Morgan Ricks on Money as Infrastructure and Bank Regulations

Morgan Ricks is a law professor at Vanderbilt University where he studies financial regulation. Between 2009 and 2010 he was a senior policy advisor and financial restructuring expert at the US department of the Treasury where he focused on financial stability initiatives and capital market policy. Morgan joins the Macro Musings podcast to discuss his new paper, ‘Money as Infrastructure.’

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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Morgan, welcome to the show.

Morgan Ricks:   Great to be here, David.

Beckworth: It's fun to have on. You always have very interesting if not provocative things to say about money and you bring both a legal and a financial perspective so it's fun to have you on the show. And then your new paper Money as Infrastructure, presents an argument for the regulation of banking I had never seen before. So it's very fascinating. I can't wait to get into it, but let's begin our show by first talking about something you bring up early in the paper. And that is the two paradigms of banking and its implications for regulations. What are they?

Ricks:    Yeah, so I think this'll probably be familiar and at least at some conceptual level to a lot of your listeners, at least those who have studied banking or have a macro background. So, I say that there's essentially been two competing paradigms that have really dominated understandings of banking and its regulation. The first is what I call the intermediation paradigm. And this has really been the dominant one, I think, certainly in recent decades, and it understands banks to be mostly in the business of taking funds from depositors and then lending those funds out. So this is just a classic financial intermediation function. The other paradigm, which was certainly dominant in the 19th century and I think also, and the early 20th century is what I'm calling the money paradigm. And it sees banks really is distinctively monetary institutions. And that means something more than just offering payment services.

Ricks:    It means that banks augment the money supply. And so rather than seeing banks as entities that take funds and lend them out, it sees banks really as issuers of 'funds.' And of course, that's both a familiar statement in the sense that I think every textbook on macro or on money in banking presents banks as entities that augment the money supply. We're all familiar with the classic money multiplier model that we see in the textbooks. It's not something that's unfamiliar, but I do think it's the case that the intermediation paradigm has really dominated. The way people understand banks in terms of both academic theory. The modern models of banking within economics are really dominated by the intermediation paradigm. And within regulation, I think the intermediation paradigm starting probably in the '80s, really began to take hold and take predominance within the US bank regulatory agencies. I think that had a lot of implications for how regulation has changed over recent decades.

Beckworth: And you mentioned in your article, they're not incompatible, but they do have some tension with each other before we get to those, just to flush it out a little bit more, someone who says a bank lends out reserves is taking the inner mediation perspective, right? They see it as connecting the positives and borrowers. And then another view you often hear is, well, bank makes the loans and then they go look for the reserves. So they're in the business OF making loans, which create deposits, creates the money. And that's the money view, right?

Ricks:    That's one way of putting it. I mean, I know there's in the blogosphere over the last decade and other contexts, there have been big debates about these issues and I think a lot of times they've turned into kind of semantic debates. And I want to avoid getting into semantic debate to the extent possible. But I do think what is distinctive about banks is that they augment the money supply and that bank regulation traditionally was focused on that. And that was central to how we organized our thinking about and organized the structure of bank regulation. And that's really not as true as it used to be. And I think that's because of a shift kind of subtle but important and consequential shift in thinking about what a bank is.

Beckworth: Yeah. So just a few more thoughts on this. The intermediation paradigm I think is useful when you want to think about interest rates, right? You're connecting borrowers, savers that this is where you get this whole notion of a natural interest rate. There's a desired amount of savings, desired investment. They come together and you can think of banks playing a role and that's often stressed. At least that's part of the story. The other money paradigm that was very useful because it takes money seriously. I mean, this is what you get into your article. It really focuses in on the fact that money's this one asset that's on every exchange in the marketplace. No matter what you're buying or selling money is always half of that transaction.

Ricks:    Yeah, that's right. I mean it's a distinctive type of financial asset. And I kind of catalog some of the shift from the money paradigm to the intermediation paradigm over the course of the 20th century. And I think it had in part to do with developments in the late 19th and early 20th century when bank notes, which were the predominant liability of banks, of course, in 19th century began to be supplanted by checkable deposits. And one way of thinking about that is that was just a transition of form and not one of substance. So a deposit account of course is a demandable claim putable to the bank at par that functions as money. That's what a bank note was.

Ricks:    And so one way of thinking about this is a checkable deposit account, a transaction account is just an uncertificated banknote. And of same way that lawyers or commercial lawyers will talk about uncertificated securities as opposed to certificated, there's no difference in economic substance between the two. It just has to do with the mechanics of transfer and determining ownership. But if we think about deposit accounts as uncertificated bank notes then it forces us to think a little more about bank note issuing banks. I mean, no one would've described a bank note issuing bank in the 19th century as being in the business of taking funds that were lent out. Right? And they were issuers of funds and the tangible nature of bank notes made it much more conspicuous.

Ricks:    And I think part of the reason the intermediation paradigm took hold was the shift to transaction accounts. Had a subtle but important effect on the way we think about what a bank is and maybe we shouldn't have shifted our thinking quite as fully as we did. And I describe another reason I think that this happened which was just the rise of finance as a discipline, as an academic discipline. And one of the cornerstones of modern finance is that absent taxes and other distortions, financing structure really is unimportant.

Ricks:    It doesn't affect the firm's value. And I think that is, while it's an interesting way of thinking about corporate finance is certainly true in a lot of respects, but banks are somewhat distinctive. And maybe we should be a little bit cautious about applying that kind of framework to banks. But in any case, I think those two things, the shift away from tangible bank notes as being monetary liabilities of banks. And the rise of finance as a discipline that affected the way we thought about the right side of the balance sheet in general. Those two things have really, really impacted profoundly the way people think about banking.

Ricks:    I mean, the 19th century when I'm calling the money paradigm was just universal. I mean, and I document a lot of this in the early part of the paper in the footnotes, the degree to that, that was just common knowledge and everyone thought about banks in that particular way. And now it's really receded in importance.

Beckworth: That's interesting you mentioned in your paper that the national banking system that came in during the civil war, the federal government got back into the business of money and it started chartering national banks. And one of the things that it did is it imposed a tax on state bank notes, kind of kick them out of business. But based on what you just said, one of the unintended consequences is, is state banks they later emerged issuing checks because they couldn't issue bank notes. So kind of an unintended consequence of the national banking system is this, it helped contribute in this shift in paradigms, right?

Ricks:    That's true. It was all incidentally, a similar story, amazingly played out in England before it played out in the US but the central story of bank regulatory history has been seeking to confine the issuance of 'money' whatever we call that. And this started in England just very soon after the creation of the Bank of England, England sought to restrict entry by others into banknote issuance. And it did so successfully. But in the very late 18th century in England, checkable deposits started to become a big deal. And so sidestepping of restrictions on banknote issuance is one reason for how deposit accounts came to be at the time so prevalent. And the same story as you just mentioned, played out in the US with the National Bank Act in 1864. We imposed a form of entry restriction, which was in the form of a punitive tax essentially. But it was designed to really nationalize money creation in the sense that we were going to get states out of the business of creating entities that were issuing money at all and all money was going to be issued by these sort of franchisees of the federal government.

