Monday, March 1, 2010


Eugene White has a nice post about the history of New Deal banking regulation.

According to White, Glass insisted that investment banking be separate from commercial banking because of this belief in the real bills doctrine. On this view, commercial banks should only make short term commercial loans--fund real bills. The monetary policy element of this theory is that as long as banks only funded real bills, the quantity of money would adjust to accommodate the needs of trade.

The stand-alone investment banks were more than willing to support his effort to prohibit competition from commercial banks.

Steagall, on the other hand, was the friend of the thousands of small banks who wanted deposit insurance to reassure their customers and prevent them from shifting their funds to the larger banks that were less likely to fail.

And somehow out of this reality developed the myth that financial manipulations of banks was responsible for the Great Depression. White argues that it was instead the failure of Fed monetary policy.

1 comment:

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