The History Channel recently aired a show called “Modern Marvels: Banks” which first caught my ear early in the show when they reported that: “soon it may even be possible to do your banking in the kitchen, using a microwave oven . . . today there are less than 10 million consumers doing online banking, that’ll be over 100 million in the near future.”
WHAT!? I press the Info button on my television and see the show was produced in 2002. Back then my bank’s online service wouldn’t let me log in because I wasn’t running Windows.
Later in the show they cover the Gold Rush, the San Francisco earthquake and firestorm, the rise of Bank of America, the failures of banks during the Great Depression, and then they started talking about Roosevelt’s New Deal, starting with FDIC, and:
Narrator: The Government also took drastic action that split the banking industry into separate parts.
Richard Sylla: It was decided that because of the stock market crash and the Depression that it would be a good idea to break off commercial banking from investment banking. Commercial banking deals with loans and deposits. Investment banking deals with underwriting securities, issuing new securities. The Glass-Steagall Act of 1933 decided that bankers would have to choose either to be commercial bankers or investment bankers, but they couldn’t be both.
Narrator: It was thought that banks would be less likely to fail if they were not operating as financial “supermarkets.” Economists today believe that bigger financial institutions are much safer, because their risks are diversified. The merger between Citibank and Traveler’s Insurance that created the financial behemoth of Citigroup would have been illegal had the Glass-Steagall Act not been repealed in 1999.
Those economists of 2002 were right in that larger banks were less likely to fail, but this is because of government intervention to bail out financial institutions deemed “too big to fail” rather than diversification of risk. Just as economists were buying into the “bigger is safer” philosophy, my industry embraced a philosophy of small, cheap, redundant parts which could fail individually without bringing down the entire system. They built Citigroup, and we built Google.
Fortunately, these days I can do my banking from Linux, and my microwave never touches my money.