THE PEOPLE’S LEDGER: HOW TO DEMOCRATIZE
MONEY AND FINANCE THE ECONOMY
Saule T. Omarova *Introduction ................................................................................................... 2
I. The Central Bank Balance Sheet in “Franchise” Finance: An Overview.. 7
A. Franchise Finance: The Logic of the System ...................................... 7
B. The Fed’s Balance Sheet as the “Franchisor Ledger” ......................... 9
1. The Liability Side .......................................................................... 10
2. The Asset Side ............................................................................... 11
II. The Franchisor Ledger At Its Limit: The Impact of COVID-19 ............ 13
A. The Asset Side: “Whatever It Takes”................................................ 14
B. The Liability Side: What’s Next? ...................................................... 16
III. Reforming the Liability Side: Public Access and Monetary Policy ..... 23
A. The Proposal: FedAccounts as a Tool of Monetary Policy ............... 23
B. Transforming the Core of the Franchise: Institutional Design Issues 29
IV. Reforming the Asset Side: Public-Private Capital Allocation .............. 33
A. The Proposal: New Discount Window, Public Infrastructure Finance,
and Systemic Stabilization Portfolio ................................................. 33
1. “New Discount Window” Loans ................................................... 35
2. The National Investment Authority (NIA) Issuances .................... 37
3. “OMO Plus” Assets ....................................................................... 39
B. The Fed’s Balance Sheet as the “People’s Ledger” .......................... 41
V. The People’s Ledger in Action: Structural Implications........................ 45
A. Potential Impact on the Banking Sector ............................................ 45
B. Potential Impact on Shadow Banking and Capital Markets .............. 50
1. Money Market Mutual Funds ........................................................ 50
2. Commercial Paper and Repo Markets ........................................... 52
3. Securitizations and Derivatives ..................................................... 55
4. Securities Firms ............................................................................. 56
Conclusion .................................................................................................. 59*

Beth & Marc Goldberg Professor of Law, Cornell University. For thoughtfulcomments, thanks to Dan Awrey, Adam Feibelman, and Anna Gelpern. Special thanks to mylong-time co-author and colleague, Bob Hockett, for his invaluable contribution to thisproject, inspired and shaped by our numerous discussions and shared explorations of ideas
over the last several years. All errors are mine.

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INTRODUCTION
This Article is both a reform proposal and a thought experiment. It is anattempt to come to terms with powerful forces reshaping today’s finance:technological disruption, macroeconomic imbalances, and political demands
for broader access to financial services. These forces are redefining how we
use and understand money, payments, investments—and what we expectfrom banks, central banks, and lawmakers entrusted with our collective wellbeing. From a public policy perspective, this ongoing transformation is adouble-edged sword. On the one hand, it renders familiar tools of monetary
policy and financial regulation increasingly obsolete and ineffectual. On theother hand, it offers a unique opportunity to correct the inequities andinefficiencies built into the core structures of modern finance. In this sense,
the current convergence of deep technological, economic, and political shifts
creates a crucial opening for redesigning the financial system.
The need for this fundamental restructuring is particularly urgent in lightof the recent COVID-19 experience. In a visceral way, the pandemic exposed
the ultimate human costs of crisis-time malfunctions—and hard-wired
dysfunctions—in the financial system. These dynamics were on full display
in the United States, where the pandemic made not having a basic bankaccount an existential threat to millions of poor, disproportionately non-white
Americans.1 Containing the COVID crisis thus quickly became a matter not
only of public health but also of financial inclusion, economic justice, andracial equity. Yet, the federal government’s response followed the oldplaybook of saving the economy by propping up financial markets, withpredictably inequitable results.2 In effect, the pandemic laid bare thefundamental asymmetry in the operation of the U.S. fiscal and monetaryinfrastructure, designed to privilege financial institutions and their corporateclients over ordinary Americans.3
Not surprisingly, the crisis re-energized the long-standing academic andpolicy debate on “democratizing finance” by making it more inclusive andresponsive to the needs of the American people.4 Two ideas, in particular,
1

Isaac Scher, 14 Million American Adults Don’t Have A Bank Account. They’re Still
Waiting For A Stimulus Payment, BUSINESS INSIDER (May 5, 2020),
2
See infra Part II.A.
3
Amanda Fischer, Main Street’s workers, families, and small businesses are now
suffering as Wall Street prospers from policies to fight the coronavirus recession (Sept. 17,
2020), https://equitablegrowth.org/main-streets-workers-families-and-small-businesses-arenow-suffering-as-wall-street-prospers-from-policies-to-fight-the-coronavirus-recession/.
4
For a sample of the existing literature advocating various forms of public banking,community finance, and “banking [of] the poor,” see LISA SERVON, THE UNBANKING OF
AMERICA: HOW THE NEW MIDDLE CLASS SURVIVES (2017); MEHRSA BARADARAN, HOW
THE OTHER HALF BANKS (20016); ELLEN BROWN, THE PUBLIC BANK SOLUTION: FROM

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3

became highly salient in the context of the COVID pandemic: (1) digitizing
the U.S. dollar; and (2) allowing ordinary people to open deposit accounts
directly at the Federal Reserve (the Fed), the country’s central bank.5 These
policy objectives are at the heart of recent calls to establish what is popularly
known as FedAccounts: digital-dollar deposit accounts, provided free ofcharge by the Federal Reserve to every American household and business.6
In this current form, the FedAccounts idea may be seen as an explicitly
political—and consciously progressive—take on the traditionallytechnocratic “central bank digital currency” (CBDC) debate.7
Despite their popular appeal, however, the existing variants of the
FedAccounts proposal are fundamentally incomplete and, therefore, boundto fall short of their self-proclaimed goals. There are three principal gaps inthe current debate on FedAccounts and related CBDC proposals.
First, the existing proposals do not provide satisfactory answers to
critically important questions about potential impact of the Fed issuing retail
CBDC deposits on the structure and operation of the financial system as awhole. In order to understand the true scope of the proposed reform, however,
AUSTERITY TO PROSPERITY (2013); BUILDING INCLUSIVE FINANCIAL SYSTEMS: A
FRAMEWORK FOR FINANCIAL ACCESS (Michael S. Barr et al., eds. 2007); Michael S. Barr,
Banking the Poor, 21 YALE J. REG. 121 (2004); ORGANIZING ACCESS TO CAPITAL:ADVOCACY AND THE DEMOCRATIZATION OF FINANCIAL INSTITUTIONS (Gregory D. Squiresed., 2003); ASSETS FOR THE POOR: THE BENEFITS OF SPREADING ASSET OWNERSHIP(Thomas M. Shapiro & Edward N. Wolff eds., 2001); MICHAEL A. STEGMAN, SAVINGS FOR
THE POOR: THE HIDDEN BENEFITS OF ELECTRONIC BANKING (1999); JULIA ANN PARZEN &MICHAEL HALL KIESCHNICK, CREDIT WHERE IT’S DUE: DEVELOPMENT BANKING FORCOMMUNITIES (1992); MICHAEL SHERRADEN, ASSETS AND THE POOR: A NEW AMERICANWELFARE POLICY (1991).
5
See infra Part II.B. The Fed currently provides deposits services only to banks and a
few other institutions. See infra Part I.B.1.
6
As described below, the FedAccounts proposal was advanced in 2018 by legal scholars
Morgan Ricks, John Crawford, and Lev Menand. See Ricks et al., infra note 106. See also,
Mike Konczal, A Federal Reserve Reform Agenda: Eight Recommendations (Sept. 2020),
file:///C:/Users/sto24/Box%20Sync/CENTRAL%20BANKING%20&%20MONEY/Fed%
20accounts/RI.Fed.Reserve.Reform.Agenda.09.2020.pdf; Ameya Pawar, FedAccounts For
All—With Automatic and Recurring Payments Triggered by Economic Crises,
MARKETWATCH (July 25, 2020), https://www.marketwatch.com/story/fed-accounts-for-allwith-automatic-and-recurring-payments-triggered-by-economic-crises-2020-07-21; Sylvan
Lane, Biden-Sanders Unity Task Force Calls for Fed, US Postal Service Consumer Banking.
THE HILL (July 8, 2020), https://thehill.com/policy/finance/506469-biden-sanders-unitytask-force-calls-for-fed-us-postal-service-consumer; Nikhilesh De, US Lawmakers Talk
Digital Dollar, FedAccounts in Thursday Hearing, COINDESK.COM (June 10, 2020),
https://www.coindesk.com/watch-us-lawmakers-will-talk-digital-dollar-fedaccounts-inthursday-hearing.
7
See infra Part II.B. FedAccounts can be created without concurrent CBDC issuance.
In fact, the original proposal to open the Fed’s deposit services to the public was made in
1985, long before CBDC entered the scene. See infra note 102 and accompanying text.

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it is crucial to trace how exactly it would—or should—change the businessmodels of banks, securities dealers, hedge funds, and other financial
institutions, as well as the dynamics of financial markets in which they
operate. Glossing over these consequences masks significant policy choices
involved in the process.
Second, the existing FedAccounts and CBDC proposals focus nearlyexclusively on the liability side of the central bank balance sheet, where the
newly added deposits would be recorded, giving the asset-side issues at best
a cursory nod. The full consequences of the proposed expansion of a central
bank’s liabilities, however, cannot be fully understood without explaining
how that would affect the composition of its asset portfolio. Massive inflows
of deposit money would create both new pressures on, and new opportunities
for, the Fed to channel resources to productive use in the nation’s economy.
Yet, the current debate fails to address, or even acknowledge, thesepotentially game-changing implications of FedAccounts for system-wide
allocation of money and credit.
Third, the current debate remains conceptually and normatively
fragmented. Individual proposals are typically narrowly framed as a matterof financial inclusion and/or payments efficiency, without being explicitly
grounded in a coherent vision of how the financial system operates—and,more importantly, how it should operate. Without such a unifying vision, they
fail to advance our collective understanding of the transformative potentialof the Fed’s balance sheet as the tool of democratizing all of finance. The full
extent of this potential, therefore, remains largely unexplored.
The proposal advanced in this Article fills these gaps and, in doing so,
takes the debate to a qualitatively new level. The Article advocates acomprehensive reform of the structure and systemic function of the Fed’sbalance sheet as the basis for redesigning the core architecture of modern
finance. In essence, it offers a blueprint for democratizing both access tomoney and control over financial flows in the nation’s economy.
Conceptually, the Article starts by placing the FedAccounts idea in thecontext of a broader shift in the central bank’s role in today’s system of
public-private “franchise” finance.8 In this system, the Fed acts on behalf ofthe sovereign public as the ultimate creator of a unique collective good: themonetized full faith and credit of the United States. In a franchise-likearrangement, the Fed modulates the supply of sovereign credit-money but
outsources the economy-wide allocation of this precious resource to speciallylicensed and regulated private financial institutions: banks.9 Accordingly, theFed’s balance sheet is designed to function as a classic “franchisor ledger:”its liabilities run primarily to franchisee-banks, and its assets comprise89

See infra Part I.A.
See infra note 16.

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5

primarily federal government-backed debt and assets acquired in the courseof providing liquidity support to private financial institutions. In thisparadigm, there is no direct relationship between the central bank and the real
people participating in the real, i.e. non-financial, economy.
This Article argues that a truly systemic democratization of financedemands a structural shift at the very core of this arrangement. The Article’s
central claim is that, to achieve this goal, the Fed’s entire balance sheet should
be redesigned to operate as what it calls the “People’s Ledger:” the ultimate
public platform for both modulating and allocating the flow of sovereign
credit and money in the national economy.
On the liability side, the Article envisions the ultimate “end-state”
whereby central bank accounts fully replace—rather than compete with—private bank deposits. Making this explicit assumption helps to illuminate
and explore the full range of new monetary policy options enabled by thecompositional change in the Fed’s liabilities.10 As part of this exploratory
exercise, the Article proposes a mechanism for modulating the aggregate
supply of money via direct crediting—and, in rare circumstances, debiting—of universally held FedAccounts.11 It shows how this unconventional
mechanism, colloquially known as “helicopter money,” would empower the
Fed to conduct monetary policy in a far more targeted, dynamic, and effective
manner than can be done via interest rate management alone.12
On the asset side, the Article lays out a bold proposal for restructuring theFed’s investment portfolio and redirecting its credit-allocation power inqualitatively new ways. Under this proposal, the Fed’s principal asset
holdings would fall into three categories: (1) redesigned “discount window”
loans to qualifying lenders; (2) securities issued by existing and newlycreated public instrumentalities for purposes of financing large-scale public
infrastructure projects; and (3) an expanded portfolio of trading assets
maintained for purposes of financial market-stabilization.13 Together, these
new investment choices would empower the Fed to channel greater quantities
of credit to productive uses in the real economy far more directly andeffectively than it can hope to do today.
The proposed comprehensive restructuring of the Fed’s balance sheet
would democratize not only access to financial services but the very processof generation and allocation of financial resources. It would therefore directly
10

While using conventional accounting categories, this Article does not express a viewon whether or not FedAccounts, as a form of central bank money, are properly characterized
as “liabilities” of the Fed. For an in-depth analysis, see Michael Kumhof et al., Central Bank
Money: Liability, Asset, or Equity of the Nation? (2020) (on file with the author).
11
This Article adopts the term “FedAccounts,” coined by Ricks et al., infra note 106, toavoid unnecessary multiplication of proprietary terminology describing a generic instrument.
12
See infra Part III.A.
13
See infra Part IV.A.

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impact not only the banking industry but also “shadow banking” and capital
markets. The Article shows how the two sides of the proposed reform—fullmigration of deposits onto the Fed’s books and accompanying restructuringof its asset portfolio—would drastically reduce the scale and systemicallydestabilizing effects of speculative trading in financial instruments. It would
make financial markets less complex, more stable, and more manageable sitesof truly private risk-taking.14 In effect, putting the People’s Ledger in action
would restore the socially efficient balance between private intermediationand public generation of credit. It would redefine how the financial system
works.
The practical implementation of this multi-layered structural reform
would require detailed analyses of numerous legal, political, andtechnological issues beyond this Article’s scope. The purpose here is to bringgreater conceptual and normative clarity and cohesion into the currently
fragmented debate on the future of digital finance and central banking in a
democratic society. In that sense, the Article is a synthesizing andoperationalizing exercise. It defines the realm of structural possibilities thatroutinely go unnoticed and explores the outer boundaries of potential
institutional change, partially—and quietly—embedded within many CBDC
and FedAccounts proposals. As these ideas gain broader acceptance in the
public policy debate, it is increasingly important that we understand where
those boundaries are, how far we are prepared to go, and what choices await
us on that path.15
The Article proceeds as follows. Part I sets the conceptual context for the
proposal by discussing the “franchisor ledger” model of the central bankbalance sheet, built into today’s financial system. Part II examines how the
COVID-19 crisis effectively pushed the Fed beyond the traditional confinesof the “franchisor ledger” paradigm. Parts III and IV lay out the core proposal
for transforming the Fed’s balance sheet into the People’s Ledger. Part III
outlines the FedAccounts scheme and explores the potential expansion of the
Fed’s monetary policy tools. Part IV proposes a fundamental restructuring of
the Fed’s asset portfolio, which would enable the Fed to take a more direct
and proactive role in allocating credit to productive economic enterprise.
Finally, Part V traces the key effects of the proposed reforms on the structure
and operation of the U.S. banking industry and money and capital markets.
14

See infra Part V.
This conceptual and normative framing is one important factor distinguishing this
Article from my colleague Bob Hockett’s recent proposals to create a Treasury Dollar or a
Democratic Digital Dollar, issued respectively by the Treasury or by the Fed, with the goalof complete institutional fusion of the U.S. fiscal and monetary policies. See, e.g., Robert
Hockett, The Capital Commons: A Plan for Building Back Better and Beyond (2020),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3697337.
15

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7

I. THE CENTRAL BANK BALANCE SHEET IN “FRANCHISE” FINANCE: AN
OVERVIEWThis Part provides a brief conceptual overview of the central bank’s rolein the modern system of public-private “franchise” finance. Focusing on theFederal Reserve, it shows how the underlying dynamics of this hybrid systemshape the structure and functions of the central bank’s balance sheet—the“franchisor ledger”—and define its principal limitations.
A. Franchise Finance: The Logic of the System
The currently existing U.S. financial system is in essence a public-private
franchise arrangement for the distribution of a unique collective good: themonetized full faith and credit of the United States.16 At its core, it is a system
for supplying and dispensing a uniform national currency and its credit
equivalent, dollar-denominated debt.17 The sovereign public, acting throughits central bank and fiscal authorities, is the ultimate creator, or issuer, of thiscritical collective good.18 Privately-owned banks and other financial
institutions, in turn, distribute sovereign credit-money throughout theeconomy, effectively collecting “privatized seignorage” for their services.19
To ensure the uniformity of the sovereign credit-money administered by these
private franchisees, the sovereign franchisor promulgates and enforces strict
licensing and regulatory measures—a form of “quality control” critical to theintegrity of the arrangement.20
These basic, though routinely under-appreciated, dynamics are mostclearly evident in the operation of commercial banks that extend credit by
opening new, or crediting existing, deposits for their borrowers.21 Theborrowers can immediately spend these privately-generated bank deposits as
if they were full equivalents of Federal Reserve notes, this country’s legal
tender. While widely taken for granted, this functional equivalence is a
product of the institutional design that makes banks the key nodes in thenational payments infrastructure, administered and fully backed by the Fed.
Thus, contrary to the widespread misconception, banks do not simply
16This Part I.A. builds on the in-depth account of the U.S. financial system in Robert
C. Hockett & Saule T. Omarova, The Finance Franchise, 102 CORNELL L. R. 1143 (2017)[Finance Franchise].
17
Most of this debt takes the form of what is called “credit-money,” “bank money,”“deposit money” or “broad money.”18
For a discussion of “collective goods,” see Robert C. Hockett & Saule T. Omarova,
Private Wealth and Public Goods: A Case for a National Investment Authority, 43 J. CORP.
L. 101 (2018) [National Investment Authority].
19
Examples of privatized seignorage include interest and other fees financial institutions
charge for lending and managing money. Finance Franchise, supra note 16, at 1163.
20
Id. at 1161.
21
Id., at 1158-1164.

