The Last Financial Regulation Fight

This January 1981 Time article about the Carter administration’s bank regulation proposals casts current debates in an interesting light. One key issue was the deregulation of interest rates:

The Depository Institutions Deregulation and Monetary Control Act, which was passed by Congress last March, has ordered the phaseout of the ceilings that exist on the amount of interest that financial institutions can pay on passbook accounts. Banks can now give no higher than 5.25% interest, while Savings and Loans can pay a maximum of 5.5%. By 1986 there will be no Government-fixed interest limits. The new law also permits banks and savings institutions to pay up to 5.25% interest on money held in checking-like deposits known as NOW (for negotiable order of withdrawal) accounts. Previously the NOW accounts were available only in New England, New York and New Jersey. The changes are designed to help traditional savings institutions compete with popular new money-market funds that currently pay about 16% interest on checking-like accounts.

Note that a 5.5 percent nominal interest rate was ludicrously low in light of the inflation rate that prevailed at the time. Historically, depository institutions got to take advantage of a cozy regulatory cartel that prevented them from competing with one another, thus letting them all screw consumers. But money market funds ruined it, and led to deregulation of this point. But the really controversial idea was to allow banks to operate branches in multiple states:

San Francisco’s Bank of America has opened branches in Seattle, Dallas, Minneapolis and Cleveland to finance export business for corporations in those cities. These branches could easily increase their services if interstate banking is permitted. Bank of America’s outgoing president, A.W. Clausen, praised the White House proposal, saying that “interstate banking will foster a competitive market benefiting consumers.”


The Carter Administration recommendation, though, still faces substantial opposition in Congress. Small banks are expected to fight vigorously against any change in existing laws. Said one key congressional banking aide last week: “The chances of these proposals passing are remote. The small bank vs. big bank issue is still controversial.” Nonetheless, modern financial and credit needs in the 1980s appear to be an irresistible force for changing banking’s old ways. Citibank’s blue, compass-like trademark may yet become as familiar a symbol around the U.S. as McDonald’s golden arches.

This is just to say that we should be a bit leery of “Wall Street” vs “Main Street” constructs. Over on Wall Street are the headquarters of some large remote corporations trying to maximize profits and indifferent to the interests of consumers. Meanwhile, on Main Street you find the headquarters of medium-sized corporations trying to maximize profits and indifferent to the interests of consumers. In this case, you had banks in Seattle, Dallas, Minneapolis and Cleveland that didn’t want to face competition from Bank of America for their customers’ business.