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From "Stabilizing an unstable Economy" (2008)
Business cycles are "natural" in an investing capitalist economy, but to understand why this is so it is necessary to deal with the financing of investment and positions in capital assets explicitly. Financing other than through retained earnings involves contracts denominated in money and banks are organizations that arrange for and engage in the financing of business. Banking therefore takes in more than the organizations that are chartered as banks. The line between commercial banks, whose liabilities include checking deposits, other depository thrift institutions, miscellaneous managers of money (like insurance companies, pension funds, and various investment trusts), and investment bankers is more reflective of the legal environment and institutional history than of the economic function of these financial institutions.
The clear distinction between commercial banks and investment banks that ruled in the United States over the postWorld War II era was a creature of the reforms that followed the Great Depression. This distinction is currently breaking down, and it never really existed in other capitalist economies such as Germany's. Furthermore, as the financing of activity and asset holdings as well as the management of money have become more sophisticated in response to the turbulent era since the 1960s, the line between commercial banking, other depository institutions, and money managers of various kinds has become blurred.
We can envisage an evolution of banking in which the multiple product characteristics of banking in the asset, liability, and fee-for-services dimensions are fully realized. Individual banks will be located in a spectrum that stretches from universal banks to highly specialized, almost onedimensional organizations. (A Citicorp will coexist with a Lazard Frères.) However, as banking is presently organized, there is one set of banks-the commercial banks-that remain of special importance because of their aggregate size and because their liabilities constitute a large part of the money supply. In a capitalist economy money is tied up with the process of creating and controlling capital assets. Money is not just a universal ration coupon that makes trading possible without a double coincidence of wants: it is a type of bond that arises as banks finance activity and positions in capital and financial assets. ...
When money is created a borrower enters upon a contractual...