As the result of a careful examination of the principle on which the Act of 1844 was founded, and of the experience of its working since the time when it came into operation, I have no hesitation in giving it as my opinion that it is a total, unmitigated, uncompensated, and, in its consequences, a lamentable failure. (Tooke 1848, vol IV, p. 402)

The variations, in the rate of interest, during the year 1847, have exceeded in frequency and extent any of which there is to be found an example in the commercial history of this country. (Tooke 1848, vol IV, p. 400)

Note that the state can choose anything it likes to function as the "money thing" denominated in the money of account, and, as Knapp emphasized, can change "the thing" any time it likes: "Validity by proclamation is not bound to any material" and the material can be changed to any other so long as the state announces a conversion rate (say, so many grains of gold for so many ounces of silver). (Knapp 1924, p. 30) What Knapp called the State money stage begins when the state chooses the unit of account and names the thing that it accepts in payment of obligations to itself-at the nominal value it assigns to the thing. The final step occurs when the state actually issues the money-thing it accepts. In (almost) all modern developed nations, the state accepts the currency issued by the treasury (in the US, coins), plus notes issued by the central bank (Federal Reserve notes-green paper-in the US), plus bank reserves (again, liabilities of the central bank)-that is, the monetary base or high powered money (HPM). The material from which the money thing issued by the state is produced is not important (whether it is a gold coin, a base metal coin, paper notes, or even numbers on a computer tape at the central bank). No matter what it is made of, the state must announce the nominal value of the money thing it has issued (that is to say, the value at which the money-thing is accepted in meeting obligations to the state).

Many orthodox economists are "metallists" (as Goodhart 1998 calls them), who argue that until this century, the value of money was determined by the gold used in producing coins or by the gold that backed up paper notes. However, in spite of the amount of ink spilled about the gold standard, it was actually in place for only a relatively brief instant. Typically, the money-thing issued by the authorities was not gold-money nor was there any promise to convert the money-thing to gold (or any other valuable commodity). Indeed, throughout most of Europe's history, the money-thing issued by the state was the hazelwood tally stick. Other money-things included clay tablets, leather and base metal coins, and paper certificates. Why would the population accept otherwise "worthless" sticks, clay, base metal, leather, or paper? Because the state agreed to accept the same "worthless" items in payment of obligations to the state. Contrary to orthodox thinking, then, the value of the money-thing issued by the state was not determined by its intrinsic value, but rather by the nominal value set by the state at its own pay offices (at which it accepted payment of fees, fines, and taxes).

In the orthodox story, barter is replaced by use of a medium of exchange; due to its inherent characteristics, barterers soon settle on gold (or another precious metal) as the most efficient medium of exchange. In order to reduce transactions costs involved in assessing purity and weight, this metal is stamped and coined. However, it has long been established that the first coins were issued in Lydia and East Greece, probably no earlier than the third or fourth quarter of the seventh century BC, and long after other forms of complex financial instruments, local markets, and long distance trade had been established. If precious metal coins were indeed invented to reduce transactions costs, one wonders why it took so long to discover them. Further, while coins might have been important to the Greek world and perhaps to the Roman world, they played a relatively unimportant role throughout most of European history. Numismatists, such as Kraay (1964) have challenged the economistic thinking of orthodoxy by arguing that coins were invented to standardize payments made by and to the state.

In a detailed study of the origins of coinage in Greece during the seventh century BC, Kurke (1999) links the creation of coins to "a seventh/sixth century crisis of justice and unfair distribution of property", that was eventually decided in favor a democratically-leaning city state against a hostile elite. (Kurke 1999 p. 13) In her view, "the minting of coin would represent the state's assertion of its ultimate authority to constitute and regulate value in all the spheres in which general-purpose money operated simultaneously-economic, social, political, and religious. Thus, state-issued coinage as a universal equivalent, like the civic agora in which it circulated, symbolized the merger in a single token or site of many different domains of value, all under the final authority of the city." (Kurke 1999, p. 13) By tying the invention of coinage to the special circumstances of Greece during that period, Kurke's analysis makes it clear why coins were so unimportant to other societies, before and since. Further, as Kurke makes clear, since coins are nothing more than tokens of the city's authority, they could have been produced from any material. The choice of gold should be viewed as something of a coincidence, resulting from the particular hierarchy of metals in elite gift exchange extant in Greece at that time. In other words, and in contrast to the orthodox story, there is nothing inherent in gold (or silver, or copper) that guarantees its adoption as the money thing. A state is theoretically free to name anything it wants, although the historical circumstances might dictate that one thing is preferred over others.

