The case for the public provisioning of the payments system

Abstract

This paper makes the case for allowing citizens and organizations the option of opening deposit accounts at the central bank that would receive the policy rate of interest. Unlike proposals to nationalize banks, this proposal would leave the function of allocating credit to the private sector. I contend that opening up the privilege of transactions accounts at the central bank to non-banks would result in the public provisioning of the payments systems (PPPS). I discuss the feasibility of the reform by framing it within the context of the evolution of the payments system. Specifically, I argue that the PPPS could reduce the financial fragility and the unnecessary expansion of the financial sector that has evolved out of the current arrangements. Furthermore, I address three criticisms that can be made of the PPPS: the inefficiency of government provisioning relative to the private sector, the necessity of private sector bank deposits for the capital development of a country and, finally, the possibility that the problems created by private sector depository institutions might reemerge in the shadow banking sector.