8

The People’s Ledger - DRAFT[14-Oct-2020“intermediate” between private savers and borrowers by lending to the latter
what the former have previously deposited.22 In practice, banks create
deposits when they extend loans to creditworthy customers, as simply theliability-side entry offsetting the newly created asset on the bank’s balance
sheet.23 The real key to the spendability of these newly loaned funds as
deposit-account “bank money” is, therefore, not their fictitious derivationfrom some privately pre-accumulated capital, but an act of the sovereign: theFed accommodation and monetization of bank-created private liabilities.24 It
is an institutionalized pre-commitment by the Fed to recognize and support
the continuous clearing and settlement, through the public payments
infrastructure that the Fed administers, of payments drawn upon deposit
accounts maintained with publicly licensed banking institutions.25
That license is the bank charter, which functions essentially as a franchisecontract whose terms include mandatory reserve and capital buffers,
qualitative and quantitative restrictions on banks’ asset portfolios, regular
reporting and on-site examination requirements, and other familiar elements
of modern bank regulation.26 These “quality control” measures are designed
to maintain the stability of the franchisee-banks, minimize the moral hazard
built into this arrangement, and prevent over-issuance of money in relation to
the quantum of goods and services produced in the economy.27
In recent decades, this privileged access to public accommodation has
been steadily expanding beyond the formal confines of the banking system.
In large part, this loosening of the franchise border reflects an increasingly
complex pattern of intentionally cultivated transactional and structurallinkages between nonbank financial institutions, on the one hand, andcommercial banks, on the other.28 As a result, nonbank financial institutions—securities firms, derivatives dealers, asset managers, and other participantsin the capital markets and so-called “shadow banking” sector—have now
22

Finance Franchise, supra note 16, at 1158-1160.
For a full analysis, see id., at 1153-1164.
24
Id.at 1155-1157.
25
Id.
26
See, generally, MICHAEL S. BARR, HOWELL E. JACKSON & MARGARET E. TAHYAR,FINANCIAL REGULATION: LAW AND POLICY (2d ed. 2018); RICHARD SCOTT CARNELL,JONATHAN R. MACEY & GEOFFREY P. MILLER., THE LAW OF FINANCIAL INSTITUTIONS (6thed. 2017).
27
Finance Franchise, supra note 16, at 1161.
28
The key legislation that enabled these structural shifts was the Gramm-Leach-Bliley
Act of 1999, which repealed the Depression-era prohibition on affiliations between
commercial banks and securities firms. See Banking Act of 1933 (Glass-Steagall Act), Pub.
L. No. 73-66, 48 Stat. 162 (codified as amended in scattered sections of 12 U.S.C.), repealedin part by Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act), Pub.
L. No. 106-102, 113 Stat. 1338 (codified as amended in scattered sections of 12 and 15
U.S.C.). See also, Finance Franchise, supra note 16, at 1193-1201.
23

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9become de facto franchisees that issue and multiply public credit-money
alongside commercial banks.29
They do so via a complex web of transactional mechanisms andtechniques that either amplify the quantity of bank credit (by generating
demand for it), or functionally replicate the money-creation function reserved
for regulated banks—or both.30 The key to these amplification and replication
dynamics is the direct or indirect central bank accommodation of private
liabilities issued by these “rogue” franchisees operating outside of theoriginal franchise arrangement. Money Market Mutual Funds (MMMFs),
bespoke derivative instruments, securities repurchase (“repo”) markets, andcomplex securitizations all exemplify these dynamics and illustrate theirpotentially destabilizing systemic effects.31
B. The Fed’s Balance Sheet as the “Franchisor Ledger”
In the franchise model of finance, described above, the sovereign publicmust issue and modulate the supply of sovereign credit-money. This Article
argues that, in addition, it can and should allocate the critical quantity of thatvital resource.32 In fact, reclaiming the public’s primary role in allocating
publicly issued money and credit is critical to its ability to perform themodulatory task effectively—and to solve ubiquitous self-reinforcing
collective action problems that create financial instability and hinder sociallyequitable economic growth.33
A central bank’s balance sheet is the ultimate platform—the ledger—on
which the sovereign public can perform these core functions and ensure thecontinuous flow of capital throughout the economy. The composition of that
ledger both reflects and determines the overall structure of monetary relations
and the broader power dynamics in the financial system. Significant changes
in the composition of the Fed’s balance sheet, accordingly, reveal important
structural shifts in the U.S. financial system and the broader political
economy.
Under the current franchise arrangement, the central bank’s balance sheetfunctions as the quintessential franchisor ledger. Prior to 2008, the Fed’sbalance sheet was structured in close conformity with this baseline model: its
main liabilities ran to franchisee-entities, and the bulk of its asset holdings
were in the form of federal government debt instruments. Since the 2008
crisis, the Fed’s balance sheet has been undergoing significant changes, bothquantitative and qualitative.
29

Id., at 1165-1202.
Id.
31
For a detailed exercise tracing these dynamics, see id. See also infra Part V.
32
For a fully articulated argument, see Finance Franchise, supra note 16.
33
See infra Part IV.
30

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To understand the full systemic importance of these ongoing shifts in the
structure and operation of the Fed’s balance sheet, however, it is helpful tostart by examining the baseline logic of the franchisor ledger.
1. The Liability SideIn accordance with the franchisor ledger model, the liability side of the
Fed’s balance sheet generally consist of its notes (U.S. paper currency),
commercial banks’ reserve accounts, and repo and “swap line” liabilities todealer-banks and foreign central banks.34
This brief description readily reveals an important feature of a modern
central bank’s business model. Except for the paper currency, the Fed’s
liabilities run solely to public instrumentalities and privately-owned financial
institutions with the privileged franchisee status. The key among suchliabilities are reserve accounts held by U.S. banks.35 The Fed uses theseaccounts to impose and enforce its mandatory reserve requirements andliquidity management regime applicable to all banks chartered or operatingin the U.S.36 Because reserve accounts are effectively deposits, they areaccounted for as the Fed’s liabilities that appear as assets on banks’ balance
sheets. In this direct sense, the Federal Reserve is designed to be a “banks’bank”—a central bank.
In the post-2008 era, this narrowly restricted structure of the Fed’s
liabilities has been increasingly subject to criticism along three principal
lines. First, the present arrangement overtly privileges certain financial
institutions—especially, “big” ones—by giving them a safe and lucrative“public banking option” not available to other firms and individual
Americans. This asymmetry became particularly visible in the wake of the2008 crisis, when the Fed started paying its bank-depositors so-called“Interest on Reserves” (IOR).37 From the Fed’s perspective, IOR serves as a
34

See BD. OF GOV’S OF THE FED. RES. SYS., Monetary Policy: Credit and Liquidity
Programs
andtheBalance
Sheet:
FederalReserve
Liabilities,
https://www.federalreserve.gov/monetarypolicy/bst_frliabilities.htm.
35
See 12 U.S.C. § 342 (banks). For the limited number of other categories of entity
authorized to hold Federal Reserve Accounts, see, e.g., 12 U.S.C. § 391 (Treasury); 12
U.S.C. §§ 1435, 1452(d) & 1723a(g) (mortgage GSEs); 12 U.S.C. §§ 347d & 358 (foreign
governments, banks, and central banks); 12 U.S.C. § 286d (BIS, IBRD, IMF); 12 U.S.C. §5465 (designated financial market utilities).
36
As of March 31, 2020, the Fed held roughly $2.5 trillion in commercial bank deposits.
See BD. OF GOV’S OF THE FED. RES. SYS., Federal Reserve Banks Combined Quarterly
Financial
Report(Unaudited)(March31,2020),
https://www.federalreserve.gov/aboutthefed/files/quarterly-report-20200528.pdf,
37
Congress authorized IOR in the Emergency Economic Stabilization Act of 2008,
Pub. L. No. 110-343, § 128, 122 Stat. 3765, 3796. IOR had been planned since 2006, tocommence in 2011, but was implemented earlier as part of emergency stabilization. Ann
Saphir, Yellen Draws Fire for Fed Policy to Pay Banks, REUTERS (Feb. 10, 2016),

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11

liability-side tool of monetary policy. However, it also generates a gratuitous
rent for banks, which they do not pass on to their own depositors in the formof equivalent interest on deposits.38 It is this “special-privilege” aspect of the
IOR regime that attracts criticism as fundamentally inequitable andexclusionary.39
Second, the present arrangement allows private franchisee-institutions toover-generate publicly accommodated credit, thereby fueling financial
market volatility and causing systematic misallocation of capital to
speculative activities.40 This “rogue-franchisee” problem was on full display
in the years before the 2008 financial crisis, aided by the Fed’s failure to
perform its core “quality-control” responsibilities.41
Third, conducting monetary policy through a layer of private bankintermediaries is inherently inefficient. The Fed’s experience with“quantitative easing” (QE) and other extraordinary measures designed tokeep bank credit flowing during and after the 2008 crisis exposed thesestructural inefficiencies.42 Thus, despite the Fed’s efforts, many banks
preferred either to hoard their additional liquidity or to use it for potentiallymore lucrative trading in secondary or tertiary financial markets.43 The
persistently depressed demand for loans in the post-crash economy further
magnified the Fed’s infamous “pushing on a string” problem.44
2. The Asset SideThe bulk of the Fed’s assets traditionally consist of Treasury bonds andso-called “Agency securities”—low-risk bonds issued by federal government
agencies and government-sponsored enterprises (GSEs).45 Other typical
https://www.reuters.com/article/usa-fed-yellen-politics/yellen-draws-fire-for-fed-policy-topay-banks-idUSL2N15P1Z7.
38
What makes this rent possible is the indispensability of transaction accounts.
Supplying these transaction accounts publicly will eliminate the basis for this and many otherrent-extraction opportunities. See infra Part III.
39
Is the Federal Reserve Giving Banks a $12 Billion Subsidy? THE ECONOMIST, (Mar.
18, 2017).
40
For a detailed account of these dynamics, see Finance Franchise, supra note 16.
41
Id.at 1214.
42
See infra notes 54-57 and accompanying text.
43
Mark Blyth, The Last Days of Pushing on a String, HARVARD BUS. REV. (Aug. 7,2012), https://hbr.org/2012/08/the-last-days-of-pushing-on-a.
44
Id. The “pushing on a string” metaphor refers to the asymmetric efficacy of a central
bank’s monetary policy: while raising interest rates can relatively easily counteract
inflationary pressures, lowering the rates does not necessarily produce the desired economic
stimulus. This phrase was used during Congressional hearings where the Fed Chair, Marriner
Eccles, testified on the proposed Banking Act of 1935. See Hearings before the Committeeon Banking and Currency, House of Representatives, 74th Cong. (Mar. 18, 1935), at 377,
https://fraser.stlouisfed.org/files/docs/historical/congressional/1935hr_ba1935.pdf.
45
See https://www.investopedia.com/terms/a/agencysecurities.asp.

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items on the asset side of its balance sheet include gold certificates, Special
Drawing Rights (SDRs) with the International Monetary Fund (IMF), foreign
currencies, so-called “discount window” loans, and similar assets acquired in
the course of providing liquidity support to qualifying financial institutions.46
The Federal Reserve has traditionally used the asset side of its balance
sheet to conduct monetary policy. Thus, in addition to bank reserve
requirements and IOR, the Fed uses discount window lending to set the socalled “discount rate.”47 The discount window is the primary facility throughwhich the Fed provides liquidity support to commercial banks experiencing
short-term liquidity problems and unable to borrow in the interbank market.48
Discount window loans enable the Fed to monetize, directly or indirectly,
certain high-quality assets, deemed worthy of monetization in the interest of
maintaining systemic liquidity or encouraging the flow of credit to specificareas of economic activity.49
Even more significantly, the Federal Reserve regularly engages in socalled “open market operations” (OMO)50 by selling and purchasing Treasury
bonds and entering into “repo” and “reverse repo” transactions.51 Along with
IOR, the Fed’s OMO and repo operations serve as the means of keeping the
key “federal funds rate”—the interest rate at which banks lend to one anotherovernight—around the target established by the Federal Open Markets
Committee (FOMC).52
All of these tools utilize the Fed’s asset portfolio as the means of
performing its traditional money-modulatory task.53 Since 2008, however,46
See FED. RES. SYS., Federal Reserve Banks’ Combined Financial Statements As ofand For the Years Ended December 31, 2018 and December 31, 2017 5 (2019),
https://www.federalreserve.gov/aboutthefed/files/combinedfinstmt2018.pdf.
47
See
FED.
RES.
BANK
OF
N.
Y.,
The
Discount
Rate,
https://www.federalreserve.gov/monetarypolicy/discountrate.htm
48
Section 10B of the Federal Reserve Act, 12 U.S.C. § 347b. See also, BD. OF GOV’S OF
FED.
RES.
SYS.,
Discount
Window
Lending,THE
https://www.federalreserve.gov/regreform/discount-window.htm.
49
Id. See also, https://www.frbservices.org/assets/resources/rules-regulations/071613operating-circular-10.pdf.
50
See https://www.federalreserve.gov/monetarypolicy/bst_openmarketops.htm.
51“Repo” is an abbreviated term for securities repurchase agreements, functional
equivalent of short-term loans secured by liquid financial instruments. A “reverse repo” is a
repo transaction from the cash lender’s viewpoint. See FED. RES. BANK OF N. Y., Repo andReverse Repo Agreements, https://www.newyorkfed.org/markets/domestic-marketoperations/monetary-policy-implementation/repo-reverse-repo-agreements.
52
See https://www.federalreserve.gov/monetarypolicy/openmarket.htm.
53
Some of the Fed’s monetary policy instruments operate on the asset side of the balance
sheet, with corresponding liability-side effects. Thus, the Fed’s OMO begin with a purchaseor sale of assets, with corresponding credits or debits of banks’ reserve accounts on theliability side. Working in the opposite direction, IOR payments begin with direct credits ofbanks’ reserve accounts, with offsetting additions to the Fed’s asset portfolio.

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13

some of these tools also have been used in pursuit of the credit-allocativetask. The third round of the Fed’s quantitative easing (QE3), which began in
the fall of 2012, is a good example of this trend. Under QE3, the Fedcommitted to purchasing $85 billion in mortgage-related assets, in order tomaintain a floor under housing prices.54 It was a direct continuation of the
Fed’s massive emergency lending and liquidity-support programs instituted
in response to the crisis of 2008.55 In effect, the crisis turned the Fed into the“market-maker of last resort,”56 whose dramatically expanded portfolio ofassets included such qualitatively new asset classes as privately-issued
mortgage instruments and swap lines provided to foreign central banks.57
These large-scale crisis-driven interventions explain the remarkable
growth in the size of the Fed’s balance sheet.58 Nevertheless, both thequantitative growth of, and qualitative changes to, the Fed’s asset portfolio in
the post-2008 era were straightforward extensions of traditional Fed
operations into new market segments or levels of magnitude. Though often
controversial, they gradually became accepted as necessary crisiscontainment measures.59 The COVID-19 pandemic, however, has pushed theFed’s market operations significantly beyond their traditional confines. By
forcing the Fed much deeper into the realm of direct credit allocation, thislatest crisis exposed the inherent limitations of the 20th-century “franchisor
ledger” model of central banking in today’s world.
II. THE FRANCHISOR LEDGER AT ITS LIMIT: THE IMPACT OF COVID-19
In early 2020, the global spread of novel coronavirus triggered a major
public health crisis in the United States. Drastic virus-containment measures,54

https://www.federalreserve.gov/newsevents/pressreleases/monetary20121212a.htm.
See Robin Greenwood, Samuel G. Hanson & Jeremy C. Stein, The Federal Reserve’s
Balance Sheet as a Financial-Stability Tool, in ECONOMIC POLICY SYMPOSIUM
PROCEEDINGS (Federal Reserve Bank of Kansas City, 2016).
56
See Willem Buiter, Anne Silbert, The Central Bank as the Market Maker of Last
Resort: From Lender of Last Resort to Market Maker of Last Resort, VOXEU.COM (Aug. 13,
2007), https://voxeu.org/article/subprime-crisis-what-central-bankers-should-do-and-why.
57
See PERRY MEHRLING, THE NEW LOMBARD STREET: HOW THE FED BECAME THE
DEALER OF LAST RESORT (2010); Colleen Baker, The Federal Reserve’s Use of International
Swap Lines, 55 ARIZ. L. REV. 603 (2013).
58
The Fed’s total assets increased from $870 billion in August 2007 to $4.5 trillion inearly 2015. As of December 30, 2019, that number stood at approximately $4.2 trillion. See
BD. GOV. FED. RES. SYSTEM, Monetary Policy: Credit and Liquidity Programs and Balance
Sheet:
RecentBalance
Sheet
Trendshttps://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm.
59This fact came into a sharp relief in September 2019, when the Fed significantly
ramped up its repo operations to inject liquidity into money markets. Ariya Anbil, Alyssa
Anderson, & Zeynep Senyuz, What Happened in Money Markets in September 2019? FEDSNOTES (FEB. 27, 2020), https://www.federalreserve.gov/econres/notes/feds-notes/whathappened-in-money-markets-in-september-2019-20200227.htm.
55

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in turn, led to a wave of business closures and dramatic rise in unemployment
levels.60 Once again, the Federal Reserve’s balance sheet became the critical
tool of saving the economy from collapse. Given the enormity of thechallenge, however, the Fed’s usual crisis-time operations as the lender andmarket-maker of last resort quickly took on a qualitatively new dimension.
For the first time, the Fed began massive direct purchases of corporate debt
and opened a credit line for municipalities—extraordinary measures thatbrought into a sharp relief central banks’ fundamentally allocative role,normally obscured from public view. On the other side of the ledger, thepandemic has reignited the movement to democratize the Fed by giving all
American households and businesses direct access to central bank money.
This Part examines these ongoing pressures on the Fed’s balance sheet—and
their potential to hasten the demise of the traditional “franchisor ledger”
paradigm of central banking.
A. The Asset Side: “Whatever It Takes”
Although the COVID-19 crisis did not originate in the financial sector,
the response to the crisis quickly became a matter of getting finance flowing
throughout the abruptly incapacitated economic system. On March 27, 2020,
Congress passed the CARES Act that, among other things, appropriated a$500 billion emergency relief package to be used by the Treasury for
purposes of providing financial assistance to eligible U.S. businesses andpublic entities.61 In the familiar crisis response mode, the Fed’s balance sheet
became the principal platform for injecting emergency relief funds into thelocked-down economy. With the Treasury providing first-loss protection, theFederal Reserve established several new lending programs to facilitate theflow of credit to U.S. companies and certain public entities.62
Some of these facilities replicated the emergency programs used to stem
the financial crisis in 2008-2009.63 Much like in that earlier crisis, the Fed
used these programs to inject liquidity into the financial system by bolstering
financial institutions’ balance sheets. Several facilities, however, were
established for the first time and aimed to provide credit not to banks and60

For official unemployment data, see U.S. Bureau of Labor Statistics, BLS
Information: Effects of COVID-19 Pandemic and Response on the Employment Situation
News Release, https://www.bls.gov/covid19/effects-of-covid-19-pandemic-and-responseon-the-employment-situation-news-release.htm.
61
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, Pub. L. 116-136,
H.R.
748,
https://www.govinfo.gov/content/pkg/BILLS-116hr748enr/pdf/BILLS116hr748enr.pdf.
62
See https://www.federalreserve.gov/funding-credit-liquidity-and-loan-facilities.htm.
63
These include the Primary Dealer Credit Facility (PDCF), Commercial Paper Funding
Facility (CPFF), Money Market Fund Liquidity Facility (MMFLF), and Term Asset-Backed
Securities Loan Facility (TALF). Id.