Once the state has created the unit of account and named that which can be delivered to fulfill obligations to the state, it has generated the necessary pre-conditions for development of markets. All the evidence suggests that in the earliest stages the authorities provided a full price list, setting prices for each of the most important products and services. Once prices in money were established, it was a short leap to creation of markets. This stands orthodoxy on its head, by reversing the order: first money and prices, then markets and money-things (rather than barter-based markets and relative prices, and then numeraire money and nominal prices). The next step was the recognition by government that it did not have to rely on the mix of goods and services provided by taxpayers, but could issue the money-thing to purchase the mix it desired, then receive the same money thing in the tax payments by subjects/citizens. This would further the development of markets because those with tax liabilities but without the goods and services government wished to buy would have to produce for market to obtain the means of paying obligations to the state. As Heinsohn and Steiger (1983) say, the market is the place to which one turns for earning the means of debt settlement, including the means of tax settlement. This is quite different from the orthodox view that markets develop so that individuals may maximize utility by trading consumables.

The final theoretical topic to be tackled concerns money's supposed neutrality. The discussion thus far should make it clear that money cannot be neutral, as it is not simply a medium of exchange invented to lubricate market exchange. If, as I have hypothesized, money originated as a means to move resources to the public or state sector, then it clearly had a "real" impact. If, as Heinsohn and Steiger speculate, money was invented in private loan contracts, it played a crucial role in an important social relationship-that between debtor and creditor. Further, if one views the market as a place for earning the means of settling debts (both private debts and tax debts), rather than as a place to which one turns to increase utility through mutually beneficial trades, then one sees the market as a fundamentally monetized institution. Regardless of the origins of money and markets, institutionalists have always distinguished between the technical aspects of production and the pecuniary considerations involved in producing for markets. In the modern capitalist economy, the primary purpose of production is not to exchange for other consumables, but to "make money"-that is, to sell at a profit. The most famous characterization of capitalist production is Marx's M-C-M', according to which the capitalist begins with money (M) to produce commodities (C) to sell for more money (M'). Keynes advanced what he called the "monetary theory of production", emphasizing the same point; Dillard (1988) explicitly adopted Keynes's terminology, as have many institutionalists. (See also Mayhew 19xx and Wray 1993.) If modern production begins and ends with money, money cannot be neutral. Indeed, rather than arguing that money is a veil that hides "real" activity (as Friedman does), one might more accurately argue that money is the "real" variable that motivates production while the "real" output that results is just a veil that obscures the true purpose of individual decision making of capitalist production.

AN ALTERNATIVE VIEW OF FISCAL AND MONETARY POLICY

In the orthodox approach, the government must tax, borrow, or "print money" in order to spend. If the government borrows, that is likely to place upward pressure on interest rates, "crowding out" investment. If it prints money, that is likely to generate inflation. While most economists do not insist that government continuously balance its budget, limiting its spending to its tax revenue, they do believe that a perpetual deficit is to be avoided. Not only would it cause interest rates or inflation to rise (depending on whether the deficit were financed by borrowing or money creation), it could also eventually cause government insolvency and default on its obligations. During the last two decades of the twentieth century, "fiscal discipline" was increasingly imposed in most developed nations and in many developing nations (especially those that had fallen under the control of the IMF and World Bank). Indeed, several developed nations (including Japan, the US, Canada, the UK, and Australia) actually ran significant surpluses in some years during the final decade of the century. This was almost universally cheered by economists, as an antidote to the budget deficits that had been common in the post war years.

Institutionalists have always rejected such notions. They have always taken the pragmatic approach perhaps best espoused in Lerner's functional finance approach: "The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money, and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound." (Lerner 1943, p. 39) Further, institutionalists have recognized that the notion that government borrowing "crowds out" private borrowing is really based on either the loanable funds argument or on the supposition that the supply of money is fixed. Foster (1981) was among the first to recognize how revolutionary was Keynes's argument that investment creates an equivalent amount of saving; similarly, a government deficit must also create an equivalent amont of saving. Hence, a government deficit cannot absorb saving that would otherwise have gone to finance investment. Further, given the endogenous money arguments provided above, it is clear that government borrowing could not reduce the amount of "money" available for firms to borrow from banks. Banks create money when they make loans, and no amount of government deficit spending would reduce bank ability to create deposits for firms to use to finance investment.

