Federal Reserve individual “My America” smartphone bank accounts

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From pages 149-153 in “Optimal Money Flow: A New Vision on How a Dynamic-Growth Economy Can Work for Everyone” by Lawrence C. Marsh. (Avila University Press, 2020)

Have Fed Create Individual “My America” Accounts

The Federal Reserve can stop excessive inflation quite effectively by raising interest rates. However, as mentioned earlier, when the economy is in a recession, the lowering of interest rates by having the Federal Reserve purchase Treasury securities in the New York financial markets is sometimes referred to as “pushing on a string,” in not being very effective in quickly stimulating demand for goods and services. To provide the Federal Reserve with the ability to inject monetary stimulus more quickly and more directly into the far reaches of the economy, every person over the age of 18 with a Social Security number would be assigned a bank account directly with the Federal Reserve Bank. Such accounts could be called “My America” prosperity accounts to encourage their use. An initial $1,000 would be placed in each account, which would be treated as a minimum deposit that could not be withdrawn until after age 70. To help people become familiar with their account, all Internal Revenue Service (IRS) tax refunds would be deposited into these accounts. An individual could deposit additional money into their account up to a maximum annual limit, which could be adjusted from year to year depending upon the state of the economy.

To avoid disrupting commercial banking and to focus on the less affluent, the interest rate would only be applied to the first $10,000 of the account value. Funds above $10,000 would earn no interest. Most people have checking accounts with very little money in them, so the banks would not lose much in investible funds in phasing out paper checking accounts. At this point the $1,000 initial amount and the $10,000 upper limit are arbitrary. These numbers may be changed after more careful analysis and remain subject to change depending on economic conditions.

Each smartphone would be preregistered with the Federal Reserve through any post office. Transactions would be verified by both smartphone identification and a user-selected password, as well as fingerprint and/or iris recognition using the camera on the smartphone. In addition, there would be a 60-digit alphanumeric security code generated by an algorithm unique to the user and coordinated with the corresponding algorithm for that account at the Federal Reserve. After each transaction, the 60-digit security code would change both on the smartphone and in the corresponding Federal Reserve account so that no security code would be used more than once. A blockchain across all the account holder’s communication devices (smartphone, laptop computer, desktop computer, etc.) could record each verified transaction in sync with their “My America” Federal Reserve Bank account.

Each year the IRS would deposit all tax refunds directly into these individual accounts.[1] Any money deposited by individuals into their accounts, any additional money injected into the accounts, and any interest earned could be withdrawn at any time. Only the initial $1,000 would have to be retained in the account until age 70.

This would allow for transactions between smartphones, similar to those used in Kenya’s M-Pesa system of smartphone money transfers. The interest earned could be designated as tax-free. These Federal Reserve accounts could take the place of the old, often unprofitable, paper checking accounts that are holdovers from the 20th century. Eventually, these accounts could also replace cash, as smartphones replace wallets in people’s pockets.

The Federal Reserve could then inject money directly into these accounts to provide stimulus as needed whenever a downturn developed, and recession threatened. These bank credits would be created by the monetary authority of the Federal Reserve out of “thin air”—with no taxation required. There would be no addition to the debt, because there would be no government securities issued. As long as the economy has unused capacity, the injection of cash would not trigger inflation. These cash payments could be referred to as tax refund equivalence payments, although everyone would get them, even those who paid no taxes. These accounts could be used to implement the late economist Milton Friedman’s proposal of a negative income tax, which would especially help the poorest Americans. Such an approach would make the “My America” accounts very powerful in stimulating consumer demand using the least amount of money, because the poorest Americans have the highest marginal propensities to consume.

Not surprisingly, Wall Street bankers prefer to have the stimulus money given to them, which they typically use to buy more stocks and bonds, which inflates stock and bond prices but does little to increase consumer demand for ordinary goods and services. During Japan’s economic slump, Federal Reserve chair Ben Bernanke suggested that the Japanese government provide direct cash payments to Japanese citizens to stimulate demand. By implication he raised the idea of direct cash payments to consumers as an alternative to giving money created out of “thin air” to Wall Street bankers by buying Treasury securities during an economic downturn. Wall Street supporters responded to the idea of giving cash payments directly to consumers by coining the phrase “helicopter Ben,” as if such a plan was equivalent to dropping money from helicopters. To belittle such “helicopter money” further, the bankers and their supporters posted “helicopter Ben” videos on YouTube. But the critics of quantitative easing (known as QE) and other Federal Reserve injections of cash into the economy warned of a great inflation that never happened. The critics were wrong! Not only did QE help revive the American economy without significant inflation, but also a substantial proportion of the Fed’s bond purchases was from European banks, so the Federal Reserve helped revive the Eurozone as well.

Direct cash payments through “My America” accounts would have a much quicker and bigger impact on consumer demand and require much less money than giving a lot of money to Wall Street bankers by having the Federal Reserve Bank buy Treasury securities in the New York financial markets. Consequently, it makes more sense to bypass the Wall Street bankers and give the money directly to the American people who know best how to spend the money and, thereby, directly stimulate the economy by increasing the demand for goods and services.

Conversely, when inflation threatened, these individual “My America” bank accounts could offer attractive interest rates to absorb funds directly from the public to take money out of the economy and reduce excess demand. The high interest rates would cause people to put off consumption now for the prospect of greater consumption sometime in the future. At the same time, the Fed could pursue a mixed strategy to stimulate business investment by lowering the federal funds rate (discount rate) that banks pay for overnight loans, as well as the interest rate the Fed pays on the reserve funds that banks have at the Fed. Offering higher interest rates to consumers would reduce excess demand, while the lower rates on bank funds would make investment money available for expansion of plant and equipment, which would also help ease price pressure by increasing the supply of goods and services. Together the reduction in demand and increase in supply (over time) can ease pressure on prices and fend off inflation. The Fed can also engage in open market operations to buy or sell government securities. Econometric analysis can provide the Fed with guidance on getting exactly the right mix of these policy tools to achieve the Fed’s objectives.

[1] Such accounts could also be used to deliver a universal basic income (UBI) if a UBI law is passed by Congress and signed by the president.

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