BANKING AND the coutry's financial system are now changing with a speed not foreseen by Congress when it rewrote the basic law last year. The emerging pattern is merger, bridging the traditional divisions in financial services. It's raising unexpected questions for bank regulators. For the people who guide the country's monetary policy, the questions are even sharper. Conventional monetary policy assumes that only banks can create money. But currently that assumption only starts a debate over what you mean by banks, and what you mean by money.
Congress thought it was taking a rather daring step when it voted a year ago to phase out the interest rate restrictions on banks, and to authorize the accounts that automatically transfer money from savings to checking. But those are very modest innovations compared with the transformation that's now under way. The driving force is, of course, the high and volatile interest rates that press not only large businesses but also private savers and investors to keep their money moving smartly.
The country's largest insurnace company, Prudential, has just merged with a securities broker, the Bache Group. American Express is talking about a merger with another broker, Shearson Loeb Rhoades. The money market funds have been growing phenomenally, and some are run by brokers who offer investment in other kinds of securities as well. And some take the next step of letting you write checks on your account, which may be a variety of money market shares, stocks and bonds. The credit card provides an instant checking account that creates negative deposits. Now one of the credit cards, Visa, proposes -- if the banking authorities permit it -- giving its customers direct excess to money market funds.
It's not yet possible to foresee the full range of issues that this development will raise for public policy. But some of them are already evident. For example, federal law -- with a few narrow exceptions -- forbids banks to operate across state lines. But the big brokerage houses, not ot mention American Express, have branches all over the country. As the brokerage and credit card operations turn themselves into quasi-banks, the prohibiiton against interstate banking becomes increasingly unfair, obsolete and harmful.
But these mergers have implications that reach for beyond the banking business. One of the key points in President Reagan's economic program is the need for firm control of the money supply and unremitting restriction of its growth. But less money available from the traditional banks mean greater incentives for the creation of quasi-money from the quasi-banks. What's quasi-money? It comes in the form of credit card accounts, money-fund overdrafts and all the other forms of credit available outside the banking system. It looks like money, it behaves like money and -- subversive thought -- maybe it actually becomes money in every sense but that of the formal definition. The controversies over theory are not going to be resolved for quite a while. But it's beyond dispute that something very much like a parallel banking system is rapidly taking shape, without waiting for Congress' approval, just outside the existing structure of bank regulation and control.