Deregulation

Much of our regulation of banking was created during FDR's terms as President, during the Great Depression. A leading figure in that Administration was Marriner Eccles, who instituted much of the banking regulation and became Chairman of the Federal Reserve. Eccles was the founder of First Security Bank of Utah and a descendant of Mormon Pioneers.

Among one of the major accomplishments of the regulation was dividing commercial banking from investment banking. Broadly, commercial banking was limited to taking deposits and providing a certain rate of return, in turn lending that money out locally, usually to its same customers, at a slightly higher rate of return, thus turning a profit. It was relatively risk-free. Stocks, bonds and other securities, which carried greater risks, but also greater returns on investment was the purview of investment banking. The investment banks finaced larger capital projects, dealt with larger nation-wide corporations and not only bought and sold securities, but provided financial advice on topics such as mergers and acquisitions.

The creation of the Federal Depositor Insurance Corporation, although largely financed by the banks themselves, guaranteed deposits in the advent of a bank failure, thus providing "moral hazard" in that the U.S. government stood behind the deposits...if self-funding was exceeded, the full faith and credit of the United States stood behind the deposits (up to a certain limit on each account).

In general, the Federal Reserve regulated commercial banking, and the subsequent Securities and Exchange Commission (SEC) was created to regulated the investment banks (Wall Street).

Other financial instituions (such as Savings and Loans, Credit Unions, etc.) sprang up over time and were intially regulated through state law. Following the Savings and Loan crash in the eighties and nineties, which occured largely by deregulating them and allowing them larger markets (such as real estate and development lending, the Office of Thift Supervision was created at the federal level to oversee the Savings and Loans sector - or what was left of it.

Beyond banking and financial institutions, local, state and federal government regulation followed the expansion and increasing complexity of the broader society. Indeed, the rise in government regulatory and oversight functions became known as the "Progressive Era," running from the late eighteen hundreds to the nineteen twenties, particularly the Administrations of Theodore Roosevelt (the "Trust Buster") and Woodrow Wilson. During this era, the country experienced hugeindustrial and population growth and became a world power. Perhaps, government desired a sense of sharing that power, as critics of the era today profess, but much of this was due simply to the normal constraint of democracy upon the economic system of capitalism.

Waves of immigrants arrived to staff the country's growing industrial power. Citizenship conveyed voting power and voting power brought about the concept of "social justice" wherein government intervened to prevent the worst forms of exploitation. In some respects, the "worker" of the new largely industrial North was little better off than the pre-Civil War slave of the agrarian South...and as government stepped in to bring an end to slavery, it subsequently stepped in to regulate the use of labor in the North. It is difficult to defend Child Labor laws as "socialism," although the immigrants of industrialization brought many of those ideas as well.

I would suggest that the "Progressive Era" did have a profound change on American society in a sense similar to the expansion of Rome or any historical Empire. As the population grew in both numbers and diversity of ethnic cultures, the need for greater administrative control and "law" grew with it.

There is a second important factor in this growth of government power, democracy. Throughout human history, the wealthy and powerful have seldom had a problem accessing government...whether a monarch or a president; a Roman senator or a U.S Congressman. Democracy didn't overturn this, but it did shift the emphasis from the rule of a minority to the rule of the majority, consequently giving a "voice" to all within the society via their "vote."

Time is up for today...will continue for another post or two on this topic.