Private Deposit Insurance: Stabilizing the Banking System

June 21, 1985 • Policy Analysis No. 54

Banking regulation is at a crossroads unlike any since the 1930s. Fundamental decisions are being made that will shape the future of the financial services industry. At the heart of the issue is the role the federal government should play in the banking industry of the future.

Since Adam Smith published the Wealth of Nations in 1776, many individuals have been convinced that the laissez‐​faire approach to business is the soundest. Advocates of free markets generally argue that it is impossible for any government entity, however well intentioned, to direct an individual firm or an entire industry as efficiently as the impersonal, seemingly uncoordinated market is able to do. In making this case, three fundamental flaws are commonly associated with attempts to either protect or centrally control a particular sector of the economy.