Public and Private Financial Institutions: A Review of Reports from Two Presidential Committees

Abstract

T HEORIES of monetary and financial markets are generally concerned with the behavior of broad aggregates. As yet, economists have not successfully blended the rich variety of institutional details that make up the financial markets with the theory of relative prices. Perhaps as a result of our procedures and the state of knowledge, our policy recommendations are often suggestions for pervasive changes in institutional arrangements. Many of our perennial policy debates are concerned with issues such as whether or not the Federal Reserve should be replaced by an immutable rule or whether banks should be prevented from independently creating money. The discussions of practical men most often emphasize those institutional details that economists ignore. Practitioners (and many economists as well) generally fail to recognize that appraisals of existing or new institutional arrangements have relevance only within the context of validated hypotheses. Their concern is with the details of financial arrangements, and their proposals treat of such details, dismissing our theories as cavalierly as we dismiss many existing details. The men charged with administration of federal credit programs or involved in governmental operations affecting financial markets and institutions have now presented their recommendations. The reports and proposals of t1he two committees 1 considererd Ihere qnnmqr to be the work of practical men. Few of the proposals emerge from a detailed analysis of the monetary system or from the validated hypotheses that we currently possess in monetary theory. Those who were disappointed by the nature of the recommendations and the absence of suggestions for sweeping changes in the report of the Commission on Money and Credit 2 will be similarly discouraged by these reports. There are few indications that major institutional rearrangements would be desirable. Indeed Financial Institutions goes in the opposite direction. It, . . offers reassurance that our financial system, for the most part, functions soundly and efficiently to promote the growth and stability of our economy. I While there is a warning that, . . it would be unfortunate to confuse lack of urgency with lack of importance, one of the reports cautiously suggests that the recommendations made, . are not so compelling as to command the highest priority in the President's legislative program. This suggestion was duly noted by the late President who took steps to implement the recommendations in Federal Credit but allowed time for most of the suggestions in Financial Institutions to mature further. The two reports differ in more than their implementation. Federal Credit is primarily a series of guidelines for the executive departments and agencies that administer loan and guarantee programs or engage in secondary market operations. There are occasional glances at Congress, but most of the recom*The author readily acknowledges his debt to Karl Brunner. Both joint work with Brunner and independent work by Brunner have been used in the discussion that follows. After several years of collaboration, it is no longer possible for me to separate my ideas in this area from his, so he must share in the responsibility for any errors that remain. Discussions with Eli Shapiro were most helpful in formulating the suggestion for deposit insurance premiums graduated with asset risk. I wish also to acknowledge the research support of The Ford Foundation Faculty Research Fellowship, the National Science Foundation and the Graduate School of Industrial Administration, Carnegie Institute of Technology who have supported much of the research that forms the background of this review. 'The Report of the Committee on Federal Credit Programs to the President of the United States and The Report of the Committee on Financial Institutions to the President of the United States (Washington: Government Printing Office, Febr., and April, 1963), 67 and 66 respectively. The former report is referred to as Federal Credit, the latter as Financial Institutions. 2 Commission on Money and Credit, Money and Credit -Their Influence on Jobs, Prices, and Growth (New Jersey: Prentice-Hall, 1961), hereafter the CMC. 'Financial Institutions, v. 4Ibid., 3.