Ricks:    And it was unsuccessful precisely. This was a classic instance of what we would now call financial regulatory arbitrage to the state banks to shifted to checkable deposit accounts.

Beckworth: I would argue they also had an ulterior motive in setting up the national banking system. One argument was, let's have a uniform currency, let's get the federal government back in. But part of that setup was you had to have federal government debt back in your notes. Why would they want that in 1864? Well, they're fighting a war and need some demand for the debt they're issuing. So I'm sure there's some public choice arguments as well as there was some people who genuinely wanted to unify the currency. But anyhow, it's interesting story you bring up in your paper, there's this continual regulatory arbitrage. More recently you talked about how banks were bleeding in the 1970s, '80s because of high inflation and fixed interest rates and money market funds emerged in that period to take deposits. So there's a continual race against the regulatory structure for money creation from different types of firms. Is that right?

Ricks:    Yeah, that's right. I mean, I see, that of course is another famous story in banking history is how the rise of money market funds was an essentially an around and around regulation of bank deposit interest rates under regulation Q. And creating things that were serving the function of deposits, but were not called deposits. Interestingly less well known is the fact that the SCC when very early in the rise of money market mutual funds was concerned that maybe these actually would be deposits for purposes of federal banking law. So federal banking law says you can't have deposit liabilities unless you have a banking charter, right? This what I called elsewhere, the first law of banking. It's the way we do entry restriction into banking is to say deposits are off limit unless you have a banking charter.

Ricks:    But that begs the question, what is a deposit exactly right? What are we restricting entry into? And amazingly, there is no definition of deposit for purposes of entry restriction in federal law. And so the SCC with the money fund industry came up said, are these entities violating 12 USC Section 378, which says you can't have deposit liabilities without a banking charter. Because of course they did not have banking charter. And the SCC wrote to the department of justice to ask for a legal opinion. And justice came back and opine this is fine because these are equity and they're not debt, which was a pretty formalistic way of answering the legal question. And of course, as we all know, money funds turned out to be susceptible to the same kinds of instability problems that deposits and of course bank notes before that were susceptible too. So it's the same funding model serving the same function. And it raises the same problems.

Beckworth: In our previous interview you stress that point a lot that the run on the shadow banking system was run on money accounts effectively. And so the question is, how do you deal with that? In fact, your view is that most financial crisis, modern financial crisis are related to run on these accounts that effectively our money.

Ricks:    Yeah, that's right. I mean, and this is sort of a Gary Gorton and others have said some more things. I would put it maybe a little more forcefully than you did. Which would be to say that the main risk that the financial sector poses to the real economy has to do with the instability of what you might call private money. Money in a slightly broader sense than just transactable things, but really short-term debt that's serving a monetary function. And so on the unraveling of private monies is one of the main sources of acute macro economic disasters certainly in US history and also I think it's true to some extent abroad. And so in so far as we're concerned about the propensity of the financial sector, shocks in the financial sector to cause acute macro economic disasters, mostly with that is about is runs on money. So that's one of the central themes of my previous work. Although in this particular piece, I'm not as focused on the instability point, which I've addressed in detail elsewhere.

Beckworth: Listen to the previous show folks and you'll get the full treatment on that.

Ricks:    Or buy the book.

Beckworth: Buy the book too. I'm sorry. Absolutely. I've got both the hard back and the paper back. Thanks to you. So one last thing I want to stress on these two paradigms. Going back to the financial intermediation paradigm and think regulation and the money paradigm is that you see them in the conduct of monetary policy, at least I do. And I you see it both in how scholars view the Great Depression and how things were done and viewed during the great recession more recently. So let's go to the Great Depression, the Great Depression and Milton Friedman saw this as a monetary phenomenon, into money supply collapse. And the fed didn't do enough.

Beckworth: It was as destruction of this assets, that transaction asset across the economy, and it would cause problems. Ben Bernanke in a very famous paper look back at the Great Depression, and he saw it as a financial intermediation problem. It was a shock that banking that caused the great recession and they had different emphasis. Friedman focuses on supply, the production supply of money. Bernanke focuses on the collapse in financial intermediation. Move forward to the great recession and you have QE as one of the tools the Fed use to address the recovery and to get us back to a full healthy economy.

Beckworth: And the way QE was set up, it was focused on the asset side of the central bank's balance sheet, which is the financial intermediation view. Where the monetarist would say, no, no focus on the liability side, where you create the monetary base, you create money. And Bernanke actually was very clear about this in the one speech he said, "Look, we're not like Japan's Q." Japan's QE was actually focused a little bit more towards creating reserves, creating money. He goes, "We're not about that. We're about tinkering, credit spreads, suggesting supply of safe assets out there." So I think-

Ricks:    Exactly I remember that speech and he used a different terminology for Japan's QE than he used for ours. I forgot the specific terminology he used, but he was precisely trying to make that exact point.

Beckworth: Well he called QE credit easing.

Ricks:    Credit easing. That's what I was trying to remember. Yes.

Beckworth: They did more money easing and we're doing credit easing.

Ricks:    Yes, that's it.

Beckworth: And I think a lot of what they did related to that, why they paid interest in excess reserves at least initially was so they could kind of not worry about the liability side and just focus on getting the right mix of treasuries and mortgage backed securities in the economy and that will lower credit risk and get the economy going. And I find that fascinating because it's the same spirit of this paradigm that you're sharing it in terms of how we view the regulation of banks. Correct?

Ricks:    Yeah. I think that's right. And look, I'm not trying here to say the intermediation paradigm is wrong and the money paradigm is right. Or I think they can coexist and probably should coexist in our minds. I think we as a regulatory matter have given insufficient attention to the money paradigm, certainly in recent decades. But the way I think about, look, I'm no scholar with the Great Depression. I understand that the International Gold Standard had a lot to do with things. I'm sure that Bernanke is right about constriction of credit and I found that to be a really enlightening point of view. I think that's the flip side of the coin of bank panics is that when holders of low powered money, let's call it, are exchanging it for high powered money, that it stands to reason that banks need to be liquidating their portfolios and trying to meet redemptions.

Ricks:    And they are therefore going to both reduce their own new credit extensions and they're going to drive down the price of bonds because they're dumping on the market. And that means the yields are going up. And so newish ones is going to be very difficult. So I don't necessarily then we need to, at least in my own mind, I don't know that I think it's important to draw some really sharp distinction or choose between those things. But I see them as really two sides of the same coin.

Beckworth: Fair point. And again, I want to stress what I said earlier that the intermediation do you think is important. When you think about fundamental interest rate, the natural interest rate, you think about, what drives that. And that's kind of the built in or baked into the New Keynesian. New Keynesian view. They view monetary policy as differences in interest rates, difference between the Fed's target rate and the natural rate where a monetarist would focus more again on the liability side of the Fed's balance sheet. So you're right, they can complement each other. But I do think, I'll put a stronger foot forward than you on this point. Then we'll move on to your-

Ricks:    I've been reading the market monitors for years, so I know something about how this argument goes.

Beckworth: Let me just say this, that I do believe QE was partly less effective than anticipated because there wasn't enough focus on the liability side of the Fed's balance sheet. There wasn't enough focus on money. And so I think you can use them properly in the right context together, but I do think you can air to one side or the other to a fault. But with that said, let's move on to your paper, enough macro debate. Let's talk about the implications of this intermediation paradigm versus the monetary policy paradigm when it comes to regulating banks.