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other financial institutions but to a wide range of commercial businesses andstate and municipal governments.
The Fed created two Corporate Credit Facilities—the Primary Market
Corporate Credit Facility (PMCCF)64 and the Secondary Market Corporate
Credit Facility (SMCCF)65—to purchase qualifying corporate loans andbonds both in secondary markets and in primary issuances. Intended to help
otherwise healthy U.S. companies to avoid massive employee layoffs, these
programs were established under Section13(3) of the Federal Reserve Act,
governing the Fed’s emergency non-bank lending.66 The SMCCF supported
market liquidity by purchasing corporate bonds of qualifying companies andexchange-traded fund shares.67 Even more radically, the PMCCF gave U.S.
corporations direct access to government funding to enable them to maintainbusiness operations during the pandemic.68
In another unusual move, the Fed has established the Municipal Lending
Facility (MLF) to help state and local governments manage cash flowpressures and continue serving their communities.69 Under this program,eligible states, cities, and various local government entities were allowed toborrow directly from the Federal Reserve, subject to certain conditions.70 The
program’s strict eligibility requirements, relatively high interest rates, andother conditions significantly limited its practical use and efficacy and madeit a target of significant criticism.71 Yet, despite its limitations, the MLF
marks the first time the Federal Reserve directly entered municipal bondmarkets and effectively put its own balance sheet behind state and local
governments.72
64

See https://www.federalreserve.gov/monetarypolicy/pmccf.htm.
See https://www.federalreserve.gov/monetarypolicy/smccf.htm.
66
12 U.S.C. § 343. For an analysis of the Fed’s legal authority to establish thesefacilities, see Lev Menand, Unappropriated Dollars: The Fed’s Ad Hoc Lending Facilities
and
the
Rules
that
GovernThem(May2020),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3602740.
67
Fed. Res. Bank. N.Y., FAQs: Primary Market Corporate Credit Facility andSecondary Market Corporate Credit Facility, https://www.newyorkfed.org/markets/primaryand-secondary-market-faq/corporate-credit-facility-faq. The SMCCF purchases track a
specially created Broad Market Index of eligible bonds. Id.
68
Id.
69
Bd. Gov. Fed. Res. System, Monetary Policy: Policy Tools: Municipal Liquidity
Facility, https://www.federalreserve.gov/monetarypolicy/muni.htm. The MLF wasestablished pursuant to the Fed’s authority under Section 14 of the Federal Reserve Act andbecame operational on May 26, 2020.
70
Id.
71
See Robert Hockett, Community QE – Illinois Signs On, and Eligibility Further
Expands, But ‘Penalty Rates’ Still Have to Go, FORBES.COM (June 5, 2020),
https://www.forbes.com/sites/rhockett/2020/06/05/community-qe--illinois-signs-on-andeligibility-further-expands-but-penalty-rates-still-gotta-go/#69c4f9d218f2.
72
Robert Hockett, Welcome to Community QE – Now Let Us Put It To Use,65

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Collectively, the Fed’s multiple emergency programs—doing “whatever
it takes” to prevent an economic disaster—had a tremendous quantitative
impact on its balance sheet.73 Already by June 1, 2020, the Fed’s total assets
surpassed $7 trillion.74 What is even more important for present purposes,
however, is the qualitative shift in the Fed’s asset portfolio, especially as aresult of its direct purchases of corporate and municipal bonds. In effect, theserecent changes in the composition of the Fed’s assets reflect the ongoingchanges in the role of a modern central bank not only as the nation’s primarymoney-modulator but also, increasingly, as its credit-allocator. Put simply,
the latest crisis made it no longer possible to ignore the fact that the central
bank’s balance sheet is an indispensable integrated platform for ensuring thefunctioning of the modern economy—and not simply the back-office support
system for private franchisee-banks.
B. The Liability Side: What’s Next?
To date, the qualitative changes on the asset side of the Fed’s balance
sheet have not been accompanied by similarly significant shifts in thecomposition of its liabilities. Nevertheless, the pandemic has created asignificant new opening for potentially transformative changes on theliability side of a modern central bank’s balance sheet. In particular, the
COVID-19 pandemic pushed two ideas into the mainstream policy debate:(1) the issuance of CBDC; and (2) allowing individuals to hold money on
deposit directly at the central bank.
While intimately related, these two ideas are typically framed inconceptually and normatively different terms and addressed to different
audiences. Thus, the CBDC discussions are confined primarily to thetechnocratically-minded central bankers and economic experts concernedwith the efficacy of monetary policy tools in the era of digital finance.75 By
contrast, the “central banking for all” idea is based on an overtly politicalappeal to the goals of financial inclusion and democratizing access tofinancial services.76
FORBES.COM (Apr.9, 2020), https://www.forbes.com/sites/rhockett/2020/04/09/welcome-tocommunity-qe/#66a72ea3c415 (coining the term “Community QE” to emphasize thiseffect).
73
Neil Irwin, Fed Chair to Congress: Do Whatever It Takes to Keep the Economy fromCollapse, N.Y. TIMES (Apr. 29, 2020).
74
See Bd. Gov. Fed. Res. System, Monetary Policy: Credit and Liquidity Programs andBalance
Sheet:
RecentBalance
Sheet
Trends,https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm.
75
For a summary of the CBDC debate, see Dirk Niepelt, Digital Money and Central
Bank Digital Currency: An Executive Summary for Policymakers (Feb. 3, 2020),
https://voxeu.org/article/digital-money-and-central-bank-digital-currency-executivesummary.
76
See infra notes 99-101 and accompanying text.

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17

Issuing a new form of digitized central bank money, or CBDC, became
an increasingly hot topic of policy discussion as a result of the rapid rise in
the volume and popularity of privately-issued cryptocurrencies.77 The
success of Bitcoin paved the road for the subsequent emergence of numerous
crypto-assets purporting to challenge the supremacy of sovereign money.78
Recent growth of “stablecoins,” privately issued crypto-assets whose value
is explicitly pegged to one or more sovereign currencies, presents aparticularly tangible challenge in this respect.79 Not surprisingly, Facebook’splans to launch its own stablecoin, Libra,80 immediately heightened thesalience of CBDC on central banks’ agenda.81
The ongoing debate among central bankers and economists is focused on
the range of specific design options, both with respect to the CBDC itself andthe infrastructure for its provision and use.82 Functionally, specific CBDC
can differ in the degree of privacy and anonymity, availability around theclock or during limited times, and other user convenience features.
Economically, CBDC may be universally available (“retail” or “generalpurpose”) or restricted to financial institutions only (“wholesale”), interestbearing or not, subject to quantitative limits or unlimited, and have varying
levels of convertibility into cash or bank deposits. Finally, choices related tothe provision of CBDC concern the allocation of roles and responsibilities
between central banks and private financial firms (banks, payment
processors, etc.).83
Different design choices along each of these lines determine the77
BANK FOR INT’L SETTLEMENTS, Central Bank Digital Currencies 3 (Mar. 2018),
https://www.bis.org/cpmi/publ/d174.pdf.
78
See PRIMAVERA DE FILIPPI & AARON WRIGHT, BLOCKCHAIN AND THE LAW (2018);
NATHANIEL POPPER, DIGITAL GOLD (2015); PAUL VIGNA & MICHAEL J. CASEY, THE AGE OF
CRYPTOCURRENCY (2015); KEVIN WERBACH, THE BLOCKCHAIN AND THE NEWARCHITECTURE OF TRUST (2018).
79
See Mitsutoshi Adachi et al., A Regulatory and Financial Stability Perspective on
Global Stabelcoins, ECB MACROPRUDENTIAL BULLETIN No. 10 (2020),
https://www.ecb.europa.eu/pub/financial-stability/macroprudentialbulletin/html/ecb.mpbu202005_1~3e9ac10eb1.en.html.
80
See Libra White Paper, https://libra.org/en-US/white-paper/.
81
Issaku Harada, Digital Yuan Nears Launch as China Sweats Over Libra, NIKKEIASIAN REVIEW (Dec. 3, 2019), https://asia.nikkei.com/Business/Markets/Currencies/Digitalyuan-nears-launch-as-China-sweats-over-Libra; Tim Alper, Digital Yuan Rollout Is‘Responseto
Facebook’s
Libra’,CRYPTONEWS.COM(May26,2020),
https://cryptonews.com/news/digital-yuan-rollout-is-response-to-facebook-s-libra6635.htm.
82
BANK OF ENGLAND, Discussion Paper: Central Bank Digital Currency:
Opportunities, Challenges, and Design 11 (Mar. 2020), https://www.bankofengland.co.uk//media/boe/files/paper/2020/central-bank-digital-currency-opportunities-challenges-anddesign.pdf.
83
Id.

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technological requirements and trade-offs associated with a particular formof CBDC.84 The core issues in the debate surrounding these choices,
however, involve substantive policy implications of CBDC issuance.85 On
the one hand, the general consensus among economic experts is that CBDC
would expand and sharpen central banks’ monetary policy toolkit, by
allowing them to manage interest rates more directly via interest on CBDC
deposits.86 On the other hand, CBDC’s ability to compete with, or evendisplace, commercial bank deposits sets the stage for potentially more radical
changes in the mechanisms of monetary policy transmission—and thestructure and operation of the financial system, more broadly.
To date, virtually all CBDC discussions proceed on an assumption that
CBDC will be issued and administered alongside the existing forms ofcommercial bank money.87 Banks are generally presumed to continue
offering deposits, combined with other financial services, even when CBDC
goes live. In fact, this baseline assumption is precisely what generates thecomplex set of CBDC design choices discussed above. The expected parallel
circulation of bank money and central bank money creates the need toestablish the terms on which they co-exist: mutual convertibility, potential
limits on the availability or amount of CBDC, the relative structure of interest
rates, and so forth.88 Much of this “engineering” aims to make CBDC a lessattractive alternative to private deposits, in order to avoid so-called“disintermediation” and lower the likelihood of more frequent and violent

84
Id.; Paul Wong & Jesse Leigh Maniff, Comparing Means of Payment: What Role fora Central Bank Digital Currency? FEDS Notes (Aug. 13, 2020),
https://www.federalreserve.gov/econres/notes/feds-notes/comparing-means-of-paymentwhat-role-for-a-central-bank-digital-currency-20200813.htm.
85
Digitization is not a novel feature of modern money. Today’s commercial bankdeposits are privately-issued digital money, and central bank reserve balances are sovereign
digital currency. See Agustin Carstens, The Future of Money and the Payment System: What
Role for Central Banks? BIS (Dec. 5, 2019).
86
See Jack Meaning, Ben Dyson, James Barker, & Emily Clayton, Broadening Narrow
Money: Monetary Policy With A Central Bank Digital Currency, BoE Staff Working Paper
No. 724 (May 2018), https://www.bankofengland.co.uk/-/media/boe/files/workingpaper/2018/broadening-narrow-money-monetary-policy-with-a-central-bank-digitalcurrency.pdf?la=en&hash=26851CF9F5C49C9CDBA95561581EF8B4A8AFFA52.
87
See Raphael Auer, Giulio Cornelli and Jon Frost, Rise of the Central Bank Digital
Currencies: Drivers, Approaches and Technologies, BIS Working Paper No. 880 (Aug.
2020), https://www.bis.org/publ/work880.pdf.
88
It is also what drives the emergence of complex theoretical accounts of, and attempts
to taxonomize, multiple forms of digital money with overlapping characteristics and intricate
interrelationships. See Morten Bech & Rodney Garratt, Central Bank Cryptocurrencies, BIS
QUARTERLY REVIEW (Sept. 2017), https://www.bis.org/publ/qtrpdf/r_qt1709f.pdf; Tobias
Adrian & Tommaso Mancini-Griffoli, The Rise of Digital Money, IMF Fintech Notes (July
2019), file:///C:/Users/sto24/Downloads/FTNEA2019001.pdf.

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19bank depositor runs—an inherently difficult balancing act.89 These attempts
to minimize the inevitable structural disruption from introducing auniversally available CBDC, in effect, significantly complicate the task ofdesigning CBDC and slow down the process of its implementation.
By early 2020, a number of central banks around the world had begun
studying and preparing for potential pilot tests of their own CBDC projects.90
Yet, according to an industry survey, very few of them had concrete nearterm plans to issue their own CBDC.91 The COVID-19 pandemic, which
forced economic transactions into virtual space and dramatically reduced theuse of physical cash, catalyzed these efforts.92 Thus, Sweden’s Riksbank
launched its official eKrona in February of 2020.93 Not long thereafter, theChinese government began pilot runs of its official digital yuan, widely seenas the potential challenger to the U.S dollar in international trade.94
The Federal Reserve remained noticeably cautious in its CBDC efforts,
despite the shifting political context.95 The U.S. government’s inept
pandemic response has exposed the intimate connection between the CBDC
idea and the practical need for publicly provided and universally available
deposit services. Federal financial aid, meant to help individuals andhouseholds to weather the COVID-19 crisis, was unacceptably slow to reach89

See Niepelt, supra note 75.
Auer et al. supra note 87 at 3.
91
Rachael King, The Central Bank Digital Currency Survey 2020 – Debunking Some
Myths, CENTRAL BANKING (May 7, 2020). Fewer than half of surveyed central banks wereconsidering offering CBDC accounts directly to the public. Rachael King, Central Bank Shift
Focus to Retail CBDC, CENTRAL BANKING (May 11, 2020).
92
See Saloni Sardana, The ECB Is Looking ‘Very Seriously’ at the Creation of a Digital
Euro, President Christine Lagarde Says, BUS. INSIDER (Oct. 12, 2020),
https://markets.businessinsider.com/news/stocks/ecb-euro-digital-currency-lagarde-202010-1029670309#; BANK FOR INT’L SETTLEMENTS, Central Banks and Payments in the
Digital Era, BIS ANN. ECON. REP. 67 (2020), https://www.bis.org/publ/arpdf/ar2020e3.htm.
93
Sveriges Riksbank, Notices and Press Releases: The Riksbank to test technicalsolution for the e-krona (Feb. 2, 2020), https://www.riksbank.se/en-gb/press-andpublished/notices-and-press-releases/notices/2020/the-riksbank-to-test-technical-solutionfor-the-e-krona/.
94
Andy Mukherjee, China’s Crypto Is All About Tracing—and Power,
BLOOMBERG.COM (May 23, 2020), https://www.bloomberg.com/opinion/articles/2020-0524/china-s-yuan-will-exit-covid-19-with-a-big-digital-currencylead?utm_source=google&utm_medium=cpc&utm_campaign=dsa&utm_term=&gclid=Cj
0KCQjwvIT5BRCqARIsAAwwD-RnshNsMySHpAONSLegszW2QK0A7grjbTsJGqMvnwS1hk0YeyFxJsaAlsCEALw_wcB&sref=gflekrOm;
China Plans to Test Digital Yuan on Food Delivery Giant’s Platforms, BLOOMBERG.COM(July 14, 2020), https://www.bloomberg.com/news/articles/2020-07-15/china-to-expanddigital-yuan-test-to-food-delivery-giant-meituan?sref=gflekrOm.
95
See An Update on Digital Currencies, Speech by Governor Lael Brainard at Federal
Reserve Bank of San Francisco’s Innovation Office Hours(Aug. 13, 2020),
https://www.federalreserve.gov/newsevents/speech/brainard20200813a.htm.
90

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the most vulnerable segments of the population without access to regularbanking services.96 Millions of Americans, especially in poor and minoritypopulated communities, had to wait for a month or more to receive paper
checks from the federal government.97 This “logistical” problem brought into
sharp relief both the inexcusable lack of a fast retail payments system and theunacceptably high human cost of being “unbanked” in the United States.98
Responding to this problem, in March of 2020, Senator Sherrod Brown
urgently introduced the “Banking for All Act” that would allow individuals
to open free deposit accounts, or “digital dollar wallets,” at the Federal
Reserve.99 Under the proposed bill, these accounts would be available atregional Federal Reserve Banks and the U.S. Postal Service (USPS) offices.
Private banks would be obligated to offer pass-through digital dollar wallets
to individuals via separately capitalized subsidiaries with assets consisting
solely of reserve accounts at the Fed.100 In effect, Brown’s bill would recreate
the classic 20th-century “narrow bank” model within the new CBDC
framework.101
Of course, opening central banks’ balance sheets to non-bank firms andhouseholds is not a new concept. In 1985, James Tobin famously outlined thepossibility of allowing “individuals to hold deposit accounts at the central
bank, or in branches of it established for the purpose and perhaps located in
96

Amanda Fischer and Alix Gould-Werth, Broken Plumbing: How Systems for
Delivering Economic Relief in Response to the Coronavirus Recession Failed the U.S.
Economy, Center for Equitable Growth (July 29, 2020), https://equitablegrowth.org/brokenplumbing-how-systems-for-delivering-economic-relief-in-response-to-the-coronavirusrecession-failed-the-u-seconomy/?mkt_tok=eyJpIjoiTldSallqZzBNelkzT1RnNCIsInQiOiJLV0c0Z0pScno1c2lCV
EN2a0NyY0laWEtQUFZLUUhpSGhaZEwxdWEzbXhtNmFER3hkY3BkUUk3ekJ4NFZ4T2JYZ0ZoVlRpdnM3WHBPTHBTZjlEa0Z0aE1ienRvTGJLMktTVXdGSzhLdk1xeE83Rl
Z5WEFjeVZZQjBTTENwYkFEWiJ9.
97
Caitlin Reilly, Delayed COVID-19 Aid Spurs Search for Faster Payments, ROLL CALL
(June 23, 2020), https://www.rollcall.com/2020/06/23/delayed-covid-19-aid-spurs-searchfor-faster-payments/.
98
Id.
99
See https://www.banking.senate.gov/imo/media/doc/SIL20449.pdf.
100
Id.
101
The “narrow bank” model traces its origins to Irving Fisher’s famous “100% reservebanking” idea. See Irving Fisher, 100% Money and the Public Debt, ECONOMIC FORUM,
Spring Number, April-June (1936). Variants were subsequently advocated by several
Chicago economists (hence “The Chicago Plan” moniker). Since the 2008 crash, the idea has
steadily grown in popularity. See, e.g., LAWRENCE KOTLIKOFF, JIMMY STEWART IS DEAD
(2009); John H. Cochrane, Toward a Run-Free Financial System (2014),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2425883; Adam J. Levitin, Safe
Banking: Finance and Democracy, 83 U. CHI. L. Rev. 357 (2016); Jaromir Benes & Michael
Kumhof,
The
ChicagoPlan
Revisited,
IMF
WP/12/202(2012),
https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf.

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21

post offices.”102 In the wake of the global financial crisis of 2008, Europeanand U.S. economists began actively debating proposals to expand access tocentral bank money, often in tandem with CBDC proposals.103 In 2018, theSwiss constitutional referendum on “Vollgeld” (sovereign money)
underscored the growing political appeal of such proposals.104
In U.S. legal scholarship, both elements of Tobin’s original idea—giving
individuals access to central bank accounts and making them available
through USPS offices—provided important conceptual framing for the post2008 push to broaden financial inclusion.105 The best-known recent proposal
to institute FedAccounts was advanced in 2018 by Morgan Ricks, John
Crawford, and Lev Menand.106 Their proposal envisions FedAccounts as acheaper and more efficient alternative to, rather than effective replacement
for, private deposit accounts offered by commercial banks. As proposed,
FedAccounts would have transactional functionalities of private bankaccounts (save for the overdraft coverage) but pay higher interest on deposits
and avoid predatory charges. They would provide a “money-and-payments
safety net” for the unbanked or under-banked American households and“crowd out unstable, privately issued deposit substitutes.”107 Overall, theauthors make a thoughtful and convincing case that ending banks’ privileged
access to the Fed’s balance sheet would have a wide range of salutary effects.
102

James Tobin, Financial Innovation and Deregulation in Perspective, 3 BOJ MON’Y& ECON. STUDIES 19, 25 (1985).
103
For a small sample, see Dirk Niepelt, Reserves for All? Central Bank Digital
Currency, Deposits, and Their (Non)-Equivalence, CESifo WP (July 2018),
https://www.cesifo.org/DocDL/cesifo1_wp7176.pdf; David Andolfatto, Fedcoin: On the
Desirability of a Government Cryptocurrency, MACROMANIA (Feb. 3, 2015),
http://andolfatto.blogspot.com/2015/02/fedcoin-on-desirability-of-government.html; Robert
Sams,
Which
Fedcoin?
CRYPTONOMICS(Feb.
5,2015),
https://cryptonomics.org/2015/02/05/which-fedcoin/; J.P. Koning, Fedcoin, MONEYNESS(Oct. 19, 2014), http://jpkoning.blogspot.com/2014/10/fedcoin.html.
104
See https://www.vollgeld-initiative.ch/english/. The Vollgeld plan sought toeliminate money-creation by private banks and to render all money fully sovereign, in a way
similar to Senator Brown’s bill. See supra notes 99-101 and accompanying text. Just over aquarter of Swiss voters supported the plan. See Ralph Atkins, Swiss Voters Reject ‘Sovereign
Money’ Initiative, FIN. TIMES (June 10, 2018).
105
For recent iterations of the postal banking proposal, see Postal Banking Act,
https://www.sanders.senate.gov/download/postal-banking-act-2020?id=9925954D-D06C449B-83AF-27AF4954062F&download=1&inline=file; BARADARAN, supra note 4; USPSOFFICE OF INSPECTOR GENERAL, THE ROAD AHEAD FOR POSTAL FINANCIAL SERVICES(2015).
106
See Morgan Ricks, John Crawford, and Lev Menand, Central Banking for All: A
Public Option for Bank Accounts (June 2018), https://greatdemocracyinitiative.org/wpcontent/uploads/2018/06/FedAccountsGDI.pdf.
107
Id. at 1- 2. Importantly, however, their proposal does not address potential new formsof arbitrage and private over-leveraging likely to arise under the new regime, where fully“safe” FedAccounts co-exist with private bank deposit accounts. Cf. infra Part V.

