Bank Credit and Capital Formation: The Heretical Views of Harold Moulton and Adolf Berle

24 Pages Posted: 29 Aug 2017

Date Written: July 3, 1996


The long-standing barriers between commercial and investment banking have eroded, both with and without the help of Congress and the federal bank regulators. The restrictions were originally put into place in the 1930s in response to fears that merging the activities would, and did, lead to fraudulent activities. At the time the legislation was passed, there were those such as Adolf Berle, who believed that the separation would have long term detrimental consequences for the capital development of the economy. Berle argued that if commercial banks could not undertake long term capital investments, then a government owned, nation-wide system of capital-credit banks should be established along the lines of the Federal Reserve System. He based his argument on the theory developed earlier by Harold Moulton of The Brookings Institution, that because a fractional reserve banking system allows lending without a directly corresponding reduction in consumption expenditures, the credit so created by the banking system could be used for investment in capital. Moulton developed his views in a book published by the Brookings Institution in 1935, and Berle presented his proposal in 1939 to the Temporary National Economic Committee (TNEC).

The purpose of this paper is to present the views of Moulton and Berle, evaluate their proposal and its relationship to present day proposals for government involvement in public capital creation. Finally, there is an assessment of the political feasibility of such proposals.

Keywords: bank credit, capital formation, berle, moulton

JEL Classification: G21, G28

Suggested Citation

Phillips, Ronnie J., Bank Credit and Capital Formation: The Heretical Views of Harold Moulton and Adolf Berle (July 3, 1996). Available at SSRN: or

Ronnie J. Phillips (Contact Author)

Colorado State University ( email )

Fort Collins, CO 80523-1771
United States


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