These are powerful arguments, even if they appear rather simple. However, they can be strengthened by adding the Chartalist or taxes-drive-money approach. When a modern government spends, it issues a check drawn on the treasury; its liabilities increase by the amount of the expenditure and its assets increase (in the case of a purchase of a good produced by the private sector) or some other liabilities are reduced (in the case of a social transfer). The recipient of the check will almost certainly cash it at a bank, in which case either the recipient will withdraw currency, or (more likely) the recipient's bank account will be credited. In the former case, the bank's reserves are first increased and then are reduced by the same amount. In the latter case, bank reserves are credited by the Fed in the amount of the increase of the deposit account. The bank reserves carried on the books as the bank's asset and as the Fed's liability are nothing less than a claim on government-issued money, or, a leveraging of HPM. In other words, treasury spending by check really is the equivalent of "printing money" in the sense that it increases the supply of HPM. Unless bank required reserves happened to increase by an equivalent amount, the banking system will typically find itself with excess reserves after the treasury has spent, creating HPM.

The important thing to notice is that the treasury can spend before and without regard to either previous receipt of taxes or prior bond sales. In the US, taxes are received throughout the year (although not uniformly as tax payments are concentrated around April 15 and other quarterly due dates). These are mostly paid into special tax accounts held at private commercial banks. (Bell 2000) It is true that the Treasury transfers funds from these private bank accounts to its account at the Fed when it wishes to spend, but this is really a reserve maintenance operation designed to minimize effects on reserves that result when the treasury issues checks. When the treasury spends, bank reserves increase by approximately the same amount (less only cash withdrawals) so that the simultaneous transfer from tax accounts is used to neutralize bank reserves. These additions to/subtractions from reserves are carefully monitored and regulated by coordination between the Fed and the treasury, but this should not confuse analysts about the processes at work. The Treasury spends by having the Fed emit HPM; that HPM is simply a liability that can be increased at will. The treasury does not need to transfer deposits from private banks to the Fed in order to spend; it needs to do so simultaneously with spending only to minimize reserve effects.

On the other hand, tax payments by households lead to a reserve drain as the treasury submits the checks to the Fed for clearing, at which point the Fed debits the bank's reserves. Things would be much simpler and more transparent if tax receipts and treasury spending were perfectly synchronized. In that case, the treasury's spending would increase reserves, and the tax payments would reduce them. If the government ran a balanced budget there would be no net impact on reserves. In this case there would be no need for the complex coordination between the Fed and treasury using tax and loan accounts because there would be no reserve effects so long as the budget were balanced.

However, let us suppose that the timing were synchronized but that spending exceeded tax revenues so that a budget deficit resulted. This means that after all is said and done, there has been a net injection of reserves. It is possible that the extra reserves created happen to coincide with growing bank demand for reserves-in which case the Treasury and Fed need do nothing more. More probably, the net injection of reserves resulting from budget deficits would lead to excess reserves for the banking system as a whole. The receiving banks would offer them in the fed funds market, but would find no takers. This would cause the fed funds rate to begin to fall below the Fed's target, inducing the Fed to drain reserves either through an open market sale or by reducing its discounts. When the treasury runs a sustained deficit, quarter after quarter and year after year, the Fed would find it was continually intervening to sell bonds; obviously, it would eventually run out of bonds to sell. This is why, over the longer run, responsibility for bond sales designed to drain excess reserves from the system must fall to the treasury-which faces no limit to its own sales of bonds as it can create new bonds as needed.

While it may sound strange, we conclude that Treasury bond sales are not a borrowing operation at all, but are in fact nothing but a reserve draining operation. This becomes apparent when one recognizes that the Treasury cannot really sell bonds unless banks already have excess reserves, or unless the Fed stands by ready to provide reserves the banks will need to buy the bonds. If the Treasury typically tried to first "borrow" by selling bonds before it spent, it would be trying to drain reserves it will create only once it spends. As it drained required or desired reserves, it would cause the fed funds rate to rise above the Fed's target-inducing an open market purchase and injection of reserves by the Fed.

Another way of putting it is that the government spends by issuing IOUs, and the private sector uses those IOUs to pay taxes and buy government bonds. Obviously, if government spending were the only source of these IOUs, the private sector could not pay taxes or buy bonds before the government provided them through its spending. In the real world, government spending is the main, but not the only source, of the IOUs needed by the private sector to pay taxes and buy government bonds. In addition, the central bank provides its IOUs through discounts or open market operations, and these IOUs are perfect substitutes for treasury IOUs. Unfortunately, most economists have become confused about all this because they do not understand the nature of the coordination between the Fed and the Treasury.

