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You Call That Deregulation? A Critical Examination of Hugh Thomas's Proposal to Deregulate Banking
By George Selgin
Introduction
A regular reader of the Cato Journal, or anyone armed with a working knowledge of the English language for that matter, might be excused for assuming that Hugh Thomas's article—"A Proposal to Deregulate Banking"—in the Fall 2000 issue calls for a reduction in the government's role in the monetary and banking system. Yet, despite his article's title, what Thomas proposes is something closer to a complete nationalization of the U.S. money stock. In Thomas's "deregulated" arrangement, the only "legal money" would be high powered money, that is, exchange media supplied directly by the Federal Reserve system or by some other "central clearing authority"; and financial intermediaries or FIs (they would no longer be allowed to call themselves "banks") would be prohibited from supplying any close substitutes for this legal money apart from checkable, equity-based "money funds." The reform also calls for an expansion of the role of government in interbank payments and settlement.
I plan to argue that Thomas's proposed reform is neither prudent nor necessary for achieving its intended objectives. There is some risk, which Thomas not only acknowledges but exaggerates, that the reform could involve a wrenching readjustment of monetary policy, with a possibility of severe short-run deflation. A more certain consequence ofthe reform is that, once any monetary readjustment is complete, the United States' economy would be left with a reduced— perhaps a substantially reduced—real flow of credit to the private sector. Finally, any gains Thomas's proposed reform might achieve could be better and more reliably achieved by means of a genuine (as opposed to pseudo) deregulation o fbanking, involving the elimination of all government deposit guarantees and the removal of all remaining restrictions on banks' ability to open mutual fund accounts for their customers. Although any attempt at genuine deregulation is likely to encounter substantial political resistance, special interests are likely to be even more fervently opposed to Thomas's plan.
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