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Notably, Ricks et al. frame their proposal as a variation on the publicbanking idea, rather than a straightforward CBDC plan.108 Ultimately,
however, these parallel conversations—one on CBDC and another one on
FedAccounts—run into the same conceptual problem. In both cases, thecrucial question is: What would, or should, happen on the asset side of thecentral bank balance sheet, in order to accommodate the proposed expansionof central bank liabilities?
This question comes into a particularly sharp relief in a scenario where
CBDC (whether or not in the form of FedAccounts) fully replaces
commercial bank deposits. Part of the reason for that is the sheer quantitative
impact of this shift. As a recent Bank of England paper put it,
In this scenario there may be a shortage of high-quality assets to back anenlarged central bank balance sheet, and therefore the central bank may have tobroaden the range of assets purchased or lent against.109

The core of the problem, however, is not merely the magnitude of
portfolio expansion—it’s the composition of the central bank’s newly
expanded portfolio. Deciding which specific assets to purchase is an
inherently political act: it makes immediately transparent the fact that, behindthe veil of technocratic neutrality, central banks’ investment choices haveimmense distributional consequences.110 Perhaps not surprisingly, most
CBDC proposals either leave the composition question unanswered or reduce
it to a simple quantitative recalibration of the traditional central bank asset
portfolio. The latter typically involves increased central bank lending to
private banks (to replace their lost deposits) and open-market purchases ofhigh-quality public and private debt securities.111
The effect of this framing is to show that measures involving CBDC
issuance or creation of FedAccounts need not have a significant impact on
the overall structure and operation of the financial system.112 Tacticalconsiderations aside, this approach reflects the same underlying preference
108
Id. at 7-8. In a more recent iteration of their proposal, the FedAccounts idea isintroduced as a superior form of CBDC that simply bypasses the “digital currency” hype.
This new framing acknowledges the originally downplayed conceptual link without
appreciably altering the substance of their vision, which remains “philosophicallyharmonious” with postal banking proposals. See Morgan Ricks, John Crawford, & Lev
Menand, FedAccounts: Digital Dollars, GEO. WASH. L. REV. (forthcoming 2020).
109
BANK OF ENGLAND, supra note 82 at 37-38.
110
See discussion supra Part II.A.
111
These include government debt instruments and highly-rated corporate bonds. See
Ricks et al., supra note 108.
112
This excludes the obvious change in banks’ funding sources, as they shift from
deposits to central bank borrowing. That shift, however, merely makes explicit the alreadyexisting implicit government backing of private banks’ liabilities. Without more, this shift is
not a fundamental structural change. See id.

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for incremental change that drives—and complicates—the ongoing
discussions of CBDC design.113 From this perspective, the existing proposals
seem to be caught in a fundamentally normative dilemma: They embrace theidea of radically democratizing access to central bank money, while leaving
the rest of the finance franchise system structurally intact. This underlying
normative commitment, in turn, limits the scope of potential solutions to theasset-side problem arising in connection with both CBDC and FedAccounts.
As a result, the full structural implications and transformative potential of
their advocated liability-side change remain unexplored and unappreciated.
Overcoming these limitations requires a deeper, deliberately unified
approach to democratizing the central bank balance sheet. Today’s
technology promises to revolutionize not just the structure of the Fed’s
liabilities but the entire relational dynamics between the Fed and theAmerican public. These new dynamics will allow for a qualitatively
different—more nuanced, proactive, and multi-dimensional—mode of
conducting monetary policy, with the FedAccount interest rate being only
one of many novel modulatory tools at the Fed’s disposal.
Even more importantly, these new relational dynamics will
fundamentally alter the normative context in which the Fed makes its
investment decisions. In the post-COVID world, it is already impossible todeny the Fed’s critical role in direct credit allocation. Dramatically expanding
the size and changing the structure of the Fed’s liabilities will create a crucial
opportunity to re-envision and redirect its credit-allocation power inqualitatively new ways. To take full advantage of this opportunity, we needto think about what that may involve—and how the Fed’s unique ability to
act as the nation’s ultimate portfolio manager can be utilized to the maximum
public benefit.
The remainder of the Article tackles these important questions.
III. REFORMING THE LIABILITY SIDE: PUBLIC ACCESS AND MONETARYPOLICY
Beginning with the liability side of the central bank balance sheet, this
Article advocates the issuance of general-purpose CBDC (the “digitaldollar”) and concurrent migration of all transaction deposit accounts fromprivate banks to the Federal Reserve. Focusing on the ultimate “end-state”
whereby central bank accounts fully replace—rather than uneasily co-exist
with—private bank deposits, the Article explores the full range of newmonetary policy options the proposed structural shift would enable.
A. The Proposal: FedAccounts as a Tool of Monetary Policy
As discussed above, the current structure of the Federal Reserve’s
113

See supra notes 82-91 and accompanying text.

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liabilities reflects the underlying hierarchical organization of the modern“franchise finance.” Currently, only banking institutions are allowed to holdnon-defaultable central bank money in the form of special reserve
accounts.114 In today’s interconnected and technology-driven world,
however, this hard-wired structural separation of central banks from the vast
majority of real economic actors is becoming increasingly inefficient andhard to justify.
A single most effective solution to this problem is to reform thecomposition of the Fed’s liabilities, by replacing commercial bank reserve
accounts with universally available deposit accounts.115 The core idea here issimply to allow all U.S. citizens and lawful residents, local governments,
non-banking firms and non-business entities to open transactional accounts
directly with the Federal Reserve, thus bypassing private depository
institutions. In this sense, it is a variation on the familiar FedAccounts—or
FedCoin, “digital dollar wallets,” etc.—theme.116
In principle, FedAccounts can be made available as an alternative to bankdeposit accounts, upon a person’s request.117 As explained below, however,
the more effective option would be to transition all deposits to the Fed.118
Functionally, all FedAccounts will be essentially identical. For purely
administrative purposes, however, it would be advisable to differentiate
among “individual” and “entity” accounts. For U.S. citizens, Individual
FedAccounts would be opened automatically upon birth or naturalization.
These accounts would also be credited automatically with regularly received
federal benefits: Social Security payments, tax refunds, and all otherdisbursements that depend on one’s citizenship status.119 For qualifying
resident aliens, Individual FedAccounts would be opened and closed uponrequest, rather than automatically, but otherwise would function in the samemanner.120 Entity FedAccounts could also be administratively divided into
separate categories, depending on whether the holder is a government unit, anon-profit organization, or a business entity incorporated or operating in the114

See supra Part I.B.1.
See supra notes 99-108 and accompanying text.
116
See supra Part II.B.
117
As described above, the existing proposals to open the Fed’s balance sheet to nonbank depositors often implicitly assume this optionality. See, e.g., Ricks et al., supra note
106. For a discussion of potential systemic risks associated with it, see infra notes 138-142
and accompanying text.
118
Id.
119
These disbursements also include any additional public benefits that may exist in the
future: periodic “dividends” from sovereign wealth funds, “baby bonds,” and so forth.
120
Establishing specific eligibility criteria for resident aliens’ access to FedAccounts
would require careful consideration of multiple factors, including racial and economic
justice, national security, immigration policy goals, and so on.
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U.S.
This internal classification will simplify and optimize federal payments—
including economic stimulus benefits or crisis-time financial aid—to all
entitled recipients. The inherent programmability of the digital dollar would
enable the Fed to manage these, as well as any other, payments in real time
and with maximum flexibility, capturing the necessary gradations in theamounts or timing of individual transfers.121
Just like today’s bank reserve accounts, all FedAccounts would earninterest.122 The interest rate on these accounts will serve as an important toolof the Fed’s monetary policy, setting an effective floor in the overall interest
rate structure. As widely acknowledged, such a direct rate-setting ability
would dramatically increase the Fed’s efficacy and flexibility in managing
the economy-wide costs of borrowing.123
Yet, dynamically adjusting the cost of money rentals via manipulation ofinterest on FedAccounts is not the only—or even the most powerful—newmonetary policy tool that the proposed reforms will put on the table. Far more
importantly, offering deposit accounts to individuals and entities will enable
the Fed to modulate the aggregate supply of money and credit by directly
crediting and debiting the accounts of all participants in economic activity,
without interposing intermediary-banks.
In basic terms, the Fed will credit all eligible FedAccounts when it
determines that it is necessary to expand the money supply in order tostimulate economic activity and ensure better utilization of the national
economy’s productive capacity. In the economic literature, this form of
unconventional (by present standards) monetary policy is commonly known
as “helicopter drop” or “QE for the people.”124 The obvious benefit of this121

See Wong and Maniff, supra note 84 (discussing programmability of digital money).
See supra notes 37-39 and accompanying text.
123
See supra Part II.B.2.
124
For a small sample of academic and popular discussions of “helicopter money” and“QE for the people” proposals, see Richard Baldwin, Helicopter Money: Views of Leading
Economists, VOXEU.ORG. (Apr. 13, 2016), https://voxeu.org/article/helicopter-moneyviews-leading-economists; Ben Bernanke, What Tools Does the Fed Have Left? Part 3:
Helicopter Money, Brookings Inst. (Apr. 11, 2016) https://www.brookings.edu/blog/benbernanke/2016/04/11/what-tools-does-the-fed-have-left-part-3-helicopter-money/; Willem
H. Buiter, The Simple Analytics of Helicopter Money: Why It Works – Always, ECONOMICS(June 13, 2014), http://www.economics-ejournal.org/dataset/PDFs/discussionpapers_201424.pdf; Anatole Kaletsky, How About Quantitative Easing for the People?, REUTERS (Aug.
1, 2012), http://blogs.reuters.com/anatole-kaletsky/2012/08/01/how-about-quantitativeeasing-for-the-people/; Martin Wolf, Central Banks Need a Helicopter, FIN. TIMES (Dec. 4,2008),
https://www.ft.com/content/c9b60ecf-2b41-329d-8aad-a94daf7af45f.
The“helicopter” colloquialism originates with Milton Friedman, The Role of Monetary Policy,
58 AM. ECON. REV. 1 (1968). Some thirty years earlier, Keynes used the metaphor of burying
money in bottles. See JOHN MAYNARD KEYNES, THE GENERAL THEORY OF EMPLOYMENT,
122

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tool is that it solves the problem of a central bank “pushing on a string” in a“liquidity trap” situation.125 The principal criticism of this approach, on theother hand, is that it fundamentally alters central banks’ functions and puts
them in charge of “redistribution decisions that are fiscal in nature.”126 In
contrast to conventional monetary expansion through crediting banks’
reserve accounts in exchange for bonds or other assets, helicopter drops do
not symmetrically increase the asset side of the central bank’s balance
sheet.127 Another sense in which helicopter drops are considered dangerously
asymmetrical is that, once new money is credited to people’s accounts, itcreates a permanent expectation of never having to part with it. It is, therefore,
seen as disabling monetary policy as a tool of fighting inflationarypressures.128
These familiar criticisms notwithstanding, the “helicopter” mode ofmonetary policy can be both feasible and desirable, if carefully designed andthoughtfully implemented. While many specific details of this regime’s
practical operation are bound to take shape in the implementation phase, a
few basic design choices are worth outlining here.
Thus, with respect to monetary expansion management, it would benecessary to set the criteria for (1) deciding which accounts will be eligible
to receive automatic credits, and (2) determining the absolute and/or relative
amounts of such credits to various types of account.
On the eligibility issue, one option is to make every deposit account heldat the Fed eligible for credit. For practical reasons, however, it might makesense to restrict unconditional, or automatic, helicopter drop measures onlyto (1) Individual FedAccounts of U.S. citizens, and (2) Entity FedAccountsof local governments and governmental units. Other FedAccounts may be
included in the program subject to certain conditions. For example, private
business entities may have to commit to spending the credited funds on “real”
goods and services rather than speculative financial-asset purchases.
Employee retention and continuing provision of work benefits could be
another important condition in this respect. Individuals, on the other hand,
may qualify if they are permanent or long-term U.S. residents, or if they
demonstrate special need of funds.129
INTEREST, AND MONEY (1936).
125
See supra note 44 and accompanying text.
126
Kevin Dowd, Against Helicopter Money, CATO J. (Winter 2018),
https://www.cato.org/cato-journal/winter-2018/against-helicopter-money.
127
See, e.g., Lucrezia Reichlin, Adair Turner, Michael Woodford, Helicopter Money asa Policy Option, VOXEU.org (Sept. 23, 2019) (discussing the pros and cons of “helicopter
money”) https://voxeu.org/article/helicopter-money-policy-option.
128
See id.
129This is merely a broad-stroke sketch of potential approaches to these inevitablycomplex choices.

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On the amount issue, there is again a range of potential choices. One
option is to credit the same amount to each eligible account. This would be
the easiest to execute from a purely logistical viewpoint. To maximize theeconomic stimulus of the helicopter drops, however, it may make more sense
to have a progressive scale for crediting accounts of individuals, so that lesswealthy U.S. citizens and eligible residents receive proportionately higher
amounts of money. This differentiation would channel more funds to thepeople who both need it most and will be more likely to spend the money on
daily purchases.
It would also make sense to credit Entity FedAccounts on a higher scale,to reflect the fact that firms and other entities typically run significantly larger
balance sheets than most individuals do. Generally, however, such decisions
should depend on the specific problems that particular uses of this option aim
to resolve. Thus, a “helicopter drop” in response to serious but temporary
distress in specific industrial sectors might call for targeted crediting of aparticular set of accounts, one in response to a pandemic or a regional disastermight target a different set, and so forth.
Implementing a contractionary monetary policy by debiting
FedAccounts, in turn, presents a different set of ex ante institutional choices
aiming to minimize the economic and political fallout from what is likely tobe perceived as the government “taking away” people’s money.130 This tool
is to be reserved only for extreme and rare circumstances, when the Fed isunable to control inflation by raising interest rates and deploying its new
asset-side tools, discussed below.131 It is nevertheless important to have amechanism in place for draining excess liquidity from these accounts withminimal disruption of productive activity.
One potential approach could be to set up each account as a two-tiered
structure, in a manner functionally similar to the familiar combination of achecking and a savings account. The first tier—a “transaction sub-account”—
would be used for making and receiving payments, including regulargovernmental disbursements like tax refunds, social security benefits, and soforth. The second tier—a “reserve sub-account”—would be explicitly
reserved for use as the destination account for the receipt, transfer, andholding of funds designated by the Fed as subject to a specific monetary
policy action.
If and when the Fed injects monetary base into the system, each reserve
sub-account would be credited with the appropriate “helicoptered” amount.
If and when the Fed seeks to drain money from the system, the appropriate
amount would be transferred from the transaction sub-account to the same
holder’s reserve sub-account, where it would be effectively escrowed until
130
131

See supra notes 127-128 and accompanying text.
See infra Part IV.

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the Fed ends its tightening policies. These temporarily “reserved” funds
would pay a higher interest than the regular interest paid by the Fed on money
held in transaction sub-accounts. Importantly, raising this reserve interest ratewould enable the Fed to incentivize depositors to move more of their moneyfrom transaction into reserve sub-accounts voluntarily.
Strategic use of this tool, therefore, may decrease the need for the
mandatory “reserving” of people’s money, which would also help tocounteract negative perceptions of this policy.132 In effect, the tightening of
the money supply would be achieved through a compulsory but economicallyattractive investment scheme.133
In periods when the Fed is not actively pursuing anti-inflationary
monetary policies, account holders would be free to draw down on theirreserve sub-accounts, which would pay the same rate of interest as theassociated transaction sub-accounts. During such periods, the key would beto reduce potentially negative effects of the public’s uncertainty about theFed’s future monetary policy decisions. Thus, to avoid or minimize
unnecessarily harsh liquidity shocks, especially on small businesses andvulnerable individuals, it would be important for the Fed to communicate its
intentions clearly and continuously, with as much advance warning as
possible. It would also make sense to exempt from mandatory debiting by the
Fed accounts of (1) individuals with incomes or assets below a certain level;(2) local governments and their agencies; and (3) certain qualifying small
businesses.134
Undoubtedly, there are numerous additional details that will need to beworked out before this system is put in place.135 The purpose of this
discussion is to outline in principle how the proposed restructuring of the
Fed’s liabilities would enable it to conduct both expansionary andcontractionary monetary policy in a far more direct and effective manner than132

To a great extent, these negative perceptions reflect Americans’ notoriously
generalized and ideologically-driven mistrust of the government. Thoughtfully designingand implementing a coherent money-modulation strategy would reshape the context in whichpeople would think about the Fed’s credits and debits of their accounts.
133
In economic terms, it would be similar to investing in the high-interest U.S. Treasury
bond. Curiously, Keynes advocated functionally similar measures as part of his plan toprepare Britain for a long war with the Nazi Germany. See JOHN MAYNARD KEYNES, HOW
TO PAY FOR THE WAR (1940).
134
An exemption for local governmental units is sensible and necessary because of their
ongoing obligations to provide critical public services and social assistance to disadvantaged
communities. Exemptions for small businesses, however, should be restricted only to cases
in which the mandatory debiting of their accounts would cause undue hardship to theiremployees or communities.
135
This includes establishing specific procedures for making the necessary decisions ina fair and transparent manner, and in full compliance with the applicable legal andadministrative requirements.

