Our Financial Institutions: What Needs Changing?

Abstract

AT ONE TIME monetary economists devoted a great deal of attention to institutional problems such a bimetallism, branch banking, etc. In recent years their interests have become much more analytical and have dealt much more with short run stabilization policy. While important advances have been scored in this way, we have tended, with a few exceptions, to brush aside as not central to stabilization policy, various problems relating to the manner in which our financial industry is organized. Typically, economists who are critical of our monetary authorities have stressed particular Federal Reserve policy actions, rather than the way in which our monetary authorities have aSected the development of the private financial sector. When one considers any one short period of time, what the Fed has done to the money supply. does seem more important than the way it has allowed the private financial system to develop. But, if one considers a long period of time, then the evolution of the finance industry and the way its development aSects the transmission of monetary policy does seem more important. Moreover, developments in the finance industry are important not only for their impact on monetary policy, but also because the finance industry is by no means trivial, accounting as it does for about S percent of total employee compensation.l To look at the finance industry as many of us are wont to do merely as a facility for transmitting the impact of monetary policy to the real sector is, therefore, misleading. The industry is large enough that misallocation of its resources may, in and of itself, be a serious problem.