Ricks:    Right. So I think the important thing to understand is that the two paradigms really start from two different institutional baselines is one way of putting it and sort of one of the ways I put it in the introduction of the paper. So if you really are devoted to the intermediation paradigm, you tend to think of banking as something that sort of arises out there. It's a private activity that is then regulated and one would want that regulation under this view to be as light handed as possible, to avoid distorting private market outcomes. And so the idea under this view that say you should regulate deposit interest rates, well that's anathema to the intermediation paradigm. That's deposit interest rate should be determined by market forces. Entry restriction is disfavored if you favor the intermediation paradigm for similar reasons, right?

Ricks:    We don't want to have any limits on competition in this area. And so, and who gets access a bank account is a matter of private concern and that's not as much a matter of public concern. I think if one starts from the intermediation paradigm, which really envisages banks as private actors and we're of course regulating them because they raise problems and stability being the foremost of the problems. But we want that to be as non-intrusive as possible. The money paradigm, I think if you take it seriously and want to really think about bank regulation seriously by way of the money paradigm, you really start from a different institutional baseline. Which is not a private activity that is then regulated, but more of an intrinsically public activity that is then being outsourced.

Ricks:    So you begin to see a bank charter is sort of a franchise or outsourcing of what might be called an intrinsically public function. So the institutional baseline here is direct public provisioning. We can imagine a world just for purposes of a thought experiment, I suppose, and which we just all held our transaction accounts at the central bank. Right. And there was no private money creation. This was all a public function, just as the public monopolizes, just as the central bank monopolizes the creation of dollar bills. It could also monopolize the creation of account money as I sometimes call it.

Beckworth: So I can have a checking account at the Fed.

Ricks:    You would have a checking account at the Fed and you actually it's funny, I've been talking to various people about this including Luigi Zingales recently who was here and we had a long conversation about it. Not to get too sidetracked on this, but during the say the 1930s or for decades thereafter the idea that everyone would just hold an account at the central bank wouldn't have really made sense because all payments essentially involve physical payment media in some form or fashion. Whether it was actual delivery of federal reserve notes or whether it was a transfer of a physical check.

Ricks:    Well, now we're in a world where physical payment media are very, very small part of the overall transactional environment and are kind of going the way the Dodo bird. And in such a world, it's not hard to imagine with modern telecommunications infrastructure, with smartphone penetration being what it is, a world in which we wouldn't need to really transfer physical payment media of any sort in ordinary transactions. And that raises the prospect of everyone. I mean, realistically, somewhat of everyone just having an account at the central bank. And most of us don't interface with our banks physically that much anymore. I don't go into a bank branch very often at all and hardly even go to ATMs anymore. So suppose we all held our account just for the sake of argument at the fed and the fed was really monopolizing account money as I call it, just as it's monopolizing paper money.

Ricks:    Then ask the question, what determines the interest rates you would receive on your account? Would that be determined by 'market forces?' Well, of course it would not be determined by market forces. Any more than today and the interest on reserves, that the central bank does pay to commercial banks is determined by market forces. That's a question of monetary policy, to be determined by macroeconomic considerations that the fed is taking into account. So in the insource setting interest rate controls on your account money is a question of monetary policy and not a market question. Likewise, with respect to access say to bank accounts if the central bank were offering bank accounts, it might really favor a universal service as opposed to having everyone be necessarily paying the marginal costs of their account.

Ricks:    I mean, a lot of government services are offered below marginal costs. You could think about postal services in remote areas, for example or a variety of other services that the government offers. And I think there are good public policy reasons for those decisions. And so when you start from a money paradigm, if you're thinking of this as an outsourcing of a bank charter, essentially an outsourcing of a public function. You start by thinking about the insource setting and then asking whether anything necessarily needs to change when you outsource. And this is where things get a little bit controversial, I think in the paper, is because I argue that there's no reason in principle why you need to give up control over the payment of or the rates of interest paid on deposit accounts once you've outsourced money creation to private banks.

Ricks:    If you're starting from the money paradigm within which insourcing is the institutional baseline that you're starting with. And so I'm envisioning a world in which a regulation Q type regime, except one in which we're adjusting the right pay on deposits in accordance with monetary policy. Is something we can at least entertain as an idea. And of course that raises questions about bank profitability and other things that I deal with on the paper [crosstalk 00:25:52].

Beckworth: National crisis.

Ricks:    Yeah, national crisis, of course, in inflationary environments and so forth. But I think within the academic literature and I think in the policy world, there's pretty much universal consensus that doing away with controls on deposit interest rates was a good thing. And I'm in this paper questioning at least raising questions about whether it didn't make sense after all.

Beckworth: So you've presented this paper before, right? Did you get like oohs and gollies about it?

Ricks: Yeah. So-

Beckworth: What's been the reception? Because it is at some level pretty radical.

Ricks:    Yeah. I haven't had any takers in terms of the specific argument about deposit interest rate controls. I haven't had any takers, but I've had some really nice private... Well Luigi commented on it in a seminar and he thought some aspects certainly if the framing were interesting. He didn't really get into the deposit interest rate control argument specifically. And so I don't really know what he thought about that, but it's been pretty well received and, but also received as a provocative and sort of coming from left field in some ways.

Beckworth: A good academic writer. I retired. Great ideas. Well, I mean, the thing is what I appreciate about it, and I have some questions too, but what I like about it is this framing that takes money seriously. Going back to what we've mentioned earlier, and I just want to flesh out that the point you're making about money creation as being kind of a public good or a public provision, that goes back to the idea that money is this important asset, unlike any other asset, right. That's being used by everyone. And that therefore it's more than just selling a stock or buying a car or a house. It's very and fundamentally different. And that's why you see it in addition to the stability issues. Is that the kind of a key argument for what you're doing?

Ricks:    Yeah. I mean, it's public. In other words, money has been the creation of a functioning monetary system has been an important aspect of statecraft for a very long time. And well-functioning monies usually I think pretty much always. I mean, I'm sure George Selgin and others would pick fights with me on this, but my reading of history and my intuition tells me that you really do need the government involved in money in some form or fashion. And look, a lot of laissez-faire oriented people have agreed with that. I mean, including Milton Friedman and James Buchanan wrote a paper around the time of the crisis in which he suggested that the market can function with monetary anarchy. And I interpreted that to be an assertion of the fact that the government does have a role to play here in the monetary framework.

Ricks:    In a way that it doesn't necessarily have as much a role to play in the securities markets other than of course regulating for maybe disclosure and fraud and these kinds of general market norms that we want people to abide by. But money creation is really distinctive activity that's separate and apart from the issuance of securities in some kind of generic sense. So that's a long winded affirmative response to your question.

Beckworth: Yeah. So it's great that you're taking money seriously. So let me put on the George Selgin hat since you've mentioned him and Larry White and some of the other scholars who are classified as the free banking school. And they would point to... And I want to hear your answer to Scotland's free banking system, relatively stable. Canada up until I think great depression had a relatively stable, even in the US, the US had a... It's not really a true free banking system, but you mentioned in your paper actually there was period where standard laws you could incorporate a bank. And I know there's been work done that said some place like Michigan was horrific, that kind of the bad name that free banking has in the US is kind of like the Michigan Wildcat banks. But the State of New York had a very successful for banking system. So how would you reply to those folks who say, look, it can be done if just done right.