Indeed, most economists do not understand that monetary policy has nothing to do with the quantity of money, but is concerned only with the overnight interest rate. The central bank's provision of, or removal of, reserves is nondiscretionary and is always merely in response to actions of the treasury or the private sector. On the other hand, fiscal operations always impact reserves, and government deficits always lead to a net injection of reserves. Boulding came close to capturing this when he said:

It's just as true as it is funny,
That Deficits increase our money;
In understanding this there lies
The power of States to Stabilize.
(Boulding 1958, p. 183)

The purpose of government bond sales is not to borrow reserves -- a liability of the government-but is instead designed to offer an interest-earning alternative to undesired non-interest-earning bank reserves that would otherwise drive the fed funds rate toward zero. Note that if the Fed paid interest on excess reserves, the Treasury would never need to sell bonds because the overnight interest rate could never fall below the rate paid by the Fed on excess reserves. Note also that in spite of the widespread, orthodox, belief that government deficit spending places upward pressure on interest rates, it would actually cause the overnight rate to fall to zero if the treasury and Fed did not coordinate efforts to drain the created excess reserves from the system. (For proof of this, note that for many years after the mid 1990s, the overnight interest rate in Japan was kept at zero, in spite of government deficits that reached 8% of GDP, merely by keeping some excess reserves in the banking system.) On the other hand, budget surpluses drain reserves from the system, causing a shortage that would drive up the fed funds rate if the Fed and Treasury did not coordinate actions to buy and/or retire government debt. Needless to say, orthodoxy has got the interest rate effects of government budgets exactly backwards.

One could think of government bonds as nothing more than HPM that pays interest-indeed, as described above, the government would never need to sell bonds if the Fed paid interest on excess bank reserves, or if the Fed's interest rate target were zero. Bond sales are not really a borrowing operation but are instead an interest rate maintenance operation. Obviously, however, banks are not the only entities in the private sector that would like to earn interest by holding government IOUs. Indeed, households and firms generally like to accumulate a portion of their net wealth in the form of interest-earning government debt. In a growing economy, the outstanding stock of government IOUs (both interest-earning and non-interest earning) will need to grow to keep pace with the demands of the private sector. This means that a government deficit should be the "normal", expected, situation. In contrast, sustained budget surpluses can be achieved only by draining the government IOUs held as net wealth. This is why government budget surpluses usually cannot be sustained for long-they reduce the private sector's disposable income (because taxes exceed government spending) and destroy private net wealth (by draining government IOUs), and hence set off tremendous deflationary impacts on the economy.

MONETARY POLICY RECOMMENDATIONS

The main monetary policy recommendation that follows from this analysis is that central banks should abandon any pretense that they can influence the quantity of reserves or the quantity of money privately created. They should admit that they only set the overnight interest rate-the fed funds rate in the US. This of course sets the base interest rate; short-term interest rates on government debt are determined rather directly by the fed funds rate because the banking system uses this market as a substitute for the fed funds market to adjust reserves at the individual bank level. Longer-term government debt is priced more complexly because it must include potential capital gains and losses that result from future changes to the fed funds rate target. When a central bank frequently changes its targets wildly-as the Fed has increasingly done since the mid 1960s-a great deal of uncertainty about future policy must be built into the pricing of longer term assets. Indeed, this is the primary reason that markets deconstructed every word uttered by Chairman Greenspan during the 1990s, trying to anticipate policy moves that would impact asset prices.

It is very difficult to see why a great deal of uncertainty about Fed interest targets is desirable. Wild swings of asset prices tend to reinforce uncertainty and encourage speculative behavior. As Keynes argued, "Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." (Keynes 1964, p. 159) An "active" Fed that continually tries to surprise markets with interest rate adjustments promotes the casinos over enterprise. As Tooke argued in the quote above, "[T]he greater or less liability to variation in the rate of interest constitutes, in the next degree only to the preservation of the convertibility of the paper and the solvency of banks, the most important consideration in the regulation of our banking system." (Tooke 1959, p. 124) As the Fed's propensity to destabilize the interest rate has increased since the mid 1960s, speculative behavior has increased and economic performance has suffered. Obviously, other factors have also contributed to this and we cannot say with certainty that greater instability of interest rates has been the decisive factor.

