Why This Matters: Rethinking Money and Banking in the United States

Ming Jing is a law student and an intern at the Roosevelt Institute. 

After the failure of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank in 2023, the federal government funded $25 billion in emergency lending and guaranteed nearly $20 trillion of deposits in order to stop the panic from spreading. Despite the near-constant effort over the last 15 years to improve the legal framework for money and banking, bank runs and similar incidents continue to threaten financial crises in which people would lose their jobs and homes. Every time, extraordinary ad hoc government intervention is required to prevent economic catastrophe. Each crisis and intervention sparks renewed interest among scholars and policymakers in thinking about how to build a better, more resilient financial system. 

In a new brief, Lev Menand—Roosevelt fellow and associate professor of law at Columbia Law School— lays out a new perspective on this question by urging us to rethink the very concept of money and banking. Specifically, Menand argues that because banks create money when they originate new loans and do not need existing money to lend, they require a different type of regulatory scheme than other kinds of financial intermediaries. Menand emphasizes that: 

Any inquiry into financial policy must begin with a solid understanding of money: what it is, how certain financial institutions create it, and why governments have been outsourcing control over the activity of money augmentation to investor-owned enterprises for several hundred years.

In 2023, there were $50 billion of coins and $2 trillion of Federal Reserve notes outstanding in the US, but there were nearly $20 trillion of deposit balances. If we think of banks as individuals or as the same as other financial institutions, the discrepancy may seem shocking. However, as Menand explains in his brief, these numbers reflect a standard feature of banking since at least the 1600s. By having more liability in deposit accounts than having cash in their vault, banks create a form of money that is essential to the US economy. Creating money may seem like alchemy, but anyone can create money as long as people in their community accept that money to exchange goods and services. 

From ledgers used by Babylonian temple administrators to wooden tallies used in the 14th-century English countryside to, most recently, cryptocurrencies, the physical form of money does not need to be particularly valuable. Indeed, the physical form of money does not even need to exist. The difficult part of money creation is in convincing enough people to accept your money. Historically, forms of money often became widely accepted when they had government backing. Today in the US, the government issues some money directly in the form of coins and paper currency, but the vast majority of money in circulation is issued by banks and other financial companies, in the form of loans, credit, and other financial vehicles, with the US government’s seal of approval.

But this creates two problems: First, it gives a tremendous amount of power over our economy to a relatively small group of actors whom the government allows to operate as banks or bank-like institutions. As Menand explains, bankers perform “an essentially political role” in this system, because they are key players with influence over the distribution of wealth in our society.

Second, this system means that whenever people become skeptical about accepting bank-issued money as money—i.e., when they start to demand hard cash and cause a bank run—government intervention is required. Given that banks today always carry more liabilities than cash on hand, no bank can ever survive a bank run on its own. This creates fundamental vulnerabilities that the public has to pay for, again and again.

In this brief, Menand details the history of how this current policy landscape came to be, and outlines three types of potential reforms to address the problems this system creates: 

• Hardening Monetary Liberalism: This approach would preserve the current structure of the financial market but would impose more regulations to address market failures. Proposals in this category include enhancing executive accountability at large bank holding companies and reviving or enhancing regulatory tools that existed before. 
• Structural Reforms: A second approach is structural reforms that reconstitute a public utility legal framework to govern US money and banking. Such reforms aim not only to enhance financial stability but to target rent extraction, the size of the financial sector, and access to credit for small and regional businesses. Proposals in this category include re-separating deposit banking and capital markets activities, restoring entry restrictions in banking, and increasing scrutiny of bank mergers.
• Public Options: Finally, a third option of policy reform would introduce public options for bank deposits, and thus reduce the country’s dependence on investor-owned banks to create bank-issued money. 

The debate over bank regulation reforms is fundamental and “implicates not only the future stability of the financial system, but also the distribution of wealth, shape of economic activity, level of financial profits, and balance between public and private power in American society.” 

Read the full brief here: “Money and Banking in the United States: A Guide to the Policy Landscape.”