Ricks:    Well, with respect to the US system, which I know a lot better than Scotland and Canada. And I think George and others agree with this and I think I've seen him write about the US free banking era, which was between the demise of the second bank of the United States and the creation of the national banking system that we talked about earlier. It's sort of the mid-19th century. Free banking laws in the US we're not really laissez-faire, right? I mean, the idea was that banks, we would no longer have special legislative charters for banking. So you wouldn't have to go to the legislators smacked of cronyism and corruption. It was also a burden on legislators to have to... Even decades earlier, you needed a legislative act for even any kind of corporate charter. General incorporation acts started to be enacted around the 1820s, if I have my history right.

Ricks:    But banking was still something where was perceived as special. And so up through until say the mid-1830s in every state, you still needed a special legislative back to get a banking charter. The free banking laws were designed to turn that into more of an administrative function where we weren't going to require a special legislative act. And anyone who came in and met the requisite standards would be able to get a bank charter, but it was not laissez-faire. Right. So I think in all of the state laws you had to, it was very much like the National Bank Act that you referred to earlier. You had to post collateral in the form of bonds issued by the state in order to issue bank notes. And so that was not a laissez-faire system. It was actually in some ways a very onerous form of portfolio constraint.

Ricks:    So I don't think we can call that laissez-faire. And draw any interpretations about true laissez-faire banking from the free banking era. Scotland and Canada. And boy, it's been a little while since I looked at these closely. But Scotland for the late 18th and early 19th century had a few big banks and well, you know what, I'll probably butcher this specifics of, I tried to do. There's the Royal Bank of Scotland and the Bank of Scotland. And they were created they had some special privileges and I'm not completely sure. And they also, as I understand it, has special relationship with the Bank of England.

Ricks:    I think that George and others dispute this or have dug into the nature of this relationship. But the pushback I've seen on Scotland is that it really wasn't as laissez-faire as some people would like to suppose. But I can't give you any sort of definitive opinion on that. With respect to Canada, I think I know it a little better maybe, but there was the bank of Upper Canada and the bank of Montreal. They were both dominated from their inception by the provincial governments and they received state support in the very late 19th and early 20th centuries.

Ricks:    I don't think we can really look at those as true laissez-faire systems either. So I sort of questioned whether the extent to which those two episodes were really truly laissez-faire. And of course, they don't need to have been really purely laissez-faire for them to sustain an argument that maybe laissez-faire banking would work. But I don't think we can interpret them as real vindications either.

Beckworth: Okay. Right now in the case of the US free banking system, you're right, it was more of a transformation to a rule of law versus the crony capitalists. Let's incorporate our friends, people we know, and I think that that's an important, even though it might be onerous on the portfolio, it creates predictability and minimizes the level of corruption. And I think what's interesting in your paper, these free bankers may roll rollover and hear this, but that you kind of spend that free banking structure, that thinking into your proposal we'll get into in a minute, right? This kind of there's a standardized kind of predictable process, right? Where they based on whatever that your design would be.

Ricks:    I suppose that's true, although, I am more favorable toward a form of entry restriction in banking. And that, I get into this a bit in part two of the paper where I wouldn't necessarily grant a bank charter to anyone who came along who met the requisite standards. I think a public convenience and necessity type of a standard is important in banking. And that's one of the parallels I draw that's a theme of the paper is that the similarities to what and the law is called regulated industries, network industries, common carriers, public utilities, those things are sort of grouped under the regulated industries umbrella, which economists tend to think of in terms of natural monopoly. And that framing and the legal structure of those industries has a lot of light that it can shed on banking.

Ricks:    And historically there was a lot of parallels between the two, including and rate regulation. Of course, the quintessential practice of public utility regulation is the regulation of rates. And I'm suggesting here that there may be a stronger rationales than a previous event supposed for regulating deposit interest rates. And so that puts you kind of in that domain of thinking about rate regulation and with respect to entry restriction, of course it's similar. Certificates of public convenience and necessity is in the legal world, what you need to acquire to enter one of the regulated industries. And those are not granted to any comer, right? There's inherently some regulatory discretion that goes into that. And I think about banking more through that lens. So I think I'm not quite as free banking as the free bankers I what I want to say.

Beckworth: Okay. Many questions come to mind, but I want to hold off on some of them until we get to your specific proposal. Instantly comes to mind among other things, certificate of needs. For example, if you want to get an MRI machine, there's all kinds of pushback as well. The other people who own MRI machines don't want the competition. And so I think you'll address that later when you get to the actual proposal. Just a thought though, your hypothetical experiment, we've actually talked about this where on the show before we've had guests on talking about. There is kind of a gradual incremental move toward having a checking account at the federal reserve or at a central bank in general.

Beckworth: There's been a progression toward that. We see that with the opening of the Fed's balance sheet to other financial firms that exist before. Even the one of I think is Chicago Mercantile Exchange or one of the big exchanges in Chicago has access to the Chicago Fed the balance sheet through that. Also we see those things happening. So I think we see some incremental movement in that direction. We can debate whether it's good or bad, but I know members of the FMC have brought this issue up in their discussions as well. Do we want to shrink the balance sheet or not? Do we want to have a smaller footprint or not? And the more we opened the balance sheet, in fact, some of the issues you could bring up later in the paper why is an interest in access to reserves working as well as they intended because some firms have access to the balance sheet and some don't.

Ricks:    That's exactly right.

Beckworth: And it's arbitrage and is a lot of problems the way that it's set up.

Ricks:    Well, and in fact, I mean you speak of expanding access but part of, when they started paying interest on reserves, and I mean, you know this very well, but in late 2008 everyone sort of thought the interest on reserves rate would serve as a floor on the Fed funds rate. It would have to, right? Who would ever lend a reserve balance for less than they could get by risklessly just holding the reserve balance. And so I think a lot of people were kind of confounded by the fact that the Fed funds rate was remaining below the excess reserves rate. And of course, the answer to that is I think everyone accepts is that, well it wasn't just commercial banks that had access to the Fed balance sheet, right? The GSEs had accounts. This relates to the point you were making earlier about the kind of slow expansion of access to accounts at the Fed and the GSEs were not eligible and are not eligible, I believe, still to receive interest on their reserve balances.

Ricks:    And so that created this sort of wedge where you saw the Fed funds rate falling below the interest on excess reserves rates. But I think Bernanke I think essentially admitted that it surprised him. And I think that it surprised a lot of people. Even at the Fed, the Fed funds rate wasn't fully supported by the interest on excess reserves rates. Of course, broader money market rates have consistently fallen significantly below the Fed funds rate. And that's why they started the reverse repo facility itself, which is in a way-

Beckworth: It's another opening.

Ricks:    ... Another opening is exactly what I was going to say, right. So we have 100 money funds or whatever, that in essence are owning, have access to the Fed's balance sheet, right? They have access to Fed liabilities. And so we haven't gotten to the point where you and I can open an account there, but maybe that's down the road.

