National Economic Council Director Gary Cohn, formerly President of Goldman Sachs, startled markets last week by suggesting that the United States should re-impose the Glass-Steagall division between commercial and investment banking. That is probably desirable on balance, but the U.S. and global financial system was already a mess when Glass-Steagall was removed in 1999. We should do more, beyond restoring Glass-Steagall, to restore finance to its proper state.

The U.S. and British financial systems developed in different directions after 1870 or so. In Britain, the merchant banks were private partnerships, so were forced to stay small. Broking and dealing was hived off into specialist firms and the large deposit-taking banks never developed the IQ to become a serious threat to the merchants. The British financial system was thus stable, and could have remained so for millennia had it not been mutilated by successive governments through two world wars, decades of exchange control and a final decade of rampant inflation and crippling taxes.

In the United States, government policy was less damaging. However, the business mix of investment banking was different, the Trusts were much more interesting customers than the small and stagnant British industrial firms, while international business was only a modest part of the total mix. Consequently after 1900 major deposit-taking banks grew up that were not private partnerships and could grow to behemoth size. Naturally, since capital was not a constraint for such juggernauts, they took on trading businesses as well as commercial banking and true investment banking.

When 1929 happened, the British banking system was not much affected. The Bank of England prevented the merchant banks from making overseas loans, which had the mildly beneficial effect of forcing them to focus, fifty years late, on business from industrial companies. Then after three decades of somnolence they made a good job of recovering some of their international business in the 1960s. Unfortunately, among the other vital British interests Maynard Keynes gave away at the 1944 Bretton Woods conference was the emerging markets advisory business, for which he invented two unnecessary international institutions, the World Bank and the IMF, thereby providing the merchant banks with large-scale subsidized competition.

In the United States, the large banks with active trading desks proved as incompetent at managing their business in 1929 as they were to in 2008, resulting in two policy innovations by an aggrieved government: deposit insurance and the Glass-Steagall Act.