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Central Bank Electronic Money for All

The coronavirus pandemic has forced the Trump Administration to send out direct payments to most U.S. American citizens. The problem now arises: how to most effectively deliver checks? Central bank electronic money could be the solution.

Apr 4, 2020

On March 27, U.S. President, Donald Trump, signed into law the largest stimulus package in modern U.S. history — a record-breaking two trillion USD bill to fight the coronavirus pandemic. Included in the bill are individual checks up to 1200 USD for all American citizens with a yearly income of 99,000 USD or less. According to the Tax Policy Center, 90 percent of Americans would be eligible to receive full or partial payment.
A staggering number of people now wait to receive checks from the Internal Revenue Service. A comparable cash distribution occurred in 2008 under President George W. Bush when the U.S. was attempting to avert a looming recession caused by the global financial crisis. It took more than three months before people started seeing checks in their mail. Unmet needs for information technology support resulted in IRS’ inefficiency in implementing legislation and delivering payments on time. In addition to this, since 2010, the IRS has seen its staff reduced by 23 percent. These factors make it unlikely that U.S. Americans will receive any coronavirus relief check before the summer. Quicker and more efficient alternatives have to be developed for a large number of people to receive government checks. Whether they be stimulus payments to fight an ongoing economic crisis or welfare measures to fight unemployment such as a universal basic income, the implementation of a digital currency delivered by the central bank is a viable alternative to both cash and commercial bank deposits.
There are several issues with receiving government checks as commercial bank deposits. The most prominent one is that 6.5 percent of U.S. households don't have a bank account. This translates to approximately 14 million unbanked U.S. American adults. These are the citizens who are worst hit by the coronavirus pandemic and who would most require immediate relief. Additionally, the IRS has announced that in order to receive the check, one must have filed at least one tax return in the last two years. According to the Center on Budget and Policy Priorities, up to 15 million U.S. American citizens do not file an annual tax return because their income is so low. How are these people going to receive their stimulus rebate? In 2008, when a similar government pay-out was introduced, lawmakers forced this group of people to carry the heavy bureaucratic burden of filing a tax return to receive their check. Ultimately, 3.5 million people did not receive their due payment.
Another reason for avoiding government checks as commercial bank deposits is that the money ends up in excess reserves on which, until recently, the Federal Reserve paid banks an interest rate of 2.4 percent. Considering that the total amount of excess reserves in the U.S. is approximately 1.5 trillion USD, banks would be earning a whooping 36 billion USD annually in taxpayer subsidies. There is no need for more hard earned money to go into banks’ profits.
Furthermore, keeping any money in the bank, whether it be a government check or personal savings, inevitably exposes lenders to counterparty risk. The bank might default on its contractual obligations and lenders may see their life savings vanish in the blink of an eye. This looks like a far-fetched scenario, but let's not forget what happened in the aftermath of the 2008 global meltdown to 465 supposedly healthy depository institutions. Keeping all savings in a bank account is simply a risk that many millions of U.S. Americans living paycheck to paycheck cannot take anymore. According to a 2015 survey conducted by the American Express Spending & Savings Tracker, a shocking 43 percent of U.S. Americans keep their savings in cash. This phenomenon occurs when there is a high level of distrust in the financial system. Since the start of March, there has been a significant spike in currency in circulation compared to previous months. A similar spike occurred in 2008 on the verge of the global financial crisis. This demonstrates that in times of perceived emergency, people prefer cash over bank savings.
However, delivering government payments as cash is also not the answer. Other than the logistical issues that arise from mailing checks to each and every citizen, as Swiss economists Aleksander Berentsen and Fabian Schär, argue, there are two main issues with this method. The first issue is that the use of cash is inefficient and significantly more expensive than electronic payments. The second issue is that cash promotes crime and may facilitate money laundering and tax evasion. If cash has so many disadvantages for public institutions but people still rely on it as a safe haven, governments should have a strong interest in promoting an alternative to it.
The alternative should be a new virtual asset issued by a trusted party that can be used to save outside of the private financial system. It should retain the benefits of electronic payments and eliminate the downturns of counterparty risk. It should also be quickly and easily accessible by everyone in need, whether unbanked or low income. Such an alternative is called central bank electronic money, or in other words, Federal Reserve accounts for all U.S. citizens. Instead of receiving payments as commercial bank deposits or as cash in their mail, people would be receiving them on their very own central bank account. This money would be digital currency that people can either move to their bank deposit or spend directly through new smartphone applications.
There are multiple advantages to this new tool.
First off, it would eliminate all counterparty risk for lenders since a central bank cannot become illiquid. This is because it is the central bank’s job to create money when needed.
Secondly, it would significantly improve the stability of the financial system. In order to attract deposits, banks would now have to compete with the Federal Reserve and would, therefore, be prone to increased interest rate payments on deposits to compensate lenders for the additional risk they assume in saving with them. Banks would also be more prone to assume less risky behavior, knowing that lenders can, at any time, move their deposits to their Federal Reserve account.
Thirdly, it would pave the way for the implementation of a universal basic income. Going back to the original problem at hand, the U.S. is preparing for a massive economic downturn, comparable to the crisis in 2008. Last week, 6.6 million U.S. citizens applied for unemployment benefits, the largest number ever recorded. According to a recent report by PropertyNest, 40 percent of New Yorkers won’t be able to pay their rent this month after being laid off due to the coronavirus pandemic. With the IRS checks not arriving anytime soon, this number is bound to increase in the coming months. A monthly UBI provided through central bank electronic money could prevent another housing bubble. This measure was most recently proposed by Democratic Presidential candidate Andrew Yang, receiving bipartisan support.
The two major criticisms of UBI are that it would increase government debt and inflation. This would be true if the UBI was funded through tax revenue. However, if it were to be funded by a central bank, these problems would be partially solved. This is because it is the central bank’s job to manage inflation, and it could directly alter UBI payments depending on the level of inflation. Central banks could also keep interest rates higher, cutting down on bank lending and reducing the economy’s reliance on debt.
As much as this project may sound like a naive far-fetched idea, some countries in the world are already working on implementing it in the near future. The Eastern Caribbean Central Bank recently signed a contract with, a financial technology company in Barbados, to issue the world’s first central bank digital currency. The ECCB will soon commence a six month rollout period across the entire Eastern Caribbean region to test the new currency, which may be officially implemented as soon as 2021. With this move, the ECCB hopes to achieve financial inclusion, economic growth and competitiveness. Most importantly, it hopes to “reduce cash usage within the region by 50 percent.” If the ECCB succeeds in this goal, they would demonstrate that a central bank digital currency can truly provide a more secure, accessible, faster platform for making payments and receiving government transfers compared to cash or bank savings.
While it may be too late to create central bank electronic money for this crisis, it is definitely worth looking into to diminish the effects of future crises.
Andrea Arletti is Managing Editor. Email him at
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