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it is able to do today. Of course, this restructuring would also have a wide
range of other implications, both for the Fed’s own balance sheet and for thefinancial system more generally. These implications are discussed in greater
detail below.136 The remainder of this Part focuses on the more immediate
institutional design issues arising in connection with the creation of
FedAccounts.
B. Transforming the Core of the Franchise: Institutional Design Issues
The proposed reform of the Fed’s liabilities raises numerous questions,most of which are best left for the implementation phase. It is neverthelesshelpful to highlight a few key design choices that go directly to the core of
the proposed change in the current finance franchise arrangement.137
From this perspective, the most important set of choices concerns the roleof private financial firms, including banks, in the newly redesigned anddigitized money-and-payments system. As discussed above, most existing
CBDC proposals assume that private banks will continue to offer deposit
accounts, either exclusively or alongside the central bank.138 These choices
are typically justified—explicitly or, more often, implicitly—by appeal topragmatic considerations. Keeping private bank deposits would minimize
potential structural disruption to the existing system, thus reducing political
opposition and easing transition to the new CBDC regime. Continuing tooutsource at least some deposit-taking to private banks would also reduce thepublic cost and administrative burden on the central bank. Private actors areoften said to be better positioned to undertake the “consumer-facing activity”
associated with CBDC, which includes a wide variety of things ranging from
customer service to compliance with “Know Your Customer” (KYC) andanti-money laundering rules.139 Finally, dealing with private banks may
assuage depositors’ concerns about potential state surveillance of their136

See infra Parts IV-V.
This Article deliberately leaves out a number of issues that are either sufficiently
covered in the existing literature or not critical in advancing the Article’s core claims. It iseasy to stipulate, for example, that (1) the money in FedAccounts would be freely convertible
into physical cash (which is important for privacy and inclusion reasons); (2) cash would be
easily accessible through ATMs or at physical service locations (potentially including USPS
branches); (3) FedAccounts would not be subject to any fees (but would not allow
overdrafts); and (4) real-time payments would be available around the clock. The existing
literature covers these and related issues in sufficient detail. See supra Part II.B. For similarreasons, the Article does not trace the mechanics of payments flows in the FedAccounts
system, nor does it get into detailed discussions of “distributed ledger technology” (DLT)that can be used to run it.
138
See supra Part II.A. Notably, Ricks et al. also envision the continuing availability ofbank deposit accounts alongside FedAccounts. Id.
139
BANK FOR INT’L SETTLEMENTS, supra note 92, at 88.
137

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accounts.140
At the same time, allowing private banks to continue accepting deposits
in competition with the central bank potentially creates significant problems
from the perspective of systemic stability. Universal availability of fully
sovereign digital money will make it much easier for all bank depositors to“run to safety” in real time, thus taking the classic bank run problem to thenext level. Furthermore, private banks—particularly, large ones nestledinside diversified financial conglomerates—will have strong incentives tooffer depositors not only higher interest rates on their accounts but also a
broader suite of high-risk, high-return financial products.141 While it isdifficult to predict what specific forms this risk arbitrage might take, pastexperience shows that their appearance is virtually certain.142 In effect,
introducing FedAccounts as merely an option on top of the current “financefranchise” arrangement may greatly exacerbate the fundamental dysfunctions
built into it.
This Article, accordingly, advocates full migration of demand deposits
onto the Fed’s balance sheet. Importantly, however, some private financial
institutions may still be able to assist the Fed with administering
FedAccounts, if doing so is deemed to be in the public interest.
For example, community banks and small credit unions could be licensed
to offer “pass-through FedAccounts” on the same terms as, and directly
backed by, deposits at the Federal Reserve.143 These licensed “community
banking institutions” (CBIs) would operate physical branches and ATMs on
the Fed’s behalf and receive a fee for their services. In addition, they would
be able to offer basic non-checkable savings accounts and certificates ofdeposit, paying interest at rates exceeding the FedAccount rates.144 To
140

See Sarah Allen et al., Design Choices for Central Bank Digital Currency, Brookings(July 2020), https://www.brookings.edu/wp-content/uploads/2020/07/Design-Choices-forCBDC_Final-for-web.pdf; David Beckworth & Rohan Grey, The Future of Digital Fiat
Currency (Feb. 11, 2019), https://www.mercatus.org/bridge/podcasts/02112019/futuredigital-fiat-currency.
141
This is a particularly salient possibility with respect to banks’ institutional clients,
though it is difficult to rule out the possibility of riskier products being marketed, perhaps
indirectly, to retail depositors as well.
142
In fact, the present ubiquity of bank demand deposits is a product of successful
arbitrage by state-chartered banks in response to the creation of the U.S. national bank charterin 1863-1864. See https://www.federalreserveeducation.org/about-the-fed/history.
143
This parallels the approach proposed in Senator Brown’s bill. Each depositor of alicensed community banking institution would be entitled to the proportional amount heldby the institution in its “master FedAccount,” on the 100% reserve basis. Only entities below
a specified asset-size threshold would be eligible for the license. See supra notes 99-101 andaccompanying text.
144
Broader access to simple and safe savings products is a critical element of financial
inclusion. To ensure that CBIs serve the needs of low- and middle-income retail customers,

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generate extra income, CBIs may also be allowed to provide their customers
with affordable investment advice and basic financial and accountmanagement services.
Ultimately, however, CBIs would be integrated in the Fed’s new
payments system for reasons of public policy, as crucially important local
providers of essential banking services to middle-class and especially lowincome and currently under-banked communities across America.145 Theirbranches would effectively function as the Fed’s representative offices, thus
giving CBIs’ “franchisee” status a very direct meaning.146 These new
franchisee-institutions would not engage in money creation. Instead, theywould utilize their unique understanding of local economic conditions andcommunity needs to help the Fed with the day-to-day administration of
FedAccounts.
Outside of this particular context, the extent of private firms’ participationin the provision of payments and related transactional services becomes amatter of technological, as much as institutional, design.
As a general matter, moving all demand deposits onto the central bank’sbalance sheet renders many complex technological choices, currently
associated with CBDC design, fundamentally superfluous.147 This “direct
CBDC” option enables the Fed to internalize all payments, by simultaneously
crediting and debiting transacting parties’ accounts on its own digitalledger—just like it currently does with respect to interbank payments.148
Within this streamlined architecture, it may nevertheless be desirable toallow private “payment service providers” (PSPs) to perform certain “frontend” customer-facing functions, such as KYC checks and user-friendly
it would be desirable to establish amount limits on these savings products (no “jumbo CDs”).
CBIs would be allowed to invest funds deposited in these non-transactional accounts in a
wider range of “safe” assets, including Treasury and Agency securities, tax-exempt
municipal bonds, and certain other highly liquid financial instruments (including bonds
issued by the National Investment Authority, discussed infra Part IV.A.2).
145
To maximize these public benefits, CBIs would also be able to engage in community
lending activities. Funding for CBI loans, however, would not come from any deposits these
institutions manage or issue. Instead, CBIs would be eligible to borrow from the Fed byaccessing its New Discount Window (NDW) facility, proposed infra Part IV.A.1.
146
This means that keeping CBIs in business, especially in low-income and under-served
communities, may require public subsidy (reflected in service fees). To the extent these
institutions’ size and permissible activities are subject to explicit legal limitations, thisparticular form of subsidy should not be problematic. Accordingly, CBIs will be subject tomacroprudential regulation and supervision, appropriately modified for their business andrisk profiles.
147
See supra notes 82-89 and accompanying text.
148
For diagrams illustrating the basic mechanics of payments flows under different
CBDC arrangements, including what they call the “direct CBDC” model advocated in this
Article, see Raphael Auer & Rainer Bohme, The Technology of Retail Central Bank Digital
Currency, BIS Q. REV. 85, 89 (2020), https://www.bis.org/publ/qtrpdf/r_qt2003j.htm.

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mobile applications for initiating or receiving payments.149 By providing
valuable overlay services—financial record-keeping, personalized accountmanagement, and so forth—these specially licensed PSPs can enhance
FedAccount user experience, without imposing additional costs on the Fed.150
At the same time, however, introducing this new institutional layer would
create new risks for depositors and complicate the Fed’s ability to use its new
tools of monetary policy, discussed above.151 Accordingly, it is critical thatPSPs are required to maintain an individual FedAccount for each user, so thatall payments among their users are processed and recorded directly on the
Fed’s ledger.152 This approach would preclude PSPs from engaging inunauthorized deposit-taking activities and protect the overall integrity of the
FedAccounts system. As long as the deposit relationships remain with theFed, adding a layer of private service delivery contracts would not expose
depositors to the risk of any individual PSP’s insolvency.153 Without the needfor prudential oversight, PSPs would be regulated only under the relevant
consumer protection scheme.154
Of course, the present discussion purposely brackets a number ofpotentially important technical-design issues. Thus, it assumes that the Fed
would have the necessary technological capacity to manage FedAccounts,
without having to outsource a substantial part of its operations to private
firms. It also leaves aside issues related to ensuring reasonable levels oftransactional privacy for FedAccount holders. In part, depositors’ privacy
concerns should be alleviated by (1) the continuing availability of physicalcash; and (2) the CBI option for deposit services.155 A more complete
solution, though, would likely require technology enabling sufficiently
149

See BANK OF ENGLAND, supra note 82, at 25-33. The COVID experience makes it
particularly important to enable FedAccount holders to use mobile apps for accessing andmanaging their finances. See John C. Pitts, Survey Finds that Fintech Has Been A Lifeline
During COVID-19 (Sept. 15, 2020), https://blog.plaid.com/2020-fintech-effect-covid/.
150
In fact, the Fed could receive fee revenues from PSPs allowed to connect to its ledger.
To access the Fed’s ledger via an Application Programming Interface (API), PSPs would
have to meet security, resiliency, and other requirements. The Fed could either license PSPs
itself or rely on the licensing scheme administered by another federal agency, such as theFederal Trade Commission (FTC) or the Consumer Financial Protection Bureau (CFPB).
151
See supra Part III.A.
152
BANK OF ENGLAND, supra note 82, at 27. Alternatively, each PSP could be allowed
to maintain a “pooled” FedAccount, holding all of its users’ money, and to process payments
among its users internally. That, however, would fragment the payment system and impede
the Fed’s ability to deploy “helicopter money” tools.
153
See Dan Awrey, Bad Money, 106 CORNELL L. REV. (forthcoming 2020).
154
Individual PSPs may be regulated by the FTC or the CFPB (if they provide consumer
financial services), with the focus on fraud prevention, disclosure, data security and privacy,
non-discrimination, and other relevant aspects of the PSP-client relationship.
155
Depositors worried about potential government surveillance of their payments may
prefer opening accounts at CBIs.

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anonymous digital-dollar payments, subject to amount limitations and otherconditions necessary to prevent criminal transactions.156 These technologicalsolutions may involve outsourcing of certain functions to private firms: CBIs,
PSPs, or perhaps a separate category of licensed providers.157 Any suchinstitutional arrangements would have to be narrowly delineated and closely
monitored by the Fed.
To sum up, the proposed restructuring of the Fed’s liabilities would
fundamentally alter the dynamics at the very core of the finance franchisesystem.158 As shown in this Part, it would dramatically expand—andqualitatively change—the Fed’s present arsenal of monetary policy tools. The
FedAccounts system would empower the Fed to determine, in a direct andefficiently tailored way, both the structure of interest rates and the overall
quantity of money flowing in the economy. The inherent programmability ofdigital money would make this process even more flexible and responsive tothe economy’s needs. In effect, the Fed would be able to conduct monetary
policy by managing the liability side of its own ledger.
That, however, immediately raises an important question: What needs tohappen on the asset side of the Fed’s balance sheet, in order to accommodate
this shift? Answering this question is the key to understanding the full extent
of the potential system-wide transformation that begins with opening theFed’s balance sheet to ordinary Americans.
IV. REFORMING THE ASSET SIDE: PUBLIC-PRIVATE CAPITAL ALLOCATIONThe creation of FedAccounts will have profound structural implications
for the Fed’s balance sheet—and, more broadly, its role in the economy. By
definition, the most visible such implication is the dramatic expansion in thesize of the Fed’s liabilities, which requires the corresponding growth of its
assets. This Part examines the qualitative impact of this structural shift on the
Fed’s asset portfolio. It proposes a fundamental change in the asset
composition of the Fed’s balance sheet, which would unlock its potential tofunction as the ultimate public platform for creating and managing systemwide financial flows, or the People’s Ledger.
A. The Proposal: New Discount Window, Public Infrastructure Finance,
and Systemic Stabilization Portfolio
As discussed above, any deliberate expansion of central banks’ balance
156

See Beckworth & Grey, supra note 140.
Id.; Allen et al., supra note 140, at 44-45.
158
Given the pace of technological change, however, it is critical that the Fed remain
vigilant in policing against new forms of unauthorized private amplification or replication of
the sovereign’s money creation function. These may include, for example, sophisticated newleveraging strategies and complex digital assets, directly or indirectly linked to FedAccounts.
157

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sheets tends to invite intense political controversy.159 The CBDC debate
provides a good example of this underlying discomfort with the idea of acentral bank running “too big” a book as a result of issuing its own digitalcurrency.160 The principal—and most frequently voiced—concern here is that
digitizing central bank money will render central banks dangerously powerfuland vulnerable to political manipulation and abuse. A subtler version of thesame sentiment focuses on central banks having to hold and manage assets
offsetting their digital money issuances. In wider discussions, the idea ofcentral banks as large-scale investors in financial assets triggers familiar
warnings about governments “crowding out” private investment or “picking
winners and losers” in ostensibly private markets.161 Experts channel thesame worry by emphasizing the difficulty of defining technical parameters
for central banks’ expanded portfolios and the riskiness of “a potentiallylarger central bank footprint” in the financial system.162
In short, the problem appears to stem from the recognition that CBDC
issuance opens the possibility of dramatically increasing the role of public
allocation of capital. Most objections to allowing significant quantitative
increase in the size of central bank balance sheets, in fact, grow out of theunderlying concerns about the qualitative, compositional aspects it entails.
Ultimately, however, these concerns are rarely substantiated by reference toanything more specific than deeply internalized skepticism toward thegovernment as an economic actor.163
By contrast, this Article views the proposed change in the Fed’s liabilities
as an opportunity to augment both (1) its ability to modulate credit-money
supply more effectively, and (2) its potential to facilitate the more efficient
allocation of that supply to productive enterprise.
As discussed above, the Fed’s traditional asset portfolio includes
primarily Treasury and Agency debt and various securities purchased
pursuant to its crisis-containment and market-stabilization operations.164
Under the present proposal, the Fed’s principal asset holdings will fall into
one of three key categories: (1) redesigned discount window loans toqualifying lenders; (2) securities issued by the existing and newly-createdpublic instrumentalities for purposes of financing large-scale public159

See supra Part I.B.
See supra Part II.B.
161
See, e.g., Stephen G. Cecchetti & Kermit L. Schoenholtz, The Fed Goes to War: Part
3,
(Apr.12,2020),
https://www.moneyandbanking.com/commentary/tag/Market+maker+of+last+resort.
162
BANK FOR INT’L SETTLEMENTS, supra note 92 at 87
163
See, generally, Robert C Hockett & Saule T. Omarova, Public Actors in Private
Markets: Toward a Developmental Finance State, 93 WASH. U. L. REV. 103 (2015) [Public
Actors].
164
See supra Part I.B.
160

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infrastructure projects; and (3) an expanded portfolio of trading assets
maintained for purposes of market-stabilization.165
Each of these three new asset categories represents both a significant
departure from and a direct extension of the Fed’s current investment
strategy. In this sense, the proposed restructuring of the Fed’s asset portfolio
builds on what the central bank is doing already in pursuit of macroeconomic
stability goals, but in a more direct and effective manner.
1.

“New Discount Window” Loans

The first category of assets on the Fed’s newly reconstituted balance sheet
would be what this Article calls the “New Discount Window” (NDW) loans.
Currently, discount window loans do not occupy a significant place on the
Fed’s balance sheet. Only depository institutions, such as commercial banks,
are currently eligible for discount window borrowing.166 Banks, however, aregenerally reluctant to borrow from the Fed because of the commonlydescribed “stigma” attached to discount window loans as a sign of theborrowing banks’ diminished ability to access liquidity in the interbank loan
market.167
Massive migration of deposits directly onto the Fed’s balance sheet,proposed above, will potentially necessitate a significant shift in the scale andcore function of the discount window. Most immediately, it will force
commercial banks to seek alternative sources of funding in order to continue
their lending activities. The extreme difficulty of replacing deposit liabilities
with comparably priced and “sticky” non-deposit funding on a comparable
scale will likely cause massive contraction in bank lending.168
To keep the economy-wide flow of credit, the most readily available
option would be to open the Fed’s discount window to banks and other former
depository institutions that (1) continue to engage in lending activity, and (2)meet specified qualification criteria (described below). These “qualifying
lending institutions” (QLIs) will be able to borrow from the Fed, at
165
In addition to these three new asset classes, the Fed will be able to continue holding
U.S. Treasury bonds and other government securities, as well as other assets it routinely
acquires in the course of its operations (SDRs, gold certificates, foreign currencies, etc.). See
supra note 46 and accompanying text. For purposes of presentational clarity and brevity, thefollowing discussion focuses only on the three newly proposed asset classes.
166
See supra notes 46-49 and accompanying text.
167
This does not prevent banks from borrowing through the Fed’s discount window
when market conditions demand it. See Renee Courtois Haltom, Federal Reserve: Stigma
and the Discount Window, REGION FOCUS (2011), https://www.richmondfed.org//media/richmondfedorg/publications/research/econ_focus/2011/q1/pdf/federal_reserve.pdf;
Yalman Onaran, U.S. Banking Giants Tap Fed’s Discount Window to Ease Stigma,
BLOOMBERG.COM (Mar. 16, 2020), https://www.bloomberg.com/news/articles/2020-0317/u-s-banking-giants-tap-fed-s-discount-window-to-ease-stigma.
168
See supra notes 109-111 and accompanying text.

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preferential rates and against qualifying high-quality collateral. In contrast to
the current model of discount window as a short-term backup liquidity
facility for troubled banks, the NDW will function as the principal channel
for directing funds deposited in FedAccounts into private credit markets. The
NDW credit facility will efficiently and effectively replace deposit funding
for banks and enable a broad range of non-bank credit institutions to accessthis reliably “patient,” stable, and affordably priced capital.
From the Fed’s—or the public’s—perspective, this expansion of direct
liquidity provision constitutes a logical continuation of the current practiceof outsourcing loan portfolio management to private financial institutions.169
By directly supporting private lenders’ credit allocation activities, the Fed
will be able to harness private market actors’ micro-informational advantages
and micro-economic incentives in the public interest.
Of course, it will be critically important to protect the Fed’s balance sheet
by imposing strict eligibility requirements on private lender’s access to its
NDW facility. These should include both collateral eligibility criteria andentity qualification requirements.
The criteria for acceptable NDW collateral need not differ significantly
from the current requirements: the assets pledged by the QLIs will have to beof sufficiently high quality, much like they would be under today’s discountwindow regime.170 At the same time, the NDW facility’s role as the principal
source of publicly subsidized funding for private credit markets will greatly
amplify the impact of the Fed’s collateral eligibility policies on the economywide credit allocation.
To maximize the allocative impact of the NDW facility, the Fed could
supplement its traditional credit-quality criteria for NDW-eligible collateralby explicitly preferencing certain categories of assets (such as, for example,
loans to small and medium-size non-financial enterprises and minorityowned businesses, student loans, credit supporting development inunderserved communities, bonds issued by firms in certain sectors of theeconomy, etc.) and excluding others (such as, for example, margin loans,private equity bridge loans, highly engineered asset-backed securities, etc.).
While building on the current discount window practice, these new standards
would allow for a more granularized pursuit of a broader policy agenda.
Furthermore, the Fed could make carefully targeted adjustments to its
169

Such outsourcing is the defining feature of the existing “franchise” finance. See supra
Part I.A. This point is also emphasized in Ricks et al., supra note 108; Rohan Grey, Banking
in a Digital Fiat Currency Regime, in REGULATING BLOCKCHAIN (Phillip Hacker et al., eds.
2019).
170
See BD. OF GOV’S OF THE FED. RES. SYS., Federal Reserve Collateral Guidelines
file:///C:/Users/sto24/Downloads/FRcollguidelines.pdf;
https://www.frbdiscountwindow.org/pages/collateral/discount%20window%20margins%20
and%20collateral%20guidelines.

