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Article Title

Making Money Safe

Document Type

Essay

Abstract

Providing better options to hold money safely is desirable and feasible; failure to do so is a serious but fixable flaw in the legal architecture of money and payments in the United States. There have been a handful of proposals to mitigate this problem. The Federal Reserve (the Fed), however, is currently resisting an attempt to contribute to this effort. The project involves a new bank called “TNB USA Inc.” (TNB), which proposes to hold as its sole investment asset a reserve account at the Fed. (One of the Fed’s principal functions is to serve as a banks’ bank, providing a safe place for private banks to park their cash, in so-called reserve accounts.) Other banks keep only a fraction of their deposits on reserve with the Fed, and loan the rest out. Thus, in a famous scene from It’s a Wonderful Life, George Bailey, played by Jimmy Stewart, tells his skittish depositors, “You’re thinking of this place all wrong—as if I had the money back in a safe.” The money, he explains, has been loaned out. But TNB would keep its depositors’ money in a virtual safe at the Fed.

The Fed, however, has not permitted TNB to open a reserve account. In a recent advance notice of proposed rulemaking (ANPR), the Fed lays out its rationale for rejecting TNB’s application. This Essay argues that the Fed’s reasoning amounts to an indictment of the current system. Some of the Fed’s arguments are on point but capable of being addressed by a more comprehensive approach; others amount to a defense of a suboptimal status quo. After critiquing the ANPR, the Essay concludes with an account of how a more comprehensive approach could capture the benefits TNB offers, while addressing the Fed’s few legitimate concerns.

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