I have the 2008 hardcover edition, and in that edition, Chapter 10 starts on page 249. I could not spot that quote - what is the section title?
In any event, in the 2008 edition, there is a section “Prudence and Surveillance” within Chapter 10. In it, he describes “customer and collegiate surveillance.” The argument is that when banks were largely allowed to fail, the private sector had no choice but to monitor bank risk taking.
- Customer surveillance refers to surveillance depositors; they will pull their deposits out if they view the bank as especially risky.
- Collegiate surveillance refers to surveillance by banks and other institutions that lend to a bank in the wholesale money markets (e.g., in the Fed Funds market to make up reserve deficiencies).
As for why this matters, this shows up in the rest of Chapter 10. He describes how bank lending determines the level and type of investment.
Financial market and banking affect investment because the current value of capital assets and thus the demand price for investment outout are determined in financial markets, because the amount of investment that will be financed depends upon banking processes, and because the supply price of investment depends upon the cost of finance. (Page 254 of the 2008 edition; first section of Chapter 10).
In his section “Coda” he then argues that “there are no effective barriers to bank expansion and thus to the destabilising impact of banks on demand.”
In other words, he is worried more about the instability created by banking as a result of the lack of regulation of their portfolio growth, rather than whether people lose money.