Beckworth: I mean, the danger, and I know some of our listeners will be thinking, "Oh my goodness, are we going to turn into China's state owned banks that have kind of nonperforming loans and full of crony capitalism?" That's the fear I guess if you nationalize something that maybe requires experience and all that, but let's hold off on that discussion. One thing I wanted to mention, I failed to this last point on opening up the Fed's balance sheet is that it's been done before.

Beckworth: I had J.P. Koning on the show and he talked about the Bank of England used to be, people had their own checking accounts. It used to be a private bank, I guess then it eventually became more public. But it wasn't that long ago that if you worked at the Bank of England, you could write a check on the Bank of England, sort of blows your mind. And they finally got away with it. And J.P Koning makes it a unique argument. He believes this could still exist. He thinks if you wanted a super safe checking account, you'd open one at your central bank. And then if you wanted banks with great online service and loans and mortgages, you'd go to traditional retail banking. He thinks they could coexist. I don't know. But that's his view.

Ricks:    Well, look, if you're paying the interest on excess reserves rate on all of those accounts that are held with central bank, you're not going to have a lot of people choosing to hold their account elsewhere unless they're able to match that rate. And I'm certainly not getting that rate on my BVA account these days. So the pass through issues become more acute in that world. If you're really opening it up. And if you're not saying the interest on excess reserves, I mean, it would be hard to justify, I think opening up the Fed's balance sheet to a broader set of the public than just the commercial banks. But also saying, well, only the commercial banks are able to receive interest on their excess reserves and no one else would be. I mean, it would be, I think, really difficult to justify, even on a theoretical basis, any reason for that. So that will create a challenge.

Beckworth: Political backlash.

Ricks:    Yeah. Yeah. Well, I mean, I think it should create a political backlash probably. I mean-

Beckworth: Well it is bad optics even now, right. Large-

Ricks:    I think it's more, I think it may be more than bad optics. I mean, I know people, I know experts who want to think of this as just an optical issue that we're paying whatever it is right now, a percent and a half on our large banks balances and what are the total size of excess reserves right now? Three trillion, whatever it is. And this is a significant amount of money that checks that are being cut, essentially. And the way we do monetary policy now, of course, not until 2008 was this the case. But the way that we do monetary policy is by cutting checks to banks and it is an optical issue, but also if we're not getting really good pass through on that, which is an issue we touched on earlier. Maybe it's more than an optical issue, maybe there's an efficacy issue. Maybe there's also a, for lack of a better word, a subsidy or favoritism issue that's more than simply optical.

Ricks:    And so that's one of my concerns about the way we've chosen to do monetary policy. In theory, it works great. And in theory it's just an issue of optics that you're paying interest on these accounts because it'll all pass through an arbitrage will work perfectly. But if it doesn't work so perfectly, then I think we have reasons to be concerned about the present structure of monetary policy implementation. That's my own view. I know that's a minority view among experts.

Beckworth: Well, Marvin Goodfriend, who was one of the first scholars to advocate a floor system, he to a surprise, you mentioned Ben Bernanke and he has proposed that the Fed either take the GSEs off of its balance sheet, remove the access, or pay them full interest in excess reserves. Now that's the thing is even if they did that though, I questioned-

Ricks:    It just solves part of the optical problem, right?

Beckworth: It does. But I'm not convinced that it would still solve the fact that there would be a spread between really low money markets. Even now, you'll get a one month treasury bill it's still occasionally falls below the reverse repo rate. So there's a lot of issues with the floor system. We've mentioned George Selgin, he's been on a --

Ricks:    He's been probably the most prolific person in writing about this stuff and very interestingly.

Beckworth: And he makes two points I think are fair. One is that the floor system to make it work, to make a sustainable has a natural bias to keep. Because that rate the interest in excess reserve rate is higher than market rates. It can create a bit of a drag. It has a deflationary bias is one point, his other point is increase distortions in banks. How they operate, what happens to their balance sheets and stuff. Well let's move back to your paper though. Interesting side discussion. Your paper comes at bank regulation that the same way we do infrastructure regulations. So there's three things that you mentioned that you do when you go to the infrastructure regulation, like utilities, you look at the rate, the entry, and then also the service, right? And you say, we should do the same thing when we regulated banks. So tell us about that.

Ricks:    Well, at least arguably. Yeah, I know this is provocative. And what I'm calling infrastructure regulation here it really fell out of fashion in the '70s and this is this mode of economic regulation. Used to be applied to much more expansively to broader portions of the transportation and telecommunications sectors. Specifically transportation is a good one to think about it. I mean, we used to do this for the airlines and for motor carriers and of course for railroads. And a lot of this was sort of phased out in the late '70s and early '80s at the federal level, but it's still persists in utility regulation at the local level. And so I think there's basically three pillars to this mode of regulation which are of course rate regulation, which we talked about a bit earlier.

Ricks:    Entry restriction, which we also talked about a bit earlier. And sort of goes hand in hand with rate regulation specifically, if you're going to hold some rates higher than they would otherwise be, you have to prevent cream skimming and that often and to prevent cream skimming, you need to restrict entry into the activity. And then the third, which is also related to the other two, is this idea of universal service, which is pretty prevalent in the regulated industries. In the airlines it used to be equal fares for equal miles is the standard we missed in the post officer earlier, equal fares for irrespective of distance traveled for letters. Telecommunications used to during the era of Mabel we had similar system of cross subsidies and between long distance and local phone service.

Ricks:    And so that really requires entry restriction because it's those cross subsidies that create the opportunity often for cream skimming. So these are the three cornerstones of a mode of regulation, which I'm calling here infrastructure regulation. And I think that they have something to teach us about banking. And so with respect to this question of monetary policy and doing interest on reserves, what I'm suggesting in the paper is rather than paying interest on reserves and hoping that it gets passed through, which is happening in perfectly. Why don't we just regulate if we're going to really think about a bank charter or a bank as a franchisee of the government. In other words, we're outsourcing a public function, then we could control deposit interest rates as a matter of monetary policy and as we're going to regulate the rates that banks are paying on their deposit accounts.

Ricks:    And so that's the old regulation Q idea. And it raises issues about profitability of banks, right? Either that rate being too high for them to earn a profit or too low such that they're earning extracting rents from the public. And my suggestion in the book... Excuse me, not the book, the article is that well if the government were doing this internalizing or the insource system before we think about outsourcing, it's earning all the revenue for money creation, right? There's seigniorage that it's gaining by virtue of earning more on its assets than it's paying on its liabilities. When we outsource to banks, we shouldn't have the public giving up that seigniorage revenue. And there's a significant literature in banking that talks about banks earning seigniorage from money creation because the pecuniary yield that they pay on their liabilities is quite low because there's a money and there's property associated with their liabilities.

Ricks:    Well, my argument is that that excess yield, that earnings really is a public asset and belongs to the public. And so I'm thinking about a bank here is in a sense, sharing some of its revenues with the public. And a bank should be paying overall a fair cost on its liabilities. And the difference between the fair cost of his liabilities and whatever it's actually paying to depositors, which in my system I'm imagining that the Fed is determining that amount in the conduct of monetary policy. That difference, that wedge should float to fiscal revenue of the government. In other words, this is really we're outsourcing kind of portfolio management function, but we don't want banks to be earning excess returns by virtue of having a banking charter. And so this turns into a system where it's more of a revenue sharing model.

