In terms of the longer-run health of the U.S. economy, though, the most important question is who will have access to bank money, and the outlook is not good. The top tier of U.S. business will be financed without question. Banks will stick with consumer installment lending because the return is so good. But the middle-grade corporation plainly faces trouble. It simply will not be able to count on a guaranteed claim on bank money, and when it does get money, the quid pro quo may be giving the bank more of a say in company management than banks have traditionally had. Chairman John Bunting of First Pennsylvania Corp. in Philadelphia is one banker who thinks bankers will have a louder voice in corporate management in coming years.
For anyone--corporation, individual, city or state--that falls below middle grade, the outlook is bleak. In the days of the new banking, they were all staked by the banks. But the days of new banking are past, and unless monetary policy turns so aggressively easy that banks have enough to supply everyone again, the plight of those frustrated borrowers may be the most significant economic story of the next decade.
That strange and disturbing things have been happening to big banks both here and abroad will scarcely be news to anyone who has read so much as the front pages of the past year's newspapers. What is not so well known is that these shocks are merely the surface expression of an earthquake, a revolution in the technology and function of banking that has shaken up the entire mechanism of the American economy. The revolution took place in the 1960s; looking back on that decade of talky turbulence-- Richard Hofstadter called it "the age of rubbish"--it seems somehow appropriate that the one revolution that actually came off occurred without publicity in the apparently solid structure of what was considered our most thoroughly conservative institution.
Banks have been around so long that we forget they were started with a purpose in mind. That purpose was to gather up what would otherwise be idle monetary assets and use them as grease for the wheels of commerce and industry. The forgetting process itself now has a hundred-year history: Walter Bagehot noted in 1873 that "we have entirely lost the idea that any undertaking likely to pay, and seen to be likely, can perish for want of money; yet no idea was more familiar to our ancestors." The malaise that tainted most people's contemplation of the American banking system in 1974 derived less from the handful of rather dramatic bank failures than from a sense that the system had lost its raison d'âtre. Downtown in the big cities one could scarcely wash down the sidewalk without splashing the plate-glass window of a bank, yet all over the country undertakings likely to pay could see themselves perishing for want of money.
The interest rates, of course, were high enough to inspire fear--effectively, counting the cost of "compensating balances" (money businessmen had to pay for but couldn't use), more than 15 percent per annum. "The Bank of England used to say that 6 percent would draw money from the moon," muttered Ralph Leach, chairman of the executive committee of Morgan Guaranty, studying an analysis some months ago, of what his bank would have to pay for money it was committed to lend. "They seem to have smarter people on the moon these days."
Whatever the definition of money--and however elegant the theoretical formulations, there is no really good, or even acceptable, practical definition--in modern societies the stuff is generated primarily by and through banks. The money shortages of 1974 argued a malfunction of the banking system. Nothing worked right; nothing felt right. We even sensed, briefly, that our monetary troubles did not result from an act