Last Friday was the public comment deadline for a seemingly harmless Federal Reserve solicitation. The request was titled “Potential Federal Reserve Actions To Support Interbank Settlement of Faster Payments.”

And, indeed, there would be nothing to see here if the Fed wanted only to support such an effort.

But one of the “potential actions” the Fed Board is considering is to develop its very own real-time settlement system. This approach makes many private sector actors anxious because no private company wants to compete with the feds. And the background on this issue does little to erase such fears.

In a 2013 consultation paper, the Fed noted the widespread desire to “improve the speed and efficiency of the U.S. payment system from end-to-end over the next decade while maintaining a high level of safety and accessibility.” The introduction noted:

The Federal Reserve Banks believe that collaboration and engagement with the industry is the foundation of any enduring strategic improvements to the U.S. payment system and look forward to public input to this consultative paper.

Two years later, the Federal Reserve convened the Faster Payments Task Force to “identify and assess alternative approaches for implementing safe, ubiquitous, faster payments capabilities in the United States.” The website prominently publicized:

Acting primarily as a catalyst, the Federal Reserve has encouraged and supported payment stakeholders in coming together in a collaborative effort to progress toward payment improvements in a complex economic environment. [Emphasis added.]

When the task force released part one of its final report in 2017, page 13 stated that “Ultimately, implementation of proposals will be driven by the private sector.” So the fact that the Fed is soliciting public comment on implementing its own real-time settlement system is somewhat disconcerting.

Since its inception, the Fed has been heavily involved in the U.S. payments system. And one can easily argue that the system has lagged behind precisely because the Fed has been too involved. As monetary scholar George Selgin points out:

At the end of the 1990s, the United States was the only industrialized nation that relied heavily upon both DNS [deferred net settlement] and RTGS [real-time gross settlement] arrangements to handle wholesale payments….The coexistence of these two arrangements, despite superior reserve-holding economies generally realized through net settlement, was largely due to the Fed’s willingness to supply sending banks with low-cost daylight overdrafts.

The Fed also effectively took over the check-clearing business even though the economic case for such a move was highly suspect. Private firms were doing fine. In fact, there is a long history of the Fed usurping the private market. The Fed was originally structured based largely on the Aldrich plan, whereby a series of reserve banks would have the legal authority to issue currency – something the private market was already doing. (And the private clearinghouses were serving this role to fix problems caused by harmful government regulations, namely restrictive bond requirements, branching restrictions, and a tax on state bank notes.)

Similar to these historical cases, it appears the government is once again angling to take over a function that private firms are already providing. The Clearinghouse, a private association owned by 25 large banks, launched its own system—Real-Time Payments (RTP)—in November 2017. And although the technologies are still in their infancy, near instantaneous settlement is one of the promising features of blockchain applications, another private market innovation. (Incidentally, it appears that the arrival of blockchain pushed existing private companies to improve their settlement systems and, in all likelihood, influenced the Fed as well).

In general, the private sector is better than the government at providing more goods and services to more people. In the private sector, competitive forces and the need to satisfy customers create constant pressure to innovate and improve. Government entities are wholly insulated from these pressures.

The government should not provide a good or service unless there is some sort of clear market failure, where the private sector has failed to provide it. This type of failure clearly does not exist in the payments industry.

Regardless, there is little room for the private sector when a government entity, least of all the Federal Reserve, competes directly for customers. If the Fed does enter this market with its own real-time settlement system, it will surely keep many private actors out of the industry.

Aside from the public-private debate, the private sector clearly delivered what the Fed’s task force supposedly wanted. Now, however, the Fed seems to be going further and suggesting that the government should also provide such a system.

This move would be bad enough in isolation, but given the recent debatesover central bank digital currencies and the prohibition of cash, it should scare the daylights out of everyone. If the tide continues to move in this direction, with central banks providing retail bank accounts to the general public and controlling every aspect of money, there will be little room left for a private banking industry.

That should make everyone a little nervous.