In his paper, John H. Kareken (in this issue) reviews the development of federal bank regulation in the United States and evaluates the effectiveness of the current regulatory structure. He concludes pessimistically that present-day federal bank regulatory policy cannot (should not) be counted on to keep the banking industry sufficiently safe and sound.... Yet ... there is no obvious alternative to the policy of the present (p. 47). To Kareken, the most appealing alternative is to split banks into two separate businesses, one offering payments services (transaction deposits) and restricted to 100% reserves in cash or Treasury securities (i.e., a money market fund) and the other offering nontransaction deposits and permitted wider investment opportunities. This idea, of course, goes back at least to the Peel Act of the mid1800s. My reading of the effectiveness of bank regulation and how it can be improved is quite different. In no way do I share Kareken's despair. To a large extent, our different outlooks reflect differences in our answers to the questions of how important are bank runs and individual bank failures and how stable is the banking system? Although he expresses some doubts, Kareken does not question and implicitly accepts the generally held view that bank failures are more important than the failures of other firms, both because they offer liabilities that serve as money and because they may spread from bank to bank through the banking system. In addition, he assumes that the banking system as a whole is unstable. In contrast, both theory and empirical evidence lead me to conclude that, except in instances of man-made policy errors, (1) individual bank runs and failures are generally not much more impor-
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Jan 1, 1986
John H Kareken 
