New Paper on the Fed's Interventions in Payment Services
The Fed never should have taken over these payments services. It’s time to end the Fed’s involvement and return these functions to the private sector.
In today’s world, it’s all too easy to assume that the Federal Reserve has always been deeply involved in how we move our money. Just look around. The Federal Reserve has a hand in cash, checks, wires, automated clearing house (ACH) payments, and faster payments. And that’s to say nothing about how it has been (up until recently) weighing the idea of a central bank digital currency (CBDC). However, it has not always been this way, and doesn’t have to stay this way.
There was a time when these functions were the responsibility of the private sector. That only came to an end because government policies undermined these efforts. Then, when private actors could no longer stand on their own, the government accused the market of failing. And with that, the stage was set for the Federal Reserve to intervene.
Consider something as simple as check processing.
As the story is often told, “[By] taking advantage of its nationwide reach, [the Federal Reserve] was uniquely positioned to streamline check collection.” That unique positioning was due to the fact that it was illegal until the 1990s for banks to branch across state lines. The market did respond with clearinghouses and correspondent banks in an attempt to bridge the gap, but then the Federal Reserve undermined these solutions by not charging for its check processing services. Nearly 30 percent of the Federal Reserve’s employees were working on check processing in 1974, and yet it did so without charging fees. In effect, “many local check clearinghouses could not compete and closed down.” The share of checks processed by the Federal Reserve decreased when Congress required fees to cover costs in the 1980s, but the Federal Reserve had already carved out market dominance.
Although the details vary, this experience can be seen across all of the Federal Reserve’s interventions in cash, wires, automated clearing house (ACH) payments, and faster payments.
If you’re interested in learning more about this history, my new Cato Institute briefing paper provides a crash course on the Federal Reserve’s interventions in payments systems. The paper explains how the market has been undermined by government favoritism, subsidized pricing, and barriers to entry. And it explains how the government has discouraged or outright prevented the private sector from building the financial infrastructure needed to support payments. More so, it explains that if competition, innovation, and true inclusion matter, we must question why the central bank still runs payments—and demand it step aside.