The orthodox response is that the Fed must move interest rates countercyclically in order to help to fine-tune the economy-to fight inflation in booms and lower unemployment in recessions-hence, even if this contributes to greater instability of asset prices, the Fed cannot abandon its responsibility. There are, however, strong reasons to doubt that Fed policy has much impact on either unemployment or inflation. As discussed above, low interest rate policy in a slump does not seem to have much effect on spending-for fairly obvious reasons, consumers are reluctant to borrow when they fear losing their jobs, and firms are unlikely to invest as sales are falling.

Furthermore, the interest rate is really a redistributive variable, as for every interest payment there is an interest receipt. When the Fed lowers interest rates this does indeed benefit new borrowers and anyone with existing debt that can be reset at a lower rate. However, all those who rely on interest payments for income (particularly pensioners and financial institutions) suffer as rates fall. Interest income has increased greatly in the postwar period as the population has aged, and as workers have built up pension funds and other savings for their retirement years. The conventional argument is that interest payments represent a transfer from mostly low and middle income earners to the rich, hence, lower interest rates redistribute income from those with a low marginal propensity to consume toward those with a high propensity to consume. There is surprisingly little work on this, however. With the aging of western societies, the redistribution that results today from rising interest rates is probably mostly from firms and younger workers (especially from new homeowners with mortgages) toward elderly persons. It is not clear that this necessarily reduces the overall propensity to consume. More importantly, in a modern economy with a large outstanding stock of government debt, the redistribution is largely from government to households and firms. Indeed, if the stock of government debt were large relative to national income and to private debt, it is possible that lower interest rates actually depress spending because of the effect on private sector incomes as government interest payments fall. It is conceivable that Japan reached such a situation in the late 1990s, when short term interest rates effectively reached zero.

Can central banks stabilize the overnight interest rate? Yes, so long as they do not try to peg currency exchange rates. Recall from the discussion above that during the Great Depression the Fed worried that if it kept interest rates too low, the US would lose reserves of gold. Exchange rates are fixed on a gold standard and hence only adjustments of the interest rate could stem a "run" on dollar-denominated assets. In the modern world, countries do not operate on a gold standard, and most countries have adopted floating exchange rates. Hence, if the US were to keep interest rates lower than those abroad, it is possible that from time to time there might be downward pressure on the dollar. So long as the US allows the dollar to fall, it can maintain low interest rates without losing international reserves. Note that low interest rates do not necessarily cause currency depreciation-Japan's currency has remained exceedingly strong (many would say it was overvalued) even with overnight rates at zero. Exchange rates, like long term interest rates, are complexly determined and the overnight interest rate is only one factor that goes into their determination. However, in any event, so long as exchange rates are indeed flexible, a nation's overnight interest rate is "exogenous" and can be set anywhere the central bank wants to put it.

What else should a central bank do? We have dealt with the issues that are most closely related to orthodox views on monetary policy: reserves, money aggregates, inflation, and interest rates. In addition, we have addressed Bagehot's recommendation that the central bank must operate as a lender of last resort--still among the most important functions of the central bank. There is also a wide array of other important central bank functions:

Setting required reserve ratios: While orthodox economists believe that required reserve ratios give the central bank leverage over private money creation, we have seen this is false. Others believe that maintenance of reserves makes banks safer because they hold a liquid asset. However, if a central bank stands ready to discount eligible assets, a bank does not need to hold reserves for liquid purposes. Indeed, it could be argued that required reserves in excess of the level of reserves that would be held voluntarily for clearing purposes acts like a tax on banks (forcing them to hold assets that do not earn a return). If this lowers bank profitability it could actually reduce bank safety and soundness. The UK has never had legal reserve ratios; Canada has recently moved to a system in which the required reserve ratio is zero. On balance, there is probably little argument in favor of retaining legal requirements, and in practice, legal ratios in the US are now so low that they probably are not very binding especially given all the innovations banks use to reduce requirements (such as sweep accounts).

Finally, as discussed above, government spending creates bank reserves, and reserve requirements force banks to hold nonearning reserves rather than earning government bonds. Hence, one might conclude that reserve requirements lower government "borrowing" costs (a point frequently made by populist groups such as COMER in Canada). However, the government can have any "borrowing" cost it wants, including zero, merely by setting the fed funds rate target at that level. It seems a bit strange to argue that banks, alone, should earn zero if the government has decided that everyone else can earn a positive return by holding government liabilities. Alternatively, as discussed above, the Fed could pay interest on reserves-in which case the difference between bank reserves and treasury bills disappears. Equivalently, the Fed could allow banks to count interest-earning government liabilities as reserves to meet requirements.