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collateral eligibility criteria, for the specific purpose of temporarily
increasing (or, conversely, decreasing) the amount of private credit flowing
into particular segments of the economy. This type of dynamic adjustment
would make the most sense when the Fed detects specific structuralbottlenecks or other inefficiencies in the allocation of credit across various
sectors or types of producer.171
Another tool of maximizing the flow of publicly-subsidized private credit
flows to productive enterprise, as opposed to socially sub-optimal speculative
activities, is to impose specific activity limitations and other prudential
requirements on private lenders eligible to access the NDW facility. Again,
this approach to entity eligibility is a direct continuation of the existing
regime, under which only regulated depository institutions that are subject toactivity restrictions and extensive prudential supervision have access to theFed’s discount window. However, as discussed below, a more targeted
imposition of investment and affiliation limitations on QLIs eligible for the
NDW borrowing can serve as a potentially powerful lever of structuralreform in the financial services sector.172
2. The National Investment Authority (NIA) Issuances
The second important asset category on the Fed’s restructured balance
sheet would comprise a broad range of public issuances in addition to thestandard holdings of Treasury and Agency debt. The proposed restructuringof the Fed’s balance sheet would enable it to channel a significant portion offunds corresponding to the newly created FedAccounts into large-scalepurchases of securities issued by various public instrumentalities for purposesof financing of critical public infrastructure projects.
One such public instrumentality is the National Investment Authority(NIA), proposed elsewhere.173 Filling the critical institutional gap between
the Fed and the Treasury, the NIA would be tasked with devising andimplementing a comprehensive national development strategy.174 In essence,
it is envisioned as the modern-day equivalent of the Reconstruction FinanceCorporation (RFC), the New Deal-era public institution that successfully led
a massive nationwide capital mobilization campaign to aid Depression-struck
sectors of the American economy.175 Much like the RFC, the NIA would
171

It is important to ensure that the Fed uses this dynamic adjustment of collateraleligibility criteria in a carefully calibrated manner, only for as long as it is necessary tocorrect the targeted allocative inefficiency, and clearly communicates its intentions to QLIs.
The key is to retain policy flexibility without creating market uncertainty.
172
See infra Part V.A.
173
For a full proposal, see National Investment Authority, supra note 18, at 469-490.
174
Id. at 469.
175
For an overview of the RFC’s experience in nationwide credit allocation, see id. at
458-463. For an expanded discussion of the proposed NIA’s functions as a national crisis-

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transact directly in private financial markets, proactively channeling public
and private financial resources into large-scale, transformative public
infrastructure projects.176 Importantly, however, it would reverse the familiar
pattern of “public capital, private management,” typical of most modern“public-private partnerships,’ in favor of the “public management, mixed
public-and-private capital” model.177
Under the proposed scheme, one arm of the NIA would pursue a wide
range of well-established credit-mobilization strategies: originating,guaranteeing, and maintaining secondary markets for loans to public andprivate parties that undertake publicly beneficial infrastructural projects. In
this role, the NIA would be acting as an infrastructure-specific analogue tothe RFC and its surviving offspring, the home finance GSEs.178
Another arm of the NIA would function as a hybrid of a sovereign wealthfund (SWF) and a private equity firm. Following the business model of atypical asset manager, the NIA would set up a series of collective investment
funds (structured similarly to traditional private equity funds) and actively
solicit private investors—pension funds, insurance companies, university
endowments, foreign SWFs, and so on—to purchase passive equity stakes in
its funds. The NIA’s dedicated professional teams would then select andmanage individual funds’ portfolios of public infrastructure assets:nationwide clean energy networks and high-speed railroads, regional air andwater cleaning and preservation programs, systems of ongoing adulteducation and technical training, networks of mixed public-private “startup”
finance funds, and so on.179 The NIA would employ advanced financial
engineering methods to reward private investors for their participation in
financing these large-scale, long-term economic growth-boosting projects—
even where such projects do not generate easily privately “capturable”
revenues.180
It is important to emphasize that the NIA will partner up with private
response coordinator, see Saule T. Omarova, Why We Need A National Investment Authority(2020), http://ssrn.com/abstract=3566462; Saule T. Omarova, Crises, Bailouts, and the Case
for a National Investment Authority, JUSTMONEY.ORG. (Apr. 1, 2020),
https://justmoney.org/s-omarova-crises-bailouts-and-the-case-for-a-national-investmentauthority/.
176
See Saule T. Omarova, The Climate Case for a National Investment Authority, DATAFOR PROGRESS REPORT (Aug. 5, 2020), https://www.dataforprogress.org/memos/the-climate-case-for-a-national-investment-authority.
177

National Investment Authority, supra note 18, at 439-440.
Id. at 473-474.
179
Id. at 475-480 (outlining the general structure and functions of the NIA as an asset
manager).
180
For a discussion of the specific methods and techniques of financial and legal
engineering the NIA could adapt to this end, see id.at 475-480; 486-490
178

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investors not out of financial necessity but solely in order to (1) offer a
productive, non-speculative and non-inflationary outlet for private
investment capital; and (2) incorporate price signals into its own investment
decisions, thereby levering private markets’ information-production capacity
as a tool of public decision-making.181 In this sense, the NIA proposal
operationalizes the principle of public modulation and allocation of money
and credit.
A detailed discussion of the NIA’s institutional design and operation isbeyond the scope of this Article. For present purposes, the key is to emphasize
the crucial complementarity between the establishment of a public
infrastructure finance agency, on the one hand, and the proposed redesign of
the Fed’s balance sheet, on the other. Instruments issued by the NIA represent
a particularly well-suited asset category for the Fed’s newly expanded
portfolio. By purchasing NIA issuances, the Fed would be investing in thelong-term development of the nation’s economic capacity. In effect, the Fed
would be offsetting the dramatic increase in its own liabilities—thus relieving
the pressure on its own balance sheet—by dramatically augmenting the flowof credit into the coordinated nationwide construction of public infrastructurethat enables and facilitates structurally balanced, socially inclusive andsustainable economic growth.182
Importantly, however, the Fed would not be making any direct creditallocation decisions on a project-by-project basis—a task explicitly reserved
for the NIA.183 This should help to avoid or minimize any potential
accusations of the Fed exceeding its mandate and conducting overtly fiscal
policy. From the Fed’s perspective, purchasing NIA instruments will function
as a much higher-level portfolio strategy that, along with the more familiar
NDW facility, aims to support and manage the flow of public and private
credit to productive economic enterprise.184 In that sense, it will represent anaddition to, or expansion of, the Fed’s well-established practice of purchasing
Treasury and agency debt.185
3. “OMO Plus” Assets
The third principal asset category on the Fed’s balance sheet will consistof a diversified portfolio of financial instruments acquired through the Fed’s

181

Id.
For a discussion of the NIA’s ability to generate economic growth that is socially
inclusive, sectorally and geographically balanced, and sustainable in the long-run, see id. at
469-489.
183
As mentioned above, the NIA would operate as a hybrid federal instrumentality,
situated between the Fed and the Treasury.
184
National Investment Authority, supra note 18, at 471-472.
185
See supra Part I.B.
182

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expanded open market trading operations, or “OMO Plus.”186
As discussed above, the Fed currently makes extensive use of the
traditional OMO tool, regularly buying and selling Treasury and agency debt
and entering into repo and reverse repo transactions—all for the explicit
purpose of managing interest rates.187
OMO Plus is a relatively straightforward extension of this wellestablished monetary policy tool. Under this proposal, the Federal Reserve
Bank of New York (FRBNY) would conduct regular purchases and sales ofa broad range of securities and other tradable financial assets with an explicit
view to modulating volatile swings in what has been defined elsewhere as“systemically important prices.”188
To this end, the FRBNY would establish a separate trading portfolio
replicating, as closely as practicable, the market portfolio. In effect, thisportfolio would be an index fund reflecting the proportional values of all
financial asset classes constituting the financial market as a whole.189 Oncethe fund is established, the Fed would conduct its current daily tracking of
the nation’s financial markets.
If a particular asset class—such as mortgage-backed securities ortechnology stocks—rises in market value at rates suggestive of a bubble
trend, the FRBNY trading desk will short these securities, thereby putting
downward pressure on their prices. This type of action would tend to tighten
the flow of speculative credit to the asset class in question, because (1)speculative profit prospects would be diminished by the price drop; and (2)the Fed’s engineering the drop would signal to the market its determinationthat current prices of the asset in question are artificially inflated andaccordingly best suppressed. Conversely, the FRBNY will go long on
particular asset classes that appear to be artificially undervalued, in order toavoid unnecessary market dislocation. It will follow the same process intargeting broader market price fluctuations.190
OMO Plus would thus serve as a flexible and direct tool of preventing
systemically destabilizing booms and busts in financial markets.191 The
186

Public Actors, supra note 163, at 141-144 (detailing the OMO Plus proposal).
See supra Part I.B.2.
188
For a detailed account of “systemically important prices,” see Robert Hockett &Saule Omarova, Systemically Significant Prices, 2 J. FIN. REG. 1 (2015).
189
In constructing this portfolio, it might be easier to start by including only publiclytraded securities. This prototype market portfolio could be a broad stock index, such as S&P
5000 or Wilshire 5000. However, because this approach might leave systemically important
asset classes out of the program’s reach, it is preferable to replicate the entire market portfolio
as closely as possible. See Public Actors, supra note 163, at 141.
190
Id. at 142.
191
Post-2008, the Fed’s role as a market-maker is often discussed as a necessary crisiscontainment measure. See MEHRLING, supra note 57; HAL S. SCOTT, CONNECTEDNESS AND
187

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resulting portfolio of tradable financial assets on the Fed’s balance sheet—its
new market-stabilization portfolio—would be set off against its newly
expanded deposit liabilities.
B. The Fed’s Balance Sheet as the “People’s Ledger”
As acknowledged from the outset, the proposed restructuring of the asset
side of the Fed’s balance sheet requires a significant change in the broader
institutional context in which the central bank operates. At bottom, thestandard objections to, and concerns about, the Fed actively using its balance
sheet to shape credit allocation erroneously assume structural immutabilityof the presently existing financial system.
Once we accept the fact that the structural context for the Fed’s asset
allocation itself can and should be changed, allowing the Fed to manage amuch larger asset portfolio should not appear as a dangerous deviation fromthe norm. In fact, under the scheme proposed here, the Fed’s operations will
finally render the orthodox notion of “financial intermediation” a reality.192
By providing universally accessible deposit accounts and channeling thecorresponding amounts into select classes of private and public issuances, theFed will effectively stand as the intermediating link between savers/investors(the liability side) and wealth/productivity growth (the asset side).
In this sense, the proposed restructuring of the Fed’s balance sheet would
signify a fundamental shift in the existing finance franchise arrangement.
Currently, as discussed above, the Fed’s balance sheet reflects its role as thesovereign franchisor whose principal liabilities run to, and assets are acquired
from or through, private franchisee-institutions.193 These private institutions
occupy the privileged position of mediating the central bank’s participationin, and engagement with, the nation’s financial and economic system. Under
the proposal advanced here, there will be no need for granting these private
financial institutions exclusive access to the Fed’s balance sheet and control
over creation and allocation of sovereign credit-money—a fundamentally
public function.194 The Fed’s balance sheet will function as the ultimate
platform for the integrated public management of the economy-wide flowsof the sovereign public’s full faith and credit. It will become the People’s
Ledger.
From this perspective, the increased size of the Fed’s balance sheet is ameasure of the People’s Ledger’s depth and capaciousness. A bigger,
CONTAGION: PROTECTING THE FINANCIAL SYSTEM FROM PANICS (2016). This Article, bycontrast, contemplates proactive use of the central banks’ market-making capacity as animportant tool of crisis prevention.
192
For a critique of the “intermediation” narrative of finance, see Finance Franchise,supra note 16.
193
See supra Part I.B.
194
See Finance Franchise, supra note 16.

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deliberately constructed, and dynamically managed asset portfolio is anindicator of the Fed’s enhanced ability to channel our collectively
accumulated financial resources into productive economic activities.
Importantly, private financial institutions will still engage in credit
allocation on a more granular, micro-level. Thus, the Fed’s NDW facility will
enable QLIs to extend private loans to entities and individuals.195 These
private lenders will be assisting the central bank by utilizing their Hayekian
micro-informational advantages and transactional expertise to evaluate andselect individual investment opportunities.196 Similarly, the proposed NIA
would directly partner with private institutional investors for purposes offinancing public infrastructure projects. To the extent these investors are free
to choose alternative uses for their capital, this model would provide the NIA
with a valuable mechanism for receiving market feedback.197 In this sense,
the People’s Ledger is a tool of optimizing the overall public-private balanceof power in our fundamentally hybrid financial system.
Of course, the proposed shift in the Fed’s business model raises a host ofadministrative and other implementation-related issues that would require
careful consideration at appropriate times. For present purposes, the key
threshold question is whether, and how, the proposed restructuring of the
Fed’s balance sheet would affect its overall mandate and operation.
Under the current law, the Federal Reserve’s charge is to[…] maintain long run growth of the monetary and credit aggregatescommensurate with the economy’s long run potential to increase production, so
as to promote effectively the goals of maximum employment, stable prices, andmoderate long-term interest rates.198

This statutory language is sufficiently broad to accommodate the shifts in
its asset portfolio, described above. In fact, the proposed shifts would
empower the Federal Reserve to fulfil this broad legal mandate far more
effectively than it has done so far.
For decades, the Fed’s monetary policy mandate has been interpreted
narrowly as pursuing the “dual” goal of price stability with maximum
employment, via interest rate manipulation—a notoriously blunt tool.199 This
195

See supra Part IV.A.1.
Id.
197
See supra Part IV.A.2.
198
12 U.S.C. § 225a. This formulation was adopted in 1977 and is widely known as theFed’s “dual mandate.” See Arron Steelman, The Federal Reserve’s “Dual Mandate”: The
Evolution of an Idea, Fed. Res. Bank. of Richmond: Economic Brief (Dec. 2011),
file:///C:/Users/sto24/Box%20Sync/CENTRAL%20BANKING%20&%20MONEY/ACA
DEMIC/Steelman.Fed's.Dual.Mandate.Evolution.2011.pdf.
199
See, e.g., Congr. Res. Serv., Monetary Policy and the Federal Reserve: Current
Policy and Conditions 1, 7 (Feb. 6, 2020), https://fas.org/sgp/crs/misc/RL30354.pdf.
196

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uneasy “duality” of the mandate and the Fed’s limited success in balancing
its imperatives in practice have long been a source of intense debate andcontroversy.200 By utilizing the full array of new tools on both sides of its
balance sheet, the Fed would be able to perform its statutory mission in an
integrated manner, without being caught in an artificial trade-off between
promoting employment-generating growth, on the one hand, and ensuring
price stability, on the other.201 In important ways, the perceived conflict
between these two policy objectives is a product of the current system thatbifurcates the functionally unified process of modulation and allocation ofsovereign credit-money.202 Giving the Fed a more direct and clearly definedallocative role would help to bridge this gap and serve as a crucial
enhancement of the Fed’s ability to perform its traditional modulatory
function.
OMO Plus, for instance, is a direct tool of preventing harmful inflation offinancial asset prices.203 Similarly, the NDW program is a straightforwardmechanism of maintaining elastic money supply. The enhanced ability tocondition access to the NDW facility on private lenders’ willingness tochannel financing into certain sectors of the U.S. economy, however, gives
the Fed a new lever of credit allocation.204 To the extent this involves moregranular and explicit qualitative choices with respect to directing credit flows
than what is typically done under the current discount window arrangements,
it may require technical adjustments or updates to the Fed’s collection anduse of macroeconomic and financial data. Thus, to manage the supply andcost of privately available credit effectively, the Fed would need to monitor
relevant market dynamics and analyze relevant quantitative and qualitative
data with a specific view to (1) identifying potential structural impediments
to achieving desired levels of output, productivity, employment, or otherpolicy-driven metrics in specific pockets of the economy; and (2) correcting
these imbalances in an optimally targeted and timely manner, among otherthings, by incentivizing QLIs to increase or decrease lending to specific200

Since 1977, the Federal Reserve has been repeatedly criticized for favoring its pricestability goal over the maximum-employment objective. See Steelman, supra note 198 at 3.
In the post-2008 era, some Fed officials have directly questioned the general feasibility of
having a central bank pursue any policy goals other than inflation control. See
https://www.stlouisfed.org/annual-report/2010;https://www.stlouisfed.org/openvault/2018/august/federal-reserve-dual-mandate. Others have advocated targeting economic
growth measures, such as nominal GDP, instead of the inflation rate. Matthew O’Brien, A
Rebellion at The Federal Reserve? THE ATLANTIC (May 2, 2012).
201
See sources cited supra note 200.
202
See supra Part I.B.
203
See supra notes 188-191 and accompanying text.
204
See supra notes 170-171 and accompanying text.

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borrower categories.205
It is important to emphasize that updating or repurposing the Fed’s
existing analytical apparatus to support its new range of action does notrender the Fed an agent of fiscal or industrial policy. While proactively
managing the economy-wide flow of credit, the Fed would not be making any
direct investment decisions, especially at the level of individual projects orentities.206 Public investment decisions would be left to the Treasury and the
newly created NIA. Having the NIA, in particular, take on the task ofmobilizing public and private investment in the real economy would
significantly ease the currently mounting political pressure on the Fed to use
its balance sheet to create jobs, fight climate change, reduce racial and social
inequity, and so forth.207The NIA’s broad developmental policy mandate
would explicitly embrace these critical public policy goals.208 In this context,
the creation of the NIA would allow the Fed to provide tangible support forthese policies, while also fulfilling its own legal mandate more effectively.
One final point deserves a brief mention here. Explicitly embracing theFed’s role in credit allocation, as proposed above, would require closer
coordination and information-sharing among the Fed, the Treasury, and the
NIA. While the Fed would continue to rely primarily on its formidable inhouse expertise in tracking and analyzing macroeconomic data, soliciting
direct input from the Treasury and the NIA would augment its capacity toassess and prioritize specific structural imbalances potentially demanding
NDW policy responses. In this tangible way, abandoning the illusory notionof technocratic neutrality as the basis of sound monetary policy creates animportant opening for a more deliberate and transparent incorporation of
democratically established public policy priorities into the Fed’s
operations.209
To sum up, the proposed structural changes to the Federal Reserve’s asset
205

See supra Part IV.A.1.
See supra notes 183-185 and accompanying text. Importantly, the Fed would retain
its emergency lending powers under Section 13(3) of the Federal Reserve Act. See supranote 66. Under the proposed new regime, however, these powers “of last resort” will likely
be reserved for truly exceptional circumstances.
207
See Patrick Honohan, A Monetary Policy Tilt for Climate and Inequality? PIEE (Oct.
17, 2019), https://www.piie.com/blogs/realtime-economic-issues-watch/monetary-policytilt-inequality-and-climate-change; Victoria Guida, An Activist Central Bank? Dems Push
the Fed to Fight Racial Inequality, POLITICO.COM (Aug. 29, 2020),
https://www.politico.com/news/2020/08/29/federal-reserve-race-economic-activism404560.
208
See supra Part IV.A.2.
209
This potentially raises questions about the Fed’s political independence, which arebeyond the Article’s scope. See, generally, PETER CONTI-BROWN, THE POWER AND
INDEPENDENCE OF THE FEDERAL RESERVE (2016); PAUL TUCKER, UNELECTED POWER: THE
QUEST FOR LEGITIMACY IN CENTRAL BANKING AND THE REGULATORY STATE (2018).
206

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portfolio, along with the broader institutional reforms necessary to enable
these changes, would fundamentally redefine the public-private balance ofpower in the finance franchise. Under the new arrangement, the sovereign
public will manage system-wide flows of credit by performing both thefamiliar modulatory and the newly expanded allocative functions in an
integrated—and therefore more effective—fashion.
It is difficult to overestimate the profound systemic implications of thiscomprehensive transformation of the Fed’s balance sheet from the traditional“franchisor ledger” into the People’s Ledger. While it is impossible to offer
a fully detailed account of how this reform will reverberate throughout theentire financial system, it is helpful to trace some of its principal structuralconsequences.
V. THE PEOPLE’S LEDGER IN ACTION: STRUCTURAL IMPLICATIONS
The creation of universally available FedAccounts and corresponding
reconfiguration of the Fed’s asset portfolio, proposed above, are bound to
generate significant changes in the key functions, business models, and risk
profiles of many private financial institutions and markets. Broadly retracing
the logic of the existing finance franchise, this Part offers a high-level—and
inevitably somewhat speculative—overview of these potential changes,
starting with commercial banks and then moving through the multiple layersof money and capital markets.210 Without claiming to offer a complete mapof the new system, it shows how transforming the Fed’s balance sheet into atrue People’s Ledger would reduce socially harmful speculative trading in
financial instruments, make the financial system less complex and more
efficient, and enable financial markets to perform their core function of
supporting productive economic enterprise more effectively.
A. Potential Impact on the Banking Sector
Every proposal to institute universally available Fed deposit accounts
immediately invites the question of how it would affect commercial banks.
Under the currently standard model of banking business, banks are expected
to operate by (1) extending long-term loans they hold on their balance sheet
until maturity, and (2) funding these illiquid long-term credit assets by taking
demand deposits.211 A wholesale migration of deposits out of commercial
banks would, therefore, directly impinge on banks’ traditional funding
model—and threaten their continuing ability to extend credit to businesses
and individuals.
210

For the original exercise tracing the operation of the existing system of franchisefinance, see Finance Franchise, supra note 16.
211
As discussed above, this is merely a description of the standard narrative that fails to
capture the entirety of these dynamics. See supra Part I.A.

