Daily Archives: December 20, 2013

Essays in Monetary Theory and Policy: On the Nature of Banking

By Ryan M. Pope*

Hyman P. Minsky said he thought there were as many forms of capitalism as Heinz had pickles.  The same can be said about the different types of banking within the financial system.  The system has undergone a dramatic transformation over the development of the capitalist economy, and Minsky spent a large amount of time studying this transformation.  Many economists feel the same way as Minsky did, that the results achieved by a capitalist economy can be viewed from two fundamentally different perspectives: the Smithian way and the Keynes way.  The Smithian way assumes the presence of an “invisible hand”, and therefore “intervention or regulation can only do mischief.” (Minsky 1991, 5)  In contrast, the Keynes way assumes that the economy is naturally unstable, and “… regulation and intervention can be beneficial.” (Minsky 1991, 5)  When designing economic policies, government leaders must choose between these two perspectives.  This is exactly what policy makers have done over the evolution of the capitalist economy, and their decisions have transformed the banking system in many ways.

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