One should not confuse the National Depository with Federal Reserve Banks. The latter would continue to implement monetary policy through open market operations and provide loans to banks. All such transactions however would result in credits or debits to accounts in the Depository.

Implementation of the National Depository system

Transition to the National Depository system would begin after the full reserve system had been in operation for a period. All reserve accounts at the Fed would be transferred to the Depository. Bound reserves (those backing transaction deposits) would become deposits in the accounts of the respective owners. Free reserves would become deposits in accounts of the respective banks. At their option, banks could exchange their vault cash for deposits at the Depository. The balance sheets of banks would be downsized by the transfers, but the net worth of each would remain unchanged. 

The National Depository would offer accounts to all who need the payment services of a traditional bank. It would only hold transaction deposits and would pay no interest. The Depository would neither lend nor borrow. It would simply execute payment orders and handle the accounting. Banks would be required to provide payment services against their customers' respective accounts in the Depository if requested.

The computer used by the National Depository would be an extension of the Fed's computer system. Payment orders would be accepted by electronic means via plastic cards, the Internet, Fed wire, or telephone. Paper checks would be phased out, after which verifying balances and making payments would all be done in real time. The nuisance of check float would vanish. Payments would be executed by simply transferring funds between accounts. The only exception would be transactions with the Fed which would involve a transfer of funds by wire in or out of the Depository.

The Depository would hold no currency. Deposits would be exchangeable for currency and vice versa at bank ATMs. The Fed would continue to purchase notes and coins from the Treasury and maintain a stock sufficient to meet the public's demand for currency.

Banking after the Transition

Banks could neither create nor accept transaction deposits. However they could accept term loans of various maturities and pay interest on them. Term loans would be insured by the FDIC up to specific dollar limits. Funds loaned to a bank would be credited to its account in the Depository and useable by the bank for its own investments.

Since money earns no interest, banks would hold no more than needed in the near term to redeem maturing liabilities and for new investments. Money in excess of that would be used to buy interest-earning securities such as Treasury bills and money market mutual funds which could be quickly converted to cash. Firms and households would minimize money holdings for the same reason. Thus the amount of money held by the non-bank public in the Depository would likely be about what it currently holds in bank transaction deposits plus some fraction of its savings deposits.    

New operating rules and restrictions for banks would be established to enhance the  stability of the banking system. For example banks might be required to hold specific minimum balances against their liabilities maturing in say less than 30 days. A bank's total liabilities might be limited to say 90% of its risk-adjusted assets. Permissible investments would be limited to those deemed beneficial to real economic growth.

Monetary Policy Implementation

The Fed would implement monetary policy by setting a target for the interest rate on interbank loans. It would buy or sell securities in the open market as needed to balance supply against demand among banks for money at the target rate. How much money non-banks chose to hold would vary with price, which banks would set as a markup from the Fed’s target rate. Growth in the money supply would therefore be endogenous, and equal to the net amount the Fed paid for securities in controlling the short-term interest rate.

The Fed’s purchase of securities from the non-bank sector would not directly increase bank-owned funds. However the sellers would seek to reinvest the proceeds in order to earn a return rather than leaving them idle. Regardless of where invested, the excess funds would remain in non-bank accounts at the Depository until invested in term loans to banks. A sizable fraction of the excess would likely end up at banks and thereby enable the Fed to control the interbank lending rate. To enhance bank liquidity, the Fed would offer to lend to banks against adequate collateral at 50 basis points above the target rate, and borrow from banks at 50 basis points below the target rate.

Treasury Operations

In addition to serving the entire private sector, the National Depository would serve the U.S. government, and offer accounts to major foreign banks and governments that need to transact in U.S. dollars. The Treasury's general fund would be held in the Depository where it would deposit the receipts from Federal taxes and the sale of its securities. All government spending would be paid out of the Treasury's account at the Depository. 

To avoid interfering with the Fed’s monetary policy operations, the Treasury would target a fixed balance in its Depository account, sufficient to meet its near-term payment obligations. It would do so by selling or redeeming securities to cover the imbalance between government spending and tax revenues, in effect paying for government deficit spending with securities rather than money.