Separation of the Two Banking Systems: Commercial and InvestmentEssay Preview: Separation of the Two Banking Systems: Commercial and InvestmentReport this essayThe questions whether the commercial and investment banking systems should be united or separated and the advantages or disadvantages both case scenarios could cause have been analyzed for years. So was it really a good idea to repeal the provisions that separated the two banking systems?
Back in the days when there was no central banking system, the big banks were actually running the corporate America by helping American businesses become trusts. Those trusts were designed in a way that eliminated any competition and thus became monopolies. Therefore, Congress knew that something had to be done to improve the situation. In addition to the Anti-Trust laws that were passed something else had to dramatically change – banking system. It was believed at the time that the bankers were in too much control over the US economy, and too much power was a dangerous thing. The separation of the systems, however, did not occur until 1930s when the country was trying to eliminate future crises after the Great Depression. Nobody could tell 100% what really caused the crisis, but certain reforms that were deemed necessary at the time were enacted.
Certain notions reasoned the “Glass-Steagall” Act. The fact that the universal systems allowed the banks too issue many securities led to the crash of the stock market. The second reason was that banks had unstable securities in possession and it weakened the trust in the banking system in general. Thirdly, those banks sold those securities to the customers, which caused conflict of interest. Lastly, it was proved that the heads of the two largest banks were involved in insider trading, and tax avoidance. All of the above helped to pass the Act. But in the 1980s when the commercial banking business was on the downside from the traditional way of lending and the investment banking did not see much of profit, the Act was challenged. Certain analysis was conducted, which indicated that the major reason behind the Great Depression was not the fact the banks were united but the operation of the single branch banks, which were weak and could not handle the pressure.
Now after considering everything, my personal opinion about the fact that the commercial and investment banking systems could operate jointly is somewhat skeptical. On the one hand, I could see how many people, who oppose universal banking systems, see that one of the issues that could be involved is an ethical one. The joint system allows these banks to fund themselves at cheaper rates, which is somewhat unfair. Also these banks could use these deposits to invest in risky securities because government gives them guarantee. For example, if the government will most likely bail out the bank from a risky investment failure, then why not take that step anyway? Those “too big to fail” banks are actually enjoying this perk from the government. But where is the proof that if such bank fails, it would have a ripple effect and threat the whole financial system? Whatever the case might be, the government has to come up with certain regulations to lower the risks
The Federal Reserve was formed in 1913 to raise the level of the money supply in a process of economic recovery. But it did NOT allow that money to be withdrawn in deposits, a practice that has been discredited by the Federal Reserve. As stated at the beginning of this post, there is no public record in New York City of anything similar. There is no record in Washington, DC that that regulation was adopted anywhere. Perhaps no one in New York City even had a bank at the time. The fact that New York, not DC was the primary place where the Federal Reserve came up with its proposal to cut interest rates was a little surprising, actually.
The New York City Council established a central bank in New York City in the 1920s. It was created by the President under the authority of the Fed. The Federal Reserve is an independent agency of the Federal Government and has no authority to create money. A bank does not make money itself, but it also is the first bank to issue money, and thus has the power to finance the creation of the money supply. It is also the only Fed institution, so that means it can create money just like any other state bank. The Fed’s bank does not have the legal power to impose money, but it has the monopoly.
There have only been two Federal Reserve banks in the United States. There is no reason why that can’t be accomplished. Also, there are few other central banks outside the United States that exist that can create money, especially in the absence of other central banks. To cite one example, we can take an example from Spain during the crisis of 1929. Spain and the Federal Reserve were formed when it was important to control the economic growth of the country, and it had no independent central bank. While the Spanish public did not have a bank, everyone was allowed to use it and enjoy the benefits. In return, this Central Bank created a public and private monopoly on printing and issuing money, not an independent central bank. Since the Spanish government was not able to maintain its own currency, money was bought into the government’s hands because the government gave it to them. This created a great wealth of money, and this wealth, from the Spanish government, was not used to buy bonds in the United States.
The fact that there are only two institutions in the United States holding money does not mean that it is possible for them to control the money supply at all. We know from several recent studies that there is a major concentration of wealth in the banking industry, so this is certainly conceivable. However, there is clearly no real guarantee that the government will let any of that money into the banking system, or that the money supply might go away, because the government cannot make money without a public bank. Most of the banking industry controls almost all the money supply. This is in stark contrast to most banks that are open and safe, such as American Bankers Association or American Bankers Trust. The government cannot force it to allow money to enter the banking system; it can force it to set aside any public money for whatever reason.
Since the United States doesn’t have a Federal Reserve body, the fact that government banks and banks are controlled by two independent entities does not mean that it can create money unless the government agrees to create a private bank. It means that the government must create a private bank to create money. The public bank that owns and regulates the money supply can control the money supply, and the government can establish a public bank for public investment. In exchange for what the public bank creates, the government can create money that it cannot control and not that it could use to run a bank.
We might think that the government doesn’t see it as a problem, but we don’t. The Federal Reserve does control the market. In practice, the Fed can create money, but so does the state, the Federal Reserve