effect, become public infrastructure akin to roads, sidewalks, public libraries and the judicial system.
FedAccounts would also reduce the likelihood of future financial crises, in which investors pull money out of the system en masse. The central bank accounts would replace some unstable deposit substitutes such as money market funds and repurchase agreements, where large depositors currently tend to park their cash. With their money safely stored at the Fed and always available, these depositors would have no reason to panic and run, removing a major source of systemic fragility.
FedAccounts would also make the U.S. payment system faster and more efficient, because all payments between the accounts would clear in real time. They would enhance the central bank’s ability to manage the economy: Interest-rate adjustments would be transmitted directly to a wide swath of the public rather than just to banks, and the Fed could conduct direct “helicopter drops” of money into FedAccounts for emergency stimulus. Consumers and retailers would benefit because, unlike other banks, the Fed would not charge fees to merchants accepting its debit cards.
A digital dollar would also preserve the dollar’s status as the dominant global currency — an immense economic advantage to the U.S. China has a digital currency in the works; so does Facebook. The dollar will likely lose its global position if it doesn’t compete.
What about cost? Far from straining fiscal resources, FedAccounts would generate revenue for the government. The central bank would expand its portfolio of government bonds and loans to banks, the interest on which would almost certainly outstrip the costs of operating FedAccounts. The Fed’s excess earnings are revenue to the federal government.
Granted, banks might not appreciate the competition from the Fed. The popularity of FedAccounts would reduce their deposits, which are their primary source of funds. But the central bank could compensate by lending to the banks, providing them with ample resources to keep lending to people and companies.
It’s time to move beyond our country’s antiquated paper currency and check system. A digital dollar can lubricate the government’s emergency response in the present crisis and future crises. And it would meet the growing demand for sovereign digital money. Let’s make these the last transfer payments the government distributes via paper checks by allowing everyone to open an account at the Fed.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Morgan Ricks is a law professor at Vanderbilt University and the author of “The Money Problem: Rethinking Financial Regulation.”