How to Think About Financial Regulation

  • Helen A. Garten
Part of the International Political Economy Series book series (IPES)


In the United States, explanations of the origins of financial regulation are often as complex and contradictory as the regulation itself. US financial regulation has been depicted at times as uniquely American, reflecting the peculiar qualities of domestic law and culture,1 and at other times as derivative of the British experience;2 at times as a genuinely public-regarding effort to respond to the definitive economic event of twentieth century America, the Great Depression,3 and at other times as a private bargain that responded to nothing more than the needs of a few politically powerful interest groups;4 at times as a reflection of rational economic theory5 and at other times as an ‘incoherent barbarism’.6


Financial Market Public Choice Financial Regulation Security Market Regulatory Reform 
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Notes and References

  1. E.g., Ellis W. Hawley (1966), The New Deal and the Problem of Monopoly (Princeton: Princeton University Press), pp. 304–9 (tracing 1930s-era US banking legislation to the uniquely American fear of concentration of financial power).Google Scholar
  2. E.g., Edwin J. Perkins (1971), ‘The Divorce of Commercial and Investment Banking: A History’, Banking Law Journal, vol. 88, p. 485 (tracing 1930s-era US banking legislation to English precedent).Google Scholar
  3. E.g., Ferdinand Pecora (1939), Wall Street Under Oath: The Story of Our Modern Money Changers (New York: Simon and Schuster), pp. 283–92, especially p. 283 (arguing that legislators adopted Depression-era financial regulation after congressional hearings revealed ‘a shocking corruption in our banking system’).Google Scholar
  4. E.g., George J. Benston (1996), ‘The Origins of and Justification for the Glass-Steagall Act’, in Anthony Saunders and Ingo Walker (eds), Universal Banking: Financial System Design Reconsidered (Chicago: Irwin), pp. 59–65 (arguing that legislators adopted Depression-era financial regulation to further their constituents’ private political and commercial interests).Google Scholar
  5. For example, economists have credited federal insurance of bank deposits, created by Congress in 1933, with ‘achieving what had been a major objective of banking reform for at least a century, namely, the prevention of banking panics’. Milton Friedman and Anna Jacobson Schwartz (1963), A Monetary History of the United States, 1867–1960 (Princeton: Princeton University Press), p. 440.Google Scholar
  6. This phrase was used to characterize the attitude of today’s economists toward now-discredited ‘business cycle’ theories that influenced US monetary policy in the early 1930s. J. Bradford DeLong (December 1990), ‘“Liquidation” Cycles: Old-Fashioned Real Business Cycle Theory and the Great Depression’ (Washington: National Bureau of Economic Research), Working Paper No. 3546. Similarly, today’s financial scholars fault drafters of Depression-era financial legislation for relying on now-discredited banking theories such as the ‘real bills’ doctrine, which posited that ‘excessive’ money creation might be avoided by limiting bank credit to short-term self-liquidating loans, e.g., Walter M. Cadette (1996), ‘Universal Banking: A U.S. Perspective’, in Anthony Saunders and Ingo Walter (eds), Universal Banking: Financial System Design Reconsidered (Chicago: Irwin), pp. 711–12.Google Scholar
  7. For the origins of public choice theory, see Richard A. Posner (1974), ‘Theories of Economic Regulation’, The Bell Journal of Economic and Management Science, vol. 5, p. 335.CrossRefGoogle Scholar
  8. E.g., Gregory A. Mark (1995), ‘Some Observations on Writing the Legal History of the Corporation in the Age of Theory’, in L.E. Mitchell (ed.), Progressive Corporate Law (Boulder: Westview Press), p. 80.Google Scholar
  9. For descriptions of the operations of J.P. Morgan and other ‘private’ banks in the pre-Glass-Steagall era, see Pecora, op. cit., note 3, pp. 4–19; Ron Chernow (1990), The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (New York: Atlantic Monthly Press), pp. 205–377.Google Scholar
  10. Arthur N. Johnson (1968), Winthrop W. Aldrich: Lawyer, Banker, Diplomat (Boston: Harvard Graduate School of Business Administration Division of Research), pp. 149–53.Google Scholar
  11. E.g., Joseph P. Kalt and Mark A. Zupan (1990), ‘The Apparent Ideological Behavior of Legislators: Testing for Principal-Agent Slack in Political Institutions’, Journal of Law and Economics, vol. 33, pp. 103–31.CrossRefGoogle Scholar
  12. Louis D. Brandeis (1914), Other People’s Money and How the Bankers Use It (New York: Frederick A. Stokes).Google Scholar
  13. Joseph Auerbach and SamuelL Hayes, III (1986), Investment Banking and Diligence: What Price Deregulation? (Boston: Harvard Business School Press), pp. 17–21.Google Scholar
  14. Arthur M. Schlesinger, Jr. (1960), The Politics of Upheaval, vol. 3 of The Age of Roosevelt (Boston: Houghton Mifflin Company), p. 301.Google Scholar
  15. David T. Llewellyn (1996), ‘Universal Banking and the Public Interest: A British Perspective’, in Anthony Saunders and Ingo Walter (eds), Universal Banking: Financial System Design Reconsidered (Chicago: Irwin), p. 177.Google Scholar
  16. For a similar argument that government regulation encourages industry innovation, see Edward J. Kane (1980), ‘Accelerating Inflation, Regulation and Banking Innovation’, Issues in Bank Regulation, vol. 4, p. 7.Google Scholar
  17. Stephen Prouse (1996), ‘Comments’, in Anthony Saunders and Ingo Walter (eds), Universal Banking: Financial System Designed Reconsidered (Chicago: Irwin), p. 551.Google Scholar

Copyright information

© Helen A. Garten 2001

Authors and Affiliations

  • Helen A. Garten
    • 1
  1. 1.Rutgers University School of LawNewarkUNITED STATES

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