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In practice, of course, banks’ balance sheets do not strictly conform tothis presumed model of the “banking business.” Today’s banks do not holdall loans to maturity, choosing instead to securitize or sell them in secondary
markets. Nor do they fund their assets exclusively with deposits. This isespecially true of large and mid-size banks operating within the diversified“financial holding company” (FHC) structures.212 Under the Bank Holding
Company Act of 1956 (the BHC Act),213 as amended by the Gramm-LeachBliley Act of 1999,214 FHCs are allowed to engage in a broad range offinancial activities, including securities underwriting and dealing, investment
fund management, insurance, and so forth.215 Large, diversified FHCs
actively use their deposit-taking bank subsidiaries’ balance sheets to support
their lucrative trading, dealing, and investing activities they conduct throughtheir non-bank subsidiaries.216 To the extent deposits, especially FDICinsured retail deposits, are by far the cheapest and “stickiest” form of bankfunding, they remain a critical driver of banking institutions’ profitability.
Accordingly, the proposed restructuring of the Fed’s balance sheet will havepotentially significant impact not only on deposit-taking banks but also on
their parent-companies and non-bank affiliates.
To begin with, it is critical to emphasize that the creation of FedAccounts
does not really have to affect the asset sides of banks’ own balance sheets.
As discussed above, the proposed NDW mechanism will enable banks tocontinue their lending activities by accessing low-cost Fed funding instead ofdeposits.217 Importantly, this change in the identity of private banks’ main
creditor—from the multitude of dispersed depositors to the Fed—would
eliminate the underlying causes of bank “runs.”218 Thus, replacing demand212

See 12 USC § 1843(k). Under the law, “bank holding companies” (BHCs) that own
or control U.S. banks are subject to strict activity limitations. FHCs are a subset of BHCs,
which satisfy certain financial and management criteria and therefore can engage in financial(and some commercial) activities ordinarily not available to BHCs. See sources sited infra
note 216.
213
Bank Holding Company Act of 1956, Pub. L. No. 84-511, §§ 1-12, 70 Stat. 134(1956) (codified as amended at 12 USC §§ 1842-1848).
214
Financial Services Modernization Act (Gramm-Leach-Bliley Act), Pub. L. No. 106102, 113 Stat. 1338 (1999). The Act repealed Sections 20 and 32 of the Banking Act of 1933,
popularly known as the Glass-Steagall Act, which established legal separation between
commercial banks and investment banks. See supra note 28.
215
See 12 USC § 1843(k)(1)(A).
216
For detailed discussions of FHCs’ activities and intra-group risk-transfer practices,
see Saule T. Omarova, The Merchants of Wall Street: Banking, Commerce, andCommodities, 98 MINN. L. REV. 265 (2013); Saule T. Omarova, From Gramm-Leach-Bliley
to Dodd-Frank: The Unfulfilled Promise of Section 23A of the Federal Reserve Act, 89 N.C.
L. Rev. 1683 (2011).
217
See supra Part IV.A.1.
218
This point is emphasized in Ricks et al., supra note 108. Generally, bank runs are
situations in which individual depositors simultaneously rush to withdraw their money from

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deposits with Fed discount window loans will remove the key source offragility built into banks’ traditional business model.
In essence, banks will become non-depository lenders. They would use
NDW financing for loans and other eligible assets that meet the Fed’s NDW
criteria for credit quality.219 They would finance loans not eligible for NDW
funding—“non-qualifying” loans—by issuing corporate debt and equity
securities in capital markets, much in the same way as other corporations
do.220 As discussed below, they would also be able to fund these nonqualifying loans via private-market securitizations.221 Without the federal
subsidy attached to demand deposits, banks’ riskier investments andactivities—as well as those deemed less critical from the public policy
perspective—will be directly subject to market discipline.
Banks, in other words, will not be “special” any more.222 By separating
their lending function from their monetary function, the proposed reform will
effectively “end banking,” as we know it.223 Credit-generation,
fundamentally dependent upon the monetized full faith and credit of thesovereign public, will be reserved either for public instrumentalities or for
QLIs—private lenders with access to the Fed’s NDW facility.
Once banks lose their “special” status and entity-based access to the
public subsidy, they will inevitably lose their appeal as potential acquisition
targets for other financial institutions. Tying the subsidy to specific NDWqualifying assets generated by private firms, rather than to the firms
themselves, makes it far more difficult (if not impossible) to transfer the
benefits of that subsidy to these firms’ affiliates. The ability to transfer such
benefits from federally-backed banks to affiliated securities firms, derivatives
dealers, and asset managers is the source of so-called “implicit” public
subsidy that FHCs currently enjoy.224 While notoriously difficult to quantify,
the bank they fear to be on the brink of insolvency. For an influential economic model of abank run, see Douglas W. Diamond & Philip H. Dybvig, Bank Runs, Deposit Insurance, andLiquidity, 91 J. POL. ECON. 401 (1983). Once the money is fully sovereign, there is no dangerof default.
219
For a discussion of the NDW collateral criteria, see supra Part III.A.1.
220This bifurcation of private lenders’ assets would be similar to the well-establishedpractice in the U.S. home-finance markets, where the GSEs are restricted by law topurchasing only so-called “conforming” loans. See Federal Housing Finance Agency,
Conforming Loan Limits, https://www.fhfa.gov/DataTools/Downloads/Pages/ConformingLoan-Limits.aspx.
221
See infra Part V.B.4.
222
See E. Gerald Corrigan, Are Banks Special? FED. RES. BANK OF MINNEAPOLISANNUAL REPORT (1983).
223
The phrase is a direct play on the title of JONATHAN MCMILLAN, THE END OFBANKING (2014).
224
See Saule T. Omarova, The “Too Big To Fail” Problem, 103 MINN. L. REV. 2495
(2019).

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this implicit subsidy has been a crucial driver of the unprecedented
consolidation and concentration in the U.S. financial industry since the1990s.225 It is also at the very core of the “too big to fail” (TBTF)
phenomenon that came to symbolize a recurring pattern of privatizing gains
and socializing losses of large financial institutions.226 Taking away deposit
insurance and other forms of public subsidy currently feeding thisphenomenon would, accordingly, end the presently intractable TBTF
problem.
Again, none of this means that private finance would be forced todisappear or “shrink into irrelevance.”227 The proposed reform would simply
redefine or restore its proper social function. In effect, it would force private
finance to conform to its own self-narrative as the realm of pure“intermediation” between private suppliers and users of “scarce” capital.228
In this sense, the restructuring of the Fed’s balance sheet, advocated here,
would allow for a more transparent, fair, and socially beneficial delineation
between the properly “private” and the legitimately “public” spheres inmodern finance.
By removing the underlying sources of bank’s present “specialness” andfragility, the proposed change would also eliminate the need for an intrusiveand complex regime of bank regulation and supervision. Thus, both federal
deposit insurance and deposit-based bank reserve requirements will become
unnecessary. Once banks stop depending on short-term funding of their longterm assets, mandatory liquidity requirements, which were introduced into
the Basel Capital Accord in the wake of the 2008 financial crisis, would also
become redundant.229 Bank capital regulation would lose its present salienceas the core tool of protecting the deposit insurance fund from losses.230 And
such controversial and complex tools of enhanced macroprudential
supervision as, for example, comprehensive stress testing of banks’ balance
sheets, would likely be eliminated.231
Simplifying the currently notoriously complex regulatory regime
governing banking institutions, however, does not mean abandoning all
225

See Arthur E. Wilmarth, Jr., The Dark Side of Universal Banking: Financial
Conglomerates and the Origins of the Subprime Financial Crisis, 41 CONN. L. REV. 963,
1002-1046 (2009).
226
Omarova, supra note 224, at 2495.
227
Koning, supra note 103.
228
For a discussion of the “intermediated-scarce-private-capital” orthodoxy, see
Finance Franchise, supra note 16, at 1146-1147.
229
For an overview of Basel III liquidity standards, see BARR ET AL., supra note 26, at
327–29.
230
For an overview of bank capital regulation, see id. at 291–311; CARNELL ET AL, supranote 26, at 238–67.
231
See 12 U.S.C. § 5365(i) (2012).

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regulation. As long as the sovereign public continues to subsidize any
meaningful amount of private money-creation, it has to protect its balance
sheet by exercising “quality control” over its private franchisees. Familiar
tools of macroprudential regulation and supervision—including basic
leverage and portfolio concentration limits, credit underwriting standards,
certain activity and affiliation restrictions, operational risk management
requirements, and so on—would still apply to all QLIs eligible for NDW
borrowing. The precise contours of this regulatory regime will depend on,
and reflect, the risk profile of the newly reconfigured system. It isnevertheless reasonable to expect that the overall intensity of regulatory
oversight would decrease significantly.
This shift would allow for a significant streamlining of the U.S. bankregulatory apparatus. The Federal Deposit Insurance Corporation (FDIC)
would have no practical role to play. All of the continuing macroprudential
oversight and chartering responsibilities can then be consolidated andtransferred to the Office of the Comptroller of the Currency (OCC), theprimary regulator of federally-chartered banks.232 Accordingly, the scope of
the Federal Reserve’s own formal bank regulatory functions would
significantly shrink, if not disappear.233
Importantly, the proposed change in the Fed’s relationship with private
financial firms presents a welcome opportunity for a more effective aproactive deployment of structural regulatory levers. Thus, the Fed could use
its control over the flow of federal subsidies by fine-tuning the NDW
eligibility conditions in furtherance of its evolving modulatory and allocative
mission. In addition to familiar discount window requirements focused on thequality of pledged collateral, the Fed could mandate a set of other sociallydesirable attributes that privately-extended credit products must have in orderto qualify for NDW support. By excluding loans fueling secondary-market
financial speculation, leveraged buy-outs (LBOs), massive stock buybacks,
and other private activities that divert resources from socially productive
enterprise, the Fed would be able to redefine the scope and nature of QLIs’
business operations.234

232

See https://www.occ.treas.gov/. The OCC would charter the deposit-taking CBIs,
discussed above. See supra Part III.B. Because QLIs will have direct access to the federal
subsidy via the Fed’s NDW facility, it also makes sense to retain a special chartering regime
for these institutions.
233
Currently, the Fed is the primary federal regulator and supervisor of state-charteredmember banks and U.S. BHCs. See https://www.federalreserve.gov/supervisionreg.htm.
234
The QLI charter would also impose entity-level limitations on permissible activities
and affiliations, similar to those currently applicable to commercial banks, to further restrict
access to the federal subsidy.

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B. Potential Impact on Shadow Banking and Capital Markets
The wholesale migration of deposits to the Fed’s balance sheet will also
trigger profound changes in the size, structure, and operation of all financial
institutions and markets that currently amplify or replicate private banks’money-creation function outside of the regulated banking system.235 This
includes, first and foremost, the “shadow banking” sector.236 It is importantto remember, however, that many key participants in shadow banking
markets are regulated financial institutions—securities broker-dealers,
investment companies, swap dealers, and so forth—that also operate in the
U.S. and global capital markets.
1. Money Market Mutual Funds
Money Market Mutual Funds (MMMFs) constitute the most obvious
category of financial institution to be affected by the proposed creation of
FedAccounts. MMMFs are open-end investment companies, or mutual funds,
that specialize in constructing diversified portfolios of “safe” short-term debt
instruments, including U.S. Treasury bills, Agency securities, andcommercial paper.237 A product of classic regulatory arbitrage, MMMFs
were invented in the 1970s as a higher-return alternative to interest-bearing
bank deposits.238 With certain exceptions, special accounting rules allow
MMMFs to maintain the value of their shares at $1.00 per share.239 Fundinvestors are thus assured that they can redeem their shares on demand andwithout losing any value.240 Check-writing capabilities further enhance the235

See supra notes 28-31 and accompanying text.
The term “shadow banking” was coined by Paul McCulley, formerly of PIMCO.
Paul McCulley, Teton Reflections, GLOBAL CENTRAL BANK FOCUS (PIMCO) (Sept. 7, 2007)
at 2, http://media.pimco-global.com/pdfs/pdf_sg/GCB%20Focus%20Sept%2007%20SGPHK.pdf.
237
MMMFs are regulated by the Securities and Exchange Commission (SEC) under theInvestment Company Act of 1940. See U.S. Sec. and Exch. Comm’n, Fast Answers: Money
Market Funds https://www.sec.gov/answers/mfmmkt.htm.
238
See https://www.investor.gov/introduction-investing/investing-basics/investmentproducts/mutual-funds-and-exchange-traded-5. At the time, the Fed’s Regulation Q
prohibited banks from paying interest on demand deposits and capped interest rates onsavings accounts. BARR ET AL., supra note 26, at 1302.
239
Post-2008, the SEC rules require prime institutional MMMFs to use floating “netasset value” (NAV) for their shares but continue allowing retail and government MMMFs tomaintain stable NAV at $1.00 per share. 17 C.F.R. § 270.2a-7 (2016); SEC, Money Market
Fund Reform; Amendments to Form PF, 79 Fed Reg. 47736 (Aug. 14, 2014) (codified at 17
C.F.R. pts. 230, 239, et al.).
240
If the NAV per share falls below $1.00, the fund is said to have “broken the buck.”
In September 2008, The Reserve Primary Fund, the oldest MMMF in the U.S., sent global
financial markets reeling when it “broke the buck” due to its exposure to Lehman Brothers.
See Diana B. Henriques, Money Market Fund Says Customers Could Lose Money, N. Y.
TIMES (Sept. 16, 2008), https://www.nytimes.com/2008/09/17/business/17fund.html?dlbk
236

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appeal of MMMF accounts as a direct substitute for regular bank accounts.
In effect, MMMFs are “shadow banks” in the most direct sense of theword.241
Currently, the MMMF industry has well over $5 trillion in assets.242
MMMFs are major cash lenders in the critically important commercial paper
and repo markets. Issuing bank-like on-demand liabilities, however, makesthese funds inherently vulnerable to massive depositor-like investor runs.
This combination of factors ultimately necessitates public accommodationand monetization of MMMFs’ liabilities—again, in direct parallel tobanks.243
These functional parallels explain why and how the creation of
FedAccounts would disrupt the MMMF business model. Non-defaultable,interest-bearing sovereign money would render MMMFs a lot less attractive
to investors seeking liquidity and safety. Without an ability to arbitrage
between two forms of privately-issued money (bank deposit-money and
MMMF “shadow” money), the original rationale for the existence of an
MMMF as a financial product would no longer exist. Instead of functionallyreplicating bank deposit services, MMMFs would revert to a traditional
mutual fund business model and offer straightforward investment products.
In effect, MMMFs would operate as a subset of conservative-allocation credit
funds: they would continue investing in liquid short-term public and private
debt instruments—including corporate commercial paper—and manage theirpools of assets so as to minimize risk to investors.244 Though relatively stable
and low-risk, MMMF shares will no longer be structured or perceived as riskfree.
In consequence, the size and systemic significance of the MMMF
industry would decrease substantially. This would, in turn, significantly
impact commercial paper and repo markets currently dependent on MMMFs
241

For more on the history, operation, and legal regime governing MMMFs, see BARRET AL., supra note 26, at 1302-1324.
242
https://www.federalreserve.gov/releases/efa/total-money-market-funds-investmentholdings.pdf.
243
This public support becomes explicit and visible in times of crisis. Thus, in
September 2008, the Treasury intervened to stop the run om MMMFs by guaranteeing
investor balances against losses of up to $50 billion. The Fed, in turn, used its emergency
powers to set up the first Money Market Mutual Fund Liquidity Facility (MMLF), fundingbank purchases of MMMFs’ assets. See BARR ET AL., supra note 26, at 1315. In March of2020, the Fed reinstituted its MMMLF facility as part of its response to the COVID-19 crisis.
See supra note 62 and accompanying text. See also, BD. OF GOV’S OF THE FED. RES. SYS.,
Reporton
theFederalReserve’s
Balance
Sheet
(Aug.
2020)
https://www.federalreserve.gov/publications/files/balance_sheet_developments_report_202
008.pdf.pdf.
244
MMMFs would also be able to invest in the NIA bonds as an additional “safe” asset
class. See supra Part IV.A.2.

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as principal cash lenders. MMMFs’ partial withdrawal would contribute to
the corresponding “downsizing” and de-risking of these markets.
2. Commercial Paper and Repo Markets
Commercial paper is a short-term, unsecured debt instrument issued bylarge, creditworthy corporations to finance their short-term business
expenses.245 These attributes generally render it a low-risk investment. In thelead up to the 2008 crisis, however, commercial paper markets grew
dramatically as a result of a massive rise in financial firms’ issuances and“asset-backed commercial paper” (ABCP).246 These new forms ofcommercial paper carried high levels of risk and channeled low-cost funding
into speculative trading activities in financial markets.247 In September 2008,
investor runs on ABCP and financial-firm commercial paper effectively cut
off the flow of short-term credit to the real economy, thus significantly
exacerbating the systemic crisis.248
In the post-2008 era, the share of commercial paper—and especially
ABCP—in the U.S. wholesale funding markets declined well below its precrisis peak levels.249 Currently, the U.S. commercial paper volume remains
at slightly over $1 trillion.250 Most of it, however, continues to be issued byfinancial firms, suggesting strong linkages to trading activities. The reformof the Fed’s balance sheet, advocated here, offers an opportunity tostrengthen this market by restoring its original function as an efficientchannel of financing the real economy—as opposed to fueling financial
speculation. Thus, smaller and more risk-averse MMMFs would likely bealready incentivized to invest mainly in low-risk commercial paper issued by
non-financial firms. The Federal Reserve could create an additional incentive
to do so by accepting high-quality commercial paper issued by non-financial
firms as collateral for its NDW loans. This would enable QLIs to increase
their holdings of commercial paper instruments tied to productive activities
in the real economy—and, indirectly, make these instruments more attractive
245
To qualify for an exemption from the registration requirements of the Securities Act
of 1933, commercial paper must mature in no more than 270 days, and its proceeds must be
used only to pay for the issuers’ short-term expenses, such as payroll or inventory purchases.
15 U.S.C. § 77c(a)(3).
246
See Mary Brown, Asset-Backed Commercial Paper Carries High Risk,
INVESTOPEDIA., https://www.investopedia.com/articles/bonds/08/commercial-paper.asp.
247
Id.; BARR ET AL., supra note 26, at 1341-1343.
248
See Daniel Covitz, Nellie Liang & Gustavo A. Suarez, The Evolution of a Financial
Crisis: Collapse of the Asset-Backed Commercial Paper Market, 68 J. OF FIN. 815 (2013);
Marcin Kacperczyk & Philipp Schanbl, When Safe Proved Risky: Commercial Paper During
the Financial Crisis of 2007-2009, 24 J. ECON. PERSP. 29 (2010).
249
In large part, this is due to stricter post-crisis accounting treatment of ABCP which
made it harder for the sponsoring entities to keep these vehicles off their balance sheets.
250
SIFMA, https://www.sifma.org/resources/research/us-abcp-and-cp-outstanding/.

