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As recovery from the present economic crisis begins, policymakers must address what reforms will be made in financial system in order to prevent the reoccurrence of a similar crisis in the future. What will Congress do in response? In terms of long-term financial reform, what is to be expected from Congress is passage of legislation that increases oversight and regulation by the federal financial regulatory agencies. The purpose of this policy brief is to explain and evaluate one proposal for reform of the financial system that would help mitigate the policy conundrum that often results from conflicting short-run and long-run policies. This proposal, known as "narrow banking," would separately regulate and supervise the role of banks in providing a safe and stable means of payment from the system of credit creation by financial institutions. The heart of the proposal is to make checkable deposits as safe a means of payment as currency presently issued by the Federal Reserve System, but without the need for the elaborate supervisory and regulatory structure required when federal deposit insurance and the discount window are part of the financial safety net.

As recovery from the present economic crisis begins, policymakers must address what reforms will be made in financial system in order to prevent the reoccurrence of a similar crisis in the future. What will Congress do in response? In terms of long-term financial reform, what is to be expected from Congress is passage of legislation that increases oversight and regulation by the federal financial regulatory agencies. The purpose of this policy brief is to explain and evaluate one proposal for reform of the financial system that would help mitigate the policy conundrum that often results from conflicting short-run and long-run policies. This proposal, known as "narrow banking," would separately regulate and supervise the role of banks in providing a safe and stable means of payment from the system of credit creation by financial institutions. The heart of the proposal is to make checkable deposits as safe a means of payment as currency presently issued by the Federal Reserve System, but without the need for the elaborate supervisory and regulatory structure required when federal deposit insurance and the discount window are part of the financial safety net.

The coronavirus pandemic and its economic consequences, in terms of the monetisation of dramatically increasing public debts and of a sudden output collapse, have rekindled debates that are never entirely dormant on the economic and political consequences of traumatic, globally relevant events. The present pandemic has frequently been compared to a large-scale war, and attention has been devoted to the consequences of both. The fiscal and monetary policy response to the coronavirus crisis has evoked, particularly in Germany, memories linked to World War I and its aftermath: the chain of events leading from money oversupply to hyperinflation and, in 1933, to Adolf Hitler's appointment as Chancellor. Today, the pandemic has added further impetus to an aggressively accommodative monetary stance, particularly in the eurozone, and questions are raised about the risk of inflationary pressure and, in the long run, of unwanted political consequences.There are two issues: one is related to past developments, on which we have by now extensive historical research, while the other is concerned with the relationship between the money stock and the price level under stressful circumstances, in an environment of profound uncertainty. I shall not tackle this latter issue. Here I want only to stress that all periods have their own specific circumstances, and to draw similarities in their consequences is at best hypothetical. I focus on past events, aware that interpretations of them differ. As a response to presentday inflationary risks and political developments, I shall try to formulate in the final section what is, at best, an educated guess.To address the historical side of the matter in a short article is not easy; a long sequence of events must be considered, and their relative relevance is influenced by the 'mode of thought' of the writer. Moreover, this sequence raises the issue of causation, an issue that is much debated in historiography and puts to severe test the Latin dictum post hoc, ergo propter hoc, a dictum which, like many others coming from antiquity, is ambiguous: neither wholly wrong nor wholly right.

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