Ricks:    And this puts you classically within the world of regulated industries and public utilities where the whole point is to set, in that case, you're setting a product rate that consumers are paying, but it's the same principle. You're setting that rate to allow the firm to earn a fair return on capital. And that's what rate making is about. And it's functionally the same in the system I'm describing here. And one of the side point I'll make about this is less this seem like something we could never rely on regulators to do. We're already in a sense of doing it because deposit insurance premium that banks pay to the FDIC since '91 have been risk-based, meaning keyed to the risk of the institution. And the idea is the FDIC is going to charge a fair premium for the put option that it's writing.

Ricks:    And so that valuation exercise is the same exact valuation exercise that I'm describing here. The difference is that in the world I'm describing, the fed would decide on deposit interest rates, commercial bank deposit interest rates, and the wedge between that rate and the fair cost of funds for the bank would flow to the government as fiscal revenue. Be essentially a quarterly fee, like a deposit insurance fee. But rather than just sitting in a fund that would be a component of government revenue, it'd be seigniorage essentially. So that was a little bit maybe longer than you want. But that's important. That's a way of thinking about the relation between traditional economic regulation and the way I'm thinking about how if we take the money paradigm really seriously. And think about a bank as an outsourcing of a public function. There's a real deep connection between the two that I think hasn't been really fully thought through.

Beckworth: So a bank would remit most of its earnings back to the federal government. I mean, how would it pay for operations, for maintenance, all those things?

Ricks:    I wouldn't say most, I mean and so the idea, I mean one way of thinking about this is suppose a bank were to replace all its money claim funding. I'm just going to use the term money claims. That can be deposit counts, but it can also be other types of really short-term debt that serve a monetary function. Well, there's a significant economic literature that shows on and money market yields are lower than you would expect based on an extrapolation of longer term treasury yields and Jeremy Stein and others called this a moneyness property, the short end of the curve, you just have deviate. It starts to be really cheap from the perspective of the issuer.

Ricks:    And that wedge between a fair longer term rate and the short term rate that they're actually paying. We can think of as an excess return from money creation. In other words, that is a seigniorage that they're earning in the same way that the federal seigniorage by earning more on its asset yields and it's able to then it needs to pay on its monetary liabilities. And so to the extent there is a wedge between those two, I'm saying that portion goes. They're piggy backing off of the public money system and that's really, that's a form of rent extraction from the public is one way of thinking about that. And that would in my world that wedge would flow back to the government as seigniorage.

Ricks:    And if you think about it and then imagine that the Fed's now controlling the deposit rate. So controlling that short term rate, well in the insource system from the perspective of just the central bank were doing all itself or when an increases that rate seigniorage goes down, all else equal, right? Because it's, it's paying more on its liabilities and that means it's remitting less to treasury. Well, in the world I'm describing where we've outsourced it, it's the same thing. If the Fed raises the administer deposit rate for commercial banks that they're able to pay on their liabilities, then that wedge gets smaller between the 'fair rate' and the administered rate. And so it reduces seigniorage in other words, it's the same as insourcing. We haven't really changed anything. We're just outsourcing something that the fed would otherwise be doing.

Ricks:    And so I do think that there's room for a revenue sharing arrangement here. And just to be clear, I mean, the deposit insurance fund over time it fills up right? And it gets fully funded. The deposit, the federal the FDIC. And what happened in I think it was about a decade before the recent crisis they really stopped charging deposit insurance fees because they were all full, right? The deposit insurance fund was fully funded. Well, that to me is just a pure subsidy. You're still insuring this thing and but you're not charging anything for it. You're writing essentially a free put option. And in my world we would've kept charging those fees and just remitted it to the treasury department as revenue, as fiscal revenue. So the functions involved of charging a quarterly fee that's based on risk is something we're already doing. We've been doing it since '91. I'm just saying that it really should flow to fiscal revenue.

Beckworth: Okay. So it's a very provocative but interesting proposal. I want to go back and talk about maybe an assumption about this. When you think of utilities and regulating utilities, because we often think they're natural monopolies, right? So the idea behind a natural monopoly is you need one big producer to produce at a scale where average costs have gone down to the minimum point. We can't have three companies running sewers into our neighborhood, it's too cost prohibitive. But if you have just one, even though it's better on cost terms, it's a monopoly and it has monopoly power. So government intervenes and says, "Okay, we're going to help you set the rate." And that's the argument, right?

Ricks:    Yes.

Beckworth: Okay. So that makes a lot of sense for a national monopoly. My question is, does money fit that definition, is money in my mind is more of a network good, which also has set of issues but a different set of issues. Right?

Ricks:    Yeah. I think you're right. You may have noticed I didn't use the phrase natural monopoly in the paper with respect to the system and I'm sort of ambivalent about that. I mean, the concept of natural monopolies, you put as sort of a technical concept about declining average cost over the relevant range of production. I don't know if that's a useful way of thinking about money itself or the monetary system or even whether we should think of those as two separate things. And I know there's been a longstanding debate within economics about whether we use this word natural monopoly in relation to money. And I seem to remember Larry White having written about that in one of his books at some length.

Ricks:    Similarly, this question about money is a public good, I don't really say that either. Because again, we're talking about a technical economic concept having to do with a non-rivalry and excludability. And my hope is that I really don't need to take a position on either of those two questions for the article to work. But it's a natural question to ask whether money is a natural monopoly because I'm analogizing-

Beckworth: Right. I mean, isn't that the whole motivation that we take an industry where we have the set of regulations because it's a natural monopoly now applying it to money?

Ricks:    Yeah. Well, let me put it this way. It's a system resource and maybe as you put a network good, I think we may be saying the same thing.

Beckworth: Yeah. Same thing.

Ricks:    I mean people network actually nowadays are network effects and that also has a very specific technical meaning and I think money certainly meets that technical meaning and that we sort of all converge on it and it's more useful to me to use a certain money if you're also using it. And so money does meet that definition. But I think that other sort of network or system type goods that are really require a resource to be heavily horizontally coordinated across, even if there are separate providers, they need to coordinate horizontally. And this has been true historically, certainly of a lot of transportation industries where there's a lot a need for heavy horizontal coordination and of course telecommunications being another. And you need a lot of interconnection in these industries if you're going to have multiple providers. These are industries in which I think economic regulation has a role to play or infrastructure regulation may have a role to play, even if we're not going to attach a technical, natural monopoly definition to the industry.

Ricks:    So of course money itself is it's a network system or a system type resource. And there's a huge amount of horizontal interconnection amongst banks. I mean from the histories of clearing houses one of the reasons we don't have payments in the US is because we have such a fragmented banking system. So greater fragmentation actually in some ways impedes the functioning of the system and therefore greater consolidation sort of makes things work better. I think this is also may have relevance to the question of monetary policy efficacy. But it is a network type good. And I think it's sort of close. It's in the sort of general range of those other network type goods to which historically we have some times applied this motive regulation. So that is an evasive answer to your question.

