On the Obsolescence of Commercial Banking

Abstract

This paper considers the obsolescence of commercial banking from the perspective of economic history. As a result of the enormous growth in money markets, it is now possible to operate a payments system in which liabilities payable on demand are backed by a diversified portfolio of liquid securities. Such a payments system, sometimes known as fund banking, is theoretically preferable to traditional commercial banking because it is not subject to the risk of runs or panics. The advantages of mutual fund banking are now being demostrated in the US marketplace, with the impressive growth of money market mutual funds with checking privileges.

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