In the Hastert matter, there are different layers of operating assumptions behind this indictment. As Mrs Falbo said, “When you ‘assume’ something, you make an ass out of u and me.” Forewarned, I proceed.
One might, at the outmost layer of our box, question why there are banks in the modern (post-Renaissance) sense in the first place, and whether they’re a blessing or a curse. Socialists of many varieties think banks are evil, many Moslems think any institution that charges interest on loans is evil, but I’ll set them both aside. What I’m somewhat more interested in is the argument about the “fractional reserve” nature of banking.
Modern banks hold customer deposits and promise to give the customers this money back on demand. But of course they aren’t holding it all in the vault. Only a small “fraction” of it is in “reserve.” Most of it is invested. As Jimmy Stewart (pictured above) says to the customers of the Bailey Building & Loan, “It’s in your house, and yours.” It’s out in the world, doing things.
BUT, to certain critics, including capitalists like Murray Rothbard, or Irving Fisher, fractional reserve banking has long seemed like a con game. The use of other people’s money for investment, with the simultaneous promise that it is all available for withdrawal on demand, sounds to them inherently dishonest.
Suppose we dismiss such scruples and accept fractional reserve banking. I personally do so. I believe modern banking has been an engine for growth and prosperity since the time of the Medici, and I’m not going to side with Savonarola against it all. And yes, modern banking involves fractional reserves. It isn’t just keeping people’s jewelry in safe keeping for them.
The second layer, moving inward, is that modern banking may plausibly be thought to require a central bank, a bank-of-banks. After all, banks that pull this trick of lending out money while promising it on demand are subject to bank ‘runs.’ That was the problem the Bailey family faced in It’s A Wonderful Life. If a lot of your customers show up at once to demand their deposits, the demands may exceed the fraction actually held. Then what? Well, then the bankers can appeal for assistance to the central bank, if they’re part of a system that has one.
I believe there are ways of resisting the logical move toward centralization, but it is at least historically plausible. And it brings us to the third layer. IF there is to be a bank-of-banks: does this institution have to be government chartered or sponsored in some way? In a world full of governments, it will be difficult to keep central bankers on the one hand and government treasury officials apart. They’ll get to know each other, at the very least.
Once we accept (for purposes of discussion) that there will be a central bank responsible for such matters as reacting to panicky bank runs at the member banks of a system, and you accept that this central bank will be chartered by some government, then you come to the fourth layer, one specific to federal systems o government. In the US, we put it this way: which government is to charter banks? The one in Washington? Or should the states have their different systems, with fifty different central banks?
Well, once there is a common currency in place, there is a powerful pull toward the centralization of responsibility for monetary institutions at the same level at which the currency is issued. This was, after all, Alexander Hamilton’s point. But the matter was not finally settled in the US for a long time after that – not even finally settled by the creation of the Federal Reserve in the Wilson era. The essentially federal/national character of banking in the US seems to have become conventional wisdom only with and since the institution of federal deposit insurance in the 1930s.
All that brings us to the inmost layer of in-the-box thinking. Given this single national system, deposit insurance, etc., the federal government unsurprisingly interests itself in large withdrawals of money.
Combined with this there is the fact that lots of bad guys, operating across state and national lines, need to move large amounts of cash. From drug cartels to Al Qaeda. The nation states trying to restrict their activities will naturally seek to restrict their access to the banking system, making their conspiracies more difficult. From this dynamic arises the regulatory apparatus -- the smallest box -- in which Hastert may now be trapped.
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