Beckworth: So I think of network goods, for example, Facebook or social media, right? The more someone uses it, the better it is for me. Where we'd say technically increasing returns to scale, the more it's produced and used, the better it is for us in consumption. And I know there's been talk about regulating Facebook because it's so powerful. But I have really, I acknowledge my ignorance here on air. I'm kind of vague on what is the standard approach to regulating network effects if we just leave them alone or what?

Ricks:    I mean, so this has become I think even in just the last 18 months. And of course this is not what this particular paper is about, but this has become a topic and not just because of the election related to stuff. I think there's a lot of questions about what's happening to local media markets for instance, and the extreme degree of economic power, the acquisition by the tech giants of other companies that might be their competitors or releasing free versions of other products to drive potential competitors out of existence when they won't sell themselves to you.

Ricks:    My own view on that question is that there is a growing movement towards trying to think about what ways of regulating the tech giants. And I'm not sure how that's going to play out. I mean one thing that's been used in other types of platform industries before is sometimes we've said you can't have both the pipes and the content. And that's been a historical principle, at least at times in US history in certain markets. And that would raise questions about say Amazon, whether it would be in a position to have a platform through which things are sold and also selling its own products through that platform. And so you can think about historical principles of regulation and their applicability. But these are extremely hard problems. I think they're going to be very contentious over the next decade or so.

Beckworth: That's probably the one thought I have, common thought to this proposal. It's very interesting to be very, very contentious I'm sure in terms of debating.

Ricks:    That's true. And I don't think, look to be honest, I think, and I'm writing this up in a separate paper now this goes back to something we were talking about earlier. I actually don't think this particular mode that I'm talking about is likely to be successful in the sense that I don't think you could get there through a direct pathway. But I do think that one could build a constituency for opening up access to the central bank for us all to hold accounts there. If people moved on a broad scale to holding their bank account with the Fed, you actually get somewhere close to this, ironically in the sense that suppose we all did, right? Suppose everyone just moved massively to holding their transaction account at the Fed. And again, the fact that we don't need physical payment media much anymore means it's actually-

Beckworth: It's feasible.

Ricks:    Yeah, it's technologically feasible. This is just debits and credits the stuff that the Fed's doing to the tune of many trillions of dollars a day through fed wire anyway. So we're just talking about adding on to something it's already doing. What would happen to the banks, right? If they lost their deposits? Well, they'd have to replace that funding from somewhere and at least in the first incident would probably be a discount window loan from the Fed, right. To replace its lost deposit so it doesn't have a liquidity crisis. Well, if you imagine going kind of all the way in that direction, everyone holding their account in the Fed and the Fed having a much larger balance sheet obviously but the assets then consist to a significant degree of loans to banks that were made to replace the lost deposits. Then guess what you're sort of in the world I'm describing in the sense that from the perspective of seigniorage for instance, right? So the Fed is going to be charging a discount window rate, hopefully a fair cost of capital that's going to exceed the rate that it's paying to depositors' presumably.

Ricks:    And the difference between those two, the wedge will accrue as seigniorage. So you see the seigniorage that would otherwise accrue to banks now are accruing to the public, which is one of the points of the system I'm describing here. You also have the rate regulation I'm describing, right? Of course, everyone's holding their account in the central bank, the central bank is determining the rate that's paid on those accounts. And it's determining that in accordance with monetary policy. Well, that's the system of rate regulation that I'm describing here as well. So I think you couldn't get here directly. I think the way that would happen in practice is if we truly did open up access to central bank account. This relates to the topic we were touching on earlier.

Beckworth: Now let's touch on that. So there's been a similar proposal, maybe similar in spirit, some dimension that is full reserve banking.

Ricks:    How does this relate to that idea? Well, it's sort of modernized version of the old Chicago plan as they call it. So for your listeners who haven't been exposed to that, so the old Chicago plan associated with Henry Simons in Chicago and Irving Fisher of Yale really started became a big thing in the 1930s during and after the depression. Although I understand there were some precursors, even in the 1920s intellectually, but in any case, Henry Simons and Irving Fisher thought, well bank runs our problem and we understand that problem. We get rid of them if banks are just holding cash, right? Say physical currency or base money essentially is their only asset. So a bank is essentially a warehouse of currency and just holds base money and then you're just sort of, you hold an account with the bank but it's really just a pass through of the central banks of sovereign issued money.

Ricks:    And so if you think about what I'm describing here, if we really all had an account at central bank, we're just getting rid of the middleman. It's the same thing is instead of having this intermediate warehouse of base money that's then with which you were holding an account of base money. Just hold your account with the issuer of base money. Right? So you're in the same place. I think the reason they thought about it in terms of having full reserve banks back then was precisely because of all the physical payment media that were used in payments that needed to be handled. There was a huge logistical undertaking, right? So you couldn't imagine a world like we do now where card swipes and, or electronic payments and bill pay, that wasn't part of the whole thing.

Ricks:    And so the Fed, the central bank wasn't going to manage the huge logistical undertaking of handling every single bit of paper. So that was what they were thinking. They weren't saying it this way. That's why they envisioned. But in the modern world because we're not using physical payment media all that much anymore. It's not hard to imagine dispensing with the middleman and I think that's an interesting way of thinking about this, right? It's a new way of doing a Chicago plan.

Ricks:    And, but it raises really serious questions, not about the right side of the balance sheet, but about the left side and the size of the asset portfolio and what it consists of. Right. I mean, if we all held our account at the central bank and the central bank are multiples of the time, the size it is now, what exactly is it holding on the left side? And how much does that matter? And I think we could debate that. I mean, one answer would be, well, just let it buy treasuries, but there's no assurance that there will always be enough treasuries outstanding to accommodate the desired money supply, particularly if we're talking about significantly expanding.

Beckworth: That's a great point.

Ricks:    And that's a problem we ran into repeatedly in actual monetary history. Right? I mean, you referred earlier to the fact that in the national bank system of late 19th century bank notes had to be secured by treasuries. Well, the problem they ran into is they didn't post-war and they started, yeah, the deficits go down and they start paying a little bit of the debt and suddenly you don't have enough bonds anymore to accommodate the desired money supply. And less we think that's just a relic of history '99, 2000 before the recession, the early 2000s you may recall this that we had fiscal surpluses, the debt was being paid down.

Ricks:    The Fed was convening our internal meetings of the Fed board to try to figure out what they were going to do if there just weren't enough treasuries outstanding to accommodate their balance sheet size was then was 600 billion or whatever it was. I mean, there was a real danger, there wouldn't be $600 billion worth of treasuries to buy. And so they were thinking and strategizing around what they would do. And so it's not written in stone there's always going to be enough of whatever your sovereign asset is. And then you need to think about outsourcing. I think you really want to avoid, in my view an organ of the federal government being involved in direct credit allocation, I think there's too much risk of the appearance or reality of politically motivated favoritism.

Ricks:    And one way, again thinking about a bank charter is we're outsourcing. That's the real thing we want to outsource is the credit allocation. We're going to issue the money supply in exchange for financial assets because we think that's a good way of doing it. But we don't want to be picking the financial assets that we're buying if we can avoid it. And so in the world I'm describing, you need to, this is what the problem of forwards or banking in the old Chicago plan is, I've always seen, I've written about this before. Is they always sort of have assumed that there's enough treasuries to accommodate the central bank, essentially issuing the whole money supply. And then they've said, well, if there aren't, and Milton Freeman addressed this, because of course he supported this at least as of around 1960 and his program for monetary stability, he came out in favor of the Chicago plan.