Credit Controls: Many support use of the Fed to try to channel credit to some areas, and to discourage it from others. Some have argued for asset-based reserve requirements to discourage banks from holding some kinds of assets. For example, if the Fed wanted to encourage home mortgage loans but discourage commercial real estate loans, it could require reserves against the latter, but exclude home mortgages from reserve requirements. The same sort of result can be obtained by risk-weighting assets and requiring greater net equity ratios against riskier assets (as is done with the Basle Accord), or simply by imposing a tax on bank purchases of riskier assets. All such requirements work by reducing the relative return on unfavored assets. Others have emphasized that central banks can impose margin requirements on borrowers, requiring them to put up liquid assets as collateral-raising the cost of borrowing. In the US, the Fed has the authority to change margin requirements on stock purchases, so that buyers are constrained in the percent of borrowed funds they may use to purchase stocks. During the NASDAQ boom after the mid 1990s, the Fed refused to raise margin requirements, although some believe this would have constrained the boom.

Encourage provision of financial services: Relatedly, many American analysts want to use the Fed and other monetary authorities (including other regulatory agencies such as the FDIC, the Comptroller of the Currency, and state banking regulators) to encourage an increased supply of credit to areas thought to be underserved. Most importantly, some studies have shown that financial institutions have traditionally discriminated against certain groups (racial minorities, women) and have "red-lined" some neighborhoods (drawn a "red line" around neighborhoods to which they would not provide many services, including loans). Note that redlining is not exactly the same as discrimination-while red-lined areas typically were neighborhoods with a high proportion of minority residents, even white males living in them would be denied banking services simply because they lived in red-lined areas. The Community Reinvestment Act in the US forced banks to report on the services provided in their own self-defined business area, and many analysts believe this has played an important role in reducing discrimination and red-lining activity. In addition, it has often been believed that more credit needed to be supplied to finance certain activities deemed to have significant social worth. This led to creation of Government Sponsored Enterprises (essentially institutional arrangements that put government guarantees behind loans initiated by private lenders) that have targeted lending to favored groups such as homeowners (Fannie Mae), students (Sallie Mae), farmers (Freddie Mac), and veterans. (Stanton 1991)

Supervision and regulation: Many economists have argued that bank regulation and supervision is a necessary corollary to central bank lender of last resort activity as well as to implicit and explicit government guarantees (such as those offered through FDIC and the Government Sponsored Enterprises). If government intervenes to prevent or contain failures, then adverse incentives are created. While all modern, developed, economies regulate and supervise financial institutions, the US is fairly unusual in the degree to which responsibilities are shared by the Fed, the FDIC (and in the past, the now-defunct FSLIC), the FHLBB, the Comptroller, and state regulators. There have been sensible proposals to streamline and consolidate these activities in the US, but they have never made much headway. Part of the problem is that financial institutions have been very important campaign contributors, and seats on House and Senate committees that have anything to do with financial institutions are highly prized as campaign cash cows. Since the early 1970s, most changes to supervision and regulation have been free-market-oriented, designed to unleash "entrepreneurial initiative". The most notorious example is the series of legislative maneuvers that succeeded in "freeing" US savings and loans associations to "market forces", playing a significant role in creating the thrift crisis of the 1980s that required a massive government bail-out. (Wray 1998) More recently, the Glass-Steagall Act (that had separated commercial banking from investment banking since the Great Depression) was eroded, first for the biggest financial institutions, allowing commercial banks to become involved in equities markets. As this chapter is being written, the deregulation chickens are coming home to roost as the Enron fiasco spreads to Enron's partner banks, including J.P. Morgan and Citi-Group. It is also becoming apparent that the mostly self-regulated accounting firms played an important role in hiding Enron's financial mis-dealings, just as they had done in the Saving and Loan fiasco a dozen years earlier. Unregulated markets seem to do well when they are doing well, and remarkably poorly when the offal hits the fan. It is too soon to forecast how this will all play out, but a very serious and prolonged recession is likely to contribute to such a financial mess that there will be a sea-change of policy, away from laissez-faire and back toward New Deal-era sorts of reforms. 

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