The relative decline of commercial banks and the rapid growth of other financial intermediaries provoke debate in the 1950’s over whether or not evolution and innovation in non-deposit financial institutions would undermine the effectiveness of monetary policy. Since early 1961, however, total assets of commercial banks have grown nearly twice as fast as they did in the 1950’s and banks have adopted new practices the might alter their responses to Federal Reserve actions. Consequently, a new debate is under way, focused this time on how evolution and innovation in banks will influence the effectiveness of monetary policy. It has been suggested that recent bank innovations have made the banking system less stable, have weakened Federal Reserve control over the money supply, and have loosened the links connecting money supply with income and prices.
This paper will describe new services, methods of attracting funds, and recent innovations in allocation of bank assets. Some of their implications will be discussed within the framework of the so-called “new view” of banks as intermediaries. Possible effects on Federal Reserve policy and on the growth prospects of commercial banks will be viewed in the light of recent research on the demand for money and other assets. Because the impact of automation has already been covered by Governor Mitchell, I shall concentrate on other innovations, recognizing of course that most of them have been influenced by the new technical possibilities offered by computers.
The Innovations
Banks undoubtedly have done more innovating in the last five years than in the preceding twenty-five. The recent innovations, moreover, are radically different from those imposed by legislation in the 1930’s, when the banks were numb from the shock of the Great Contraction. Innovations this time are responses to expanding possibilities in the markets for financial services.
The upsurge of state and local government borrowing has expanded banks’ activities not only as investors but also as underwriters. Bank trust departments have won management responsibility for most of the reserves of private non-insured pension plans, becoming in the process by far the largest institutional group in the stock market. They soon may be offering commingled investment accounts for individuals. As world trade and investment have grown, U.S. banks have greatly expanded their overseas services. The Eurodollar, one of the most remarkable financial innovations in history, is based upon transfer services provided by banks in this country.