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for MMMFs and other institutional investors.
For financial firms, the repo market would remain the key source of shortterm funding.251 Structured as securities sales, repos are economicallyequivalent to very short-term (often, overnight) loans collateralized by
securities, such as Treasury bonds.252 In recent decades, the U.S. repo market
grew dramatically in size and systemic significance, with the average daily
amount of outstanding repo transactions currently around $4 trillion.253
Securities dealers are at the heart of repo markets. Dealers use repos tofinance their market-making and trading operations, as well as those of theirclients: hedge funds, asset managers, and other institutional investors.254
Repos provide dealers and fund managers with low-cost funding for taking
leveraged positions in Treasury bonds, Agency and various asset-backed
securities, corporate bonds, and other tradable instruments.255 Thus, througha complex web of institutional arrangements, repo markets continuously fuelthe growth in the volume and velocity of trading in secondary financial
markets.256
MMMFs are major cash lenders in repo markets; they use repo
transactions as a presumably “safe” source of increasing returns on their cash
holdings.257 As all demand-deposit substitutes, however, repos are inherently
vulnerable to runs. Thus, in 2008, a massive “run on the repo” was one of theprincipal triggers of the financial crisis.258 Despite the post-crisis efforts toaddress some of the key risks in repo markets, they continue to experience
periods of high instability, necessitating major cash injections by the Fed.259
The Fed’s actions highlight the repo markets’ role as direct sites ofmoney-creation.260 In fact, since 2008, the Federal Reserve has been using
251

See Adam Copeland et al., Key Mechanics of The U.S. Tri-Party Repo Market (2012),
https://www.newyorkfed.org/medialibrary/media/research/epr/2012/1210cope.pdf.
252
See supra note 51.
253
See
SIFMA,US
Repo
MarketFact
Sheet(April2020),
https://www.sifma.org/resources/research/us-repo-market-fact-sheet/. For data on centrally
cleared repo transactions, see Office of Fin. Res., OFR Short-Term Funding Monitor,
https://www.financialresearch.gov/short-term-funding-monitor/.
254
See SIFMA, supra note 253.
255
Id.
256
For more on these dynamics, see Finance Franchise, supra note 16, at 1178-1181.
257
See Jeffrey Cheng and David Wessel, What Is Repo Market, and Why Does It Matter?
(Jan. 28, 2020), https://www.brookings.edu/blog/up-front/2020/01/28/what-is-the-repomarket-and-why-does-it-matter/.
258
In September 2008, the failure of Lehman Brothers, a major repo borrower, caused a
massive run on repo markets, which triggered the run on MMMFs and paralyzed U.S.
commercial paper markets, as discussed above.
259
See Joe Rennison and Colby Smith, Fed Curbs Repo Volatility on Last Day of 2019,
FIN. TIMES (Dec. 31, 2019).
260
See Manmohan Singh, Collateral and Monetary Policy, IMF Working Paper
WP/13/186 (2013); Manmohan Singh and Peter Stella, Money and Collateral, IMF Working

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repo operations as the key tool of managing the benchmark federal funds
rate.261 This shift in the Fed’s monetary policy reflects the underlying shift in
the financial system’s center of gravity away from the traditional banking andcapital markets and into the inherently volatile and privately controlled repo
market.262 Without a deeper understanding of how this transformation alters
the traditional relationships among core financial markets and actors,
however, the Fed’s ability to conduct an effective monetary policy may be
severely compromised.263
The creation of FedAccounts, discussed above, would give the Fed an
entirely new set of tools for achieving its monetary policy goals in a more
direct and finely-tuned manner.264 Accordingly, the Fed would not need toengage in massive repo operations to fulfill its policy mandate—nor would it
have to provide a de facto liquidity guarantee for repo markets. The Fed’s
withdrawal, in turn, would reduce the size and systemic footprint of the repo
market.265
Partial withdrawal of MMMFs, as a result of the fundamental change intheir own business model, would have a similar effect on repo markets.
Smaller, more conservative MMMFs would have strong incentives to manageand price their risk exposures to repo borrowers more carefully. Securities
dealers would still be able to finance their trading asset portfolios in repo
markets, but not on the present scale and without the benefit of the Fed’smonetization and accommodation.266 This would mean, in turn, lessleveraged financing for hedge funds and other entities engaged in speculative
trading. In short, the repo market will revert to being a much smaller,
specialized segment of the financial system, rendering the system itself bothless complex and more stable.

Paper WP/12/95 (2012); Manmohan Singh, The Velocity of Pledged Collateral, IMF
Working Paper WP/11/256 (2011); Finance Franchise, supra note 16, at 1179-1180.
261
See supra note 51 and accompanying text. See also, Michael Ng and David Wessel,
How the Powell Fed Will Raise Interest Rates (Mar. 15, 2018),
https://www.brookings.edu/blog/up-front/2018/03/15/the-hutchins-center-explains-howthe-powell-fed-will-raise-interest-rates/; Jane E. Ihrig et al., Monetary Policy 101: A Primer
on the Fed’s Changing Approach to Policy Implementation (2015),
https://www.federalreserve.gov/econresdata/feds/2015/files/2015047pap.pdf.
262
See Carolyn Sissoko, The Collateral Supply Effect on Central Bank Policy (Aug. 21,2020), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3545546.
263
Id.
264
See supra Part III.A.
265
The Fed may continue conducting repo operations but on a smaller scale and in
pursuit of specific public policy goals.
266
On the dynamics of such accommodation and monetization, see Finance Franchise,supra note 16, at 1181-1183.

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3. Securitizations and Derivatives
Like the repo and commercial paper markets, securitizations andderivatives markets would continue to operate but on a smaller scale, and ina significantly less risky way, than they do today.
Securitization is a technique of pooling revenue-generating assets, suchas receivables or mortgage loans, and using the pooled assets as collateralbacking the issuance of debt instruments—“asset-backed securities” (ABS)or “mortgage-backed securities” (MBS)—to investors.267 Banks typicallysecuritize their loans to free up balance sheet capacity for further credit
extensions. To investors, securitization offers a valuable ability to buy bonds“structured” to achieve their preferred risk-return profile.268 And borrowers
generally benefit from the increased flow and lower price of credit.269 As the2008 crisis has shown, however, the complexity and opacity of highly
structured, often multi-layered, securitized products—especially once they
get deeply embedded in commercial paper and repo markets—are a major
source of risk to the stability of the financial system.270 It is, therefore, criticalto limit securitization’s potential to create or amplify socially undesirable
speculative trading.
The reforms outlined in this Article will help to achieve this policy goal.
The NDW conditionality would be an especially potent lever in this respect.
Thus, to limit direct access to public subsidy, the Fed could exclude all ABS
from its definition of NDW-eligible collateral. Under this regime, QLIs
would still be able to obtain low-cost funding for the underlying loans thatmeet the Fed’s NDW conditions—and to securitize their riskier “nonqualifying” assets in private markets. Without public subsidy, securitizationtransactions would be subject to market discipline. ABS investors would haveevery incentive to conduct due diligence on the underlying asset portfolios,
thus actually performing their presumed information-producing, valuation,and monitoring functions. This should significantly reduce the size of private
securitization markets and lower the overall levels of non-transparent risk andcomplexity in them. Diminished demand for ABS issuances as a result of
267

Finance Franchise, supra note 16, at 1175-1176.
Ability to use ABS as collateral in repo transactions further increases their value toinstitutional investors.
269
See Steven L. Schwarcz, The Alchemy of Asset Securitization, 1 STAN. K. L. BUS. &FIN. 133 (1994).
270
See Larry Cordell, Greg Feldberg and Danielle Sass, The Role of ABS CDOs in the
Financial Crisis, 25 J. STRUCTURED FIN. 10 (2019); Larry Cordell, Collateral Damage:Sizing and Assessing the Subprime CDO Crisis, Fed. Res. Bank. of Philadelphia Working
Paper
No.
11-30/R(2012),
https://philadelphiafed.org/-/media/research-anddata/publications/working-papers/2011/wp11-30R.pdf. For a comprehensive analysis of thesystemically destabilizing rise of “private-label” securitizations, see ADAM J. LEVITIN ANDSUSAN M. WACHTER, THE GREAT AMERICAN HOUSING BUBBLE (2020).
268

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parallel downsizing and de-risking in repo and commercial paper markets,
discussed above, would further contribute to these trends.
Derivatives markets would undergo similar changes under the proposed
regime. Derivatives are contingent claim contracts that determine
counterparties’ payout and other rights and obligations by reference to some“underlying” value.271 Historically, derivatives were used as tools of hedging
risk. In the years leading to the 2008 crisis, however, bespoke derivatives
markets grew dramatically in size and capacity to generate undetectedfinancial risks. Regulatory expansion of U.S. banks’ permissible derivatives
activities272 and the 1999 repeal of the Glass-Steagall prohibition on theirability to affiliate with non-bank financial firms were major drivers of thisgrowth.273 The subsequent wave of conglomeration and consolidation in thefinancial sector has led to the emergence of global derivatives dealer-banks,
able to use their access to public subsidy to underwrite vast amounts of risky
speculative bets.274 In the wake of the 2008 crisis, Congress sought topreclude insured banks from dealing and trading in derivatives, but these
efforts were later substantially curtailed as a result of industry lobbying.275
Once banks lose their “special” status as monetary institutions, however,the principal economic and regulatory incentives for organizational affiliation
with banks will disappear.276 Derivatives dealers would not be able to take on
as much risk as they do under the current system, and their diminished riskbearing capacity would affect both the quantity and the quality of theirderivatives “books.” The fall in their clients’ demand for risky derivatives
would further decrease the overall volume of speculative trading inderivatives and related markets. In short, these markets would become what
they ought to be: relatively small and sophisticated private markets forprudent and appropriately priced risk management products.
4. Securities Firms
The proposed restructuring of the Fed’s balance sheet would also alter the
structure and dynamics of broader capital markets and securities firms
271

See generally JOHN C. HULL, OPTIONS, FUTURES, AND OTHER DERIVATIVES (9th ed.,2014); R. STAFFORD JOHNSON, INTRODUCTION TO DERIVATIVES: OPTIONS, FUTURES, AND
SWAPS 1–10 (2009).
272
See Saule T. Omarova, The Quiet Metamorphosis: How Derivatives Changed the“Business of Banking,” 63 MIAMI L. REV. 1041 (2009).
273
See supra note 28.
274
Thus, a common practice within the FHC structure is to have securities firms enter
into derivatives trades with hedge funds and other clients and then mirror the same tradeswith their affiliated banks, which end up holding the exposure on their balance sheets. This
intra-group arbitrage significantly lowers the cost of derivatives trading and dealing to theFHC. See Finance Franchise, supra note 16, at 1196-1197.
275
Id. at 1197-1198 (describing the “swap push-out” provisions of the Dodd-Frank Act).
276
See supra Part V.A.

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operating in them as broker-dealers, investment bankers, asset managers,derivatives dealers, and other “intermediary” types.
By performing multiple roles in various transactional contexts, securities
firms effectively drive the functional integration of banking, shadow banking,and long-term capital markets. Today, securities broker-dealers provide large
amounts of margin financing for their trading clients, such as hedge funds,
enabling them to leverage their positions across a wide variety of financial
assets.277 They also structure and deal in complex OTC derivatives, pool andsecuritize multiple layers of loans and other credit products, and act as repo
lenders for their clients.278 Dealer-firms finance the bulk of these activities
by issuing commercial paper and borrowing cash in repo markets, often byrehypothecating their clients’ securities.279
In short, securities dealers continuously fuel the ever-increasing volumesof trading in secondary financial markets—and the accompanying growth in
the system-wide levels of leverage, risk, and interconnectedness. As
emphasized throughout this discussion, the critical factor enabling securities
firms to conduct these activities on such a massive scale is their institutional
affiliation with federally-insured banks.280 Through organizational
attachment to banks, securities dealers gain access to—and a significant
degree of de facto control over—the flow of the sovereign public’s full faithand credit powering the financial system.281 In an important sense, this makes
securities dealer-firms the quintessential rogue franchisees.282
Recent attempts to reinstitute the Glass-Steagall regime of formal
separation between banking and securities firms proved unsuccessful, in part
because of their somewhat anachronistic appeal to the past.283 The reforms
outlined in this Article, by contrast, would help to achieve the same
substantive result indirectly, by fundamentally reshaping the basic dynamics
of the financial market from within. Simply taking away private banks’monetary function, in the name of digitization and financial inclusion, willend their currently privileged position in the financial system—and remove
the presently over-powering incentive for securities firms to seek direct

277“Margin trading” is the practice of borrowing money to purchase securities or otherfinancial assets, which are then used as collateral securing the loan extended to the trading
account holder by the broker-dealer. See Randy Frederick, Margin: How Does It Work?
(Mar. 13, 2020), https://www.schwab.com/resource-center/insights/content/margin-howdoes-it-work.
278
Finance Franchise, supra note 16, at 1193-1201.
279
On rehypothecation dynamics, see sources cited supra note 260.
280
See supra Part V.A.
281
Finance Franchise, supra note 16, at 1194-1196.
282
See supra notes 28-31 and accompanying text.
283
Omarova, supra note 224, at 137.

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institutional affiliation with banks.284
No longer being able to tap into the public subsidy would directly affectsecurities dealers’ capacity both to take on highly leveraged proprietary
positions and to enable leveraged investing by their clients. As noted earlier,margin loans would not be eligible for the NDW funding.285 Without abanking affiliate as the captive source of credit, the dealer-firm would be
limited in its ability to funnel large amounts of low-cost funding into its
clients’ margin accounts. The overall tightening of the repo and commercial
paper markets, discussed above, would further constrain securities firms’
access to cheap financing. Diminished supply and increased cost of funding
would force securities dealers to scale back their trading inventories, risk
exposure, and overall leverage. Among other things, that would lead to asignificant fall in speculative trading by hedge funds and other entities thatcurrently rely on leveraged financing provided by securities firms.
In addition to these institutional constraints, private actors’ ability toengage in socially harmful speculation would be curtailed as a result of thebroader structural reforms outlined above. Thus, the Fed’s new marketmaking operations—OMO Plus—would effectively preclude many
opportunities for profitable short-term gambling in financial markets.286 The
creation of the NIA, on the other hand, would expand the menu of productive
long-term investment options available to large institutional investors, thus
diverting their money away from risky assets and directional bets.287
In this environment, securities broker-dealers and asset managers wouldcease being predominantly and necessarily scale-based businesses, asmeasured by their balance sheets or assets under management. Instead ofleveraging their credit-generation capacity and market power, these firms
would go back to competing on the basis of their superior risk assessment andmanagement capabilities and ability to serve their real-economy clients’needs efficiently and nimbly. In other words, they would revert to their
original business model of relational, skill-based investment advice,
securities underwriting, and transaction facilitation.288 And most of theirbusiness would re-focus on primary markets for capital, where theirintermediation services would be more directly conducive to long-term
growth of the U.S. economy.
It is difficult to foresee all of the potential implications of this shift for the
structure and operation of capital markets. It is reasonable to expect, for284

See supra Part V.A.
See supra Part IV.A.1.
286
See supra Part IV.A.3.
287
See supra Part IV.A.2.
288
See ALAN D. MORRISON AND WILLIAM J. WILHELM, JR., INVESTMENT BANKING:INSTITUTIONS, POLITICS, AND LAW (2007).
285

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instance, that many securities firms would choose to operate as traditional
partnerships.289 At the same time, technological changes may enable theemergence of new patterns of organizational and functional integration in thefinancial industry. These developments would require careful examination
and appropriate policy responses, as they arise.
For now, the key is to show that the proposed restructuring of the Federal
Reserve’s balance sheet would fundamentally alter the systemic dynamics offinance. Eliminating private banks’ deposit-taking function and giving the
Fed new asset-side tools of shaping economy-wide credit flows, as discussed
above, will dramatically reduce the levels of speculative activity in secondary
markets for financial instruments. It will, accordingly, render financial
markets less risky, less complex, and more manageable sites of private“intermediation,” as opposed to unauthorized credit-generation. The precise
size and composition of these markets will depend on the supply of, andactual demand for, private financing of productive economic enterprise. It
will stop being a function of non-banks’ ability to tap into the full faith andcredit of the United States. In that sense, the People’s Ledger will simply
restore the traditionally central role of private ordering and risk-taking inprivate finance. It will return the markets to their original state of “freedom.”
CONCLUSIONAs stated at the outset, this Article is both a reform proposal and a thought
experiment. It offers a blueprint for reshaping the basic architecture anddynamics of modern finance. Using the creation of digital-dollar
FedAccounts as its starting point, the Article constructs a coherent set ofstructural reforms aiming to make the financial system more inclusive,
efficient, and stable. It advocates a comprehensive update of the Federal
Reserve’s balance sheet—the nation’s core economic ledger—to maximize
its structural capacity to support productive economic enterprise, in the longterm interests of the American people. In effect, it re-imagines the role of acentral bank as the ultimate public platform for generating, modulating, andallocating financial resources in a modern economy—the People’s Ledger:
Needless to say, many details of the reforms envisioned here require
further thinking and analysis. The proposal will undoubtedly invite questions
and criticisms this Article does not claim to preempt. The Article’s goal is
not to repackage familiar prescriptions but to expand the boundaries—and to
sharpen the focus—of the currently fragmented public debate on what
“democratizing finance” means in today’s complex world.
Doing so is especially urgent in light of the ongoing digitization offinance, which includes rapid proliferation of privately-issued digital money
and privately-run digital payments systems. Notwithstanding their rhetoric of289

Id. at 15-16.

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democratization, these technologies threaten to undermine the fundamentalbalance of the sovereign public’s and private actors’ relative powers and rolesin the financial system.290 As decades-old institutional arrangements comeunder an increasing pressure, what replaces them becomes a matter of utmost
public policy importance. This Article offers a unified set of structural
solutions to this all-important structural challenge.

290

See, generally, Saule T. Omarova, New Tech v. New Deal: Fintech as a Systemic
Phenomenon, 36 YALE J. ON REG. 735 (2019); Saule T. Omarova, Technology v.
Technocracy: Fintech as a Regulatory Challenge, 6 J. FIN. REG. 75 (2020).