Ricks:    They've always said, well, I guess if you start to run out of treasury, you just got to cut taxes, you need more debt so you spend more or cut taxes.

Beckworth: Seigniorage is that abundant

Ricks:    Yeah. I call this fiscal monetary entanglement, right? I mean, if you're going to say both, that we're not going to have any private sector money creation. And also that all public money creation by the central bank is going to consist of... Is going to be issued in exchange for treasury securities. You got to make sure you have enough treasuries and you end up in these kinds of contortions.

Beckworth: That is interesting.

Ricks:    ... Of figuring out how to issue more.

Beckworth: As a full reserve banking became popular for a bit. I know there still was some observers, but it really became popular back in 2008, 2009 After that crisis. Was that Larry Kotlikoff?

Ricks:    Yeah. He wrote a book about it.

Beckworth: He wrote a book about that. What's also fascinating is that some Austrian economists, not all of them, there's a branch that I think that Rothbardian Austrians, they believe in full reserve banking. And it's interesting to think this through, these Austrians who free market. What they're implicitly asking is for enough government debt to back. Now they might go for a goal, I guess, maybe they'd have called it back but the more traditional full reserve banking story assumes there's enough treasury debt, which means this fiscal policy become entangled with monetary policy-

Ricks:    I mean, you could imagine a world where Congress tries to inflict political damage on the president by not creating more securities. And then their hands are tied.

Ricks:    And then we have a monetary tightening by virtue of the fact that we don't have enough treasury securities. So you've got to think of widening the asset portfolio of the central bank. I think realistically in this world, or at least leaving it to discretion to widen its asset portfolio. Of course, a lot of foreign central banks. So, here too with QE. But others have gone even further in terms of what they're willing to buy. And that does create I think that creates problems. I think you really want to try to outsource that somehow.

Beckworth: And that's a part of your plan.

Ricks:    Yeah. I mean, look, in this paper, I'm not suggesting everyone have their account in central bank, although in effect, it's sort of a similar place. But I am suggesting, look one of the reasons we want to outsource in the first place and a main reason we want to outsource in the first place is the asset side piece here where we don't want credit allocation happening from the central bank if we can avoid it. And so chartering a bank is a way of harnessing private incentives to invest well, to get the local expertise and knowledge, relationship-

Beckworth: So you're still utilizing that.

Ricks:    Yeah, you're trying to harness incentives, you're trying to harness private incentives for profit. And-

Beckworth: So you hang onto that. I see what you're really trying to do here is to get better pass through of the policy rate to the deposit rate and minimize any distortion between the two.

Ricks:    That's right. I mean that's both a monetary policy efficacy point, but there's also this seigniorage bit that there may be a little maybe came through a little less clearly in the paper, but-

Beckworth: But as a public good, you want the public sharing the seigniorage. So that's-

Ricks:    Yeah.

Beckworth: So, well one other point on your proposal we haven't touched on, I want to do before we run out of time and that is the accessibility, the reach, the amount of service. So you highlight in your paper a number of challenges that many people don't have access to the official financial system that you mentioned how credit cards really are set up in a way that favor those who do have higher income. People who are responsible, are better educated. You would give an example of if you have a credit card and you pay off your balances because you have the discipline, the income, you earn points. If you're someone who's poor and collects big balances, you get all these fees. So it's really hard in many other examples you've given, but it's hard to be a part of the official financial system, part of the banking system and your proposal would try to fix that, right?

Ricks:    Yeah, I think so. I mean this is the third part of the paper is about what I'm calling universal service, which I'm saying is sort of the third prong of traditional economic regulation. And it's not universal access to credit. Credit I'm still sort of viewing here as a function of the private market crisis place. But access to an account, a money account or access to account money is another way of putting it. It's something that we could think about as being an area in which the federal government might have a role to play. And if we're outsourcing, again, this issuance of account money to chartered banks we might impose conditions on them in terms of access and not excluding people on the basis of some bounce checks in the past or not imposing fees. We're excluding people based on small balances. I mean, we saw BVAs is reducing its degree of low cost checking. So we have 8% of US households that are unbanked in the sense that they just don't have a transaction account with a bank.

Ricks:    And we have another 20% of US households are under-banked in the sense that they do have a bank account but they still rely on check-cashing, expensive money orders and alternative payments arrangements in order to meet a lot of their payment needs. And the bank is just, isn't working that well for the lower end of the income spectrum in the US, they're tending to move a lot more toward prepaid cards especially in the past kind of 10 years. And that's really, really taken on a big role in terms of how the lower end of the income and wealth spectrum is interfacing with the payment system. And a prepaid card, it's funny, we think of money being 'loaded' onto the card and being spent off the card. But in fact, what it is, it's a card that's linked to a bank account.

Ricks:    It's a pooled bank account that's managed by the program manager. But the way the FDIC sees it is that the card holder is the owner of a bank account and they pass through deposit insurance to the individual card holder because they say the money is not on the card. The money consists of the bank account that's managed on a pool basis and in which the card holder has a demarcated interest. And so we talk about them being unbanked. There's a sense in which card holders prepaid cardholders actually are part of the bank, but they're banked in a really expensive a way. The fees are very high. There is a lot of inconvenient aspects of prepaid cards. Customer service is really not great. They've also shown problems that are operational problems in terms of unavailability of funds. And so the lower end of the income spectrum, the less well-off Americans don't have really full access to the mainstream payment system in the way that you or I do.

Ricks:    And we could conceivably I'm saying here, if we adopted the money paradigm, if we took it more seriously and think of this as outsourcing of a public function. It makes us maybe more open to the idea of imposing universal service mandates on banks to serve really everyone. And let's have this be more like the interstate highway system or other public functions where they're really equal access components of our infrastructure. We could think of the monetary system as an infrastructural good. The title of the paper's Money as Infrastructure though. So that's what I'm thrusting at here. So that's what part three is about.

Beckworth: Well, in closing, I want to bring up bitcoin. Bitcoin has a long, long ways to go before it's actually really used as if transaction asset as money. It's mostly used as speculative asset, particularly in the West, Europe, the United States. But what happens one day if it does become widely used, how does that affect your system?

Ricks:    Well my system doesn't have any direct implications for cryptocurrencies at all. I'm talking about dollar denominated money creation or the sovereign monetary unit and money that is denominated in that unit is what I'm concerned about. So I think there's plenty of room for experimentation. I for one, I'm pretty skeptical that it's going to take on a scale to seriously rival the dollar in terms of ordinary payments that are being made in the US economy. But I could be wrong and if it works out and if we could do it in a way that isn't too unstable and isn't too costly from a resource perspective then that's great. But so the system I'm describing would have no direct implications for cryptocurrencies.

Beckworth: So Morgan Ricks is open to currency competition. Huh?

Ricks:    Absolutely.

Beckworth: Well, great. On that positive note, we will end. Our guest today has been Morgan Ricks. Morgan, thank you for coming on the show again.

Ricks:    Thanks, great to be here.