Chapter 10. Constrained and Deregulated Banking in the Twentieth Century and Beyond

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This chapter is in the book Unsettled Account

c h a p t e r 1 0constrained and Deregulated Banking in the twentieth century and BeyondSeek neither license, where no laws compel, Nor slavery beneath a tyrant’s rod; Where liberty and rule are balanced well Success will follow as the gift of God, though how he will direct it none can tell.—aeschylus, The EumenidesNo matter where banking systems were within their evolutionary life cycle, the Great Depression and World War II stopped the process dead in its tracks. In response to financial devastation and wartime needs, governments enacted strict rules and regulations aimed at stabilizing the banking system and directing credit toward favored sectors. these con-straints—a sort of financial “lockdown”—combined with low, stable interest rates and robust economic growth, led to a period of unprec-edented banking stability. the gradual rise in market interest rates that began in the 1960s, the liberalization of banking regulation during the 1970s and 1980s, and the economic slowdown associated with oil shocks in 1973 and 1979, however, contributed to growing instability which, in turn, led to renewed cycles of crises, bailouts, mergers, and regulatory reform, which continue until the present day. the banking history of the period covered by this chapter warrants a volume of its own. Given that the focus of this book is primarily historical, this chapter presents an ab-breviated version of developments since the Great Depression.Constrained Bankingthe economic collapse that accompanied the Great Depression and World War II left indelible marks on the banking systems of the industrialized world. Many countries were struck with severe banking crises during the 1920s and/or 1930s. It is safe to say that few industrialized countries emerged from the interwar period with their banking systems completely intact. the unprecedented severity of these crises led policy makers in many countries to adopt wide-ranging reforms aimed at both reducing

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c h a p t e r 1 0constrained and Deregulated Banking in the twentieth century and BeyondSeek neither license, where no laws compel, Nor slavery beneath a tyrant’s rod; Where liberty and rule are balanced well Success will follow as the gift of God, though how he will direct it none can tell.—aeschylus, The EumenidesNo matter where banking systems were within their evolutionary life cycle, the Great Depression and World War II stopped the process dead in its tracks. In response to financial devastation and wartime needs, governments enacted strict rules and regulations aimed at stabilizing the banking system and directing credit toward favored sectors. these con-straints—a sort of financial “lockdown”—combined with low, stable interest rates and robust economic growth, led to a period of unprec-edented banking stability. the gradual rise in market interest rates that began in the 1960s, the liberalization of banking regulation during the 1970s and 1980s, and the economic slowdown associated with oil shocks in 1973 and 1979, however, contributed to growing instability which, in turn, led to renewed cycles of crises, bailouts, mergers, and regulatory reform, which continue until the present day. the banking history of the period covered by this chapter warrants a volume of its own. Given that the focus of this book is primarily historical, this chapter presents an ab-breviated version of developments since the Great Depression.Constrained Bankingthe economic collapse that accompanied the Great Depression and World War II left indelible marks on the banking systems of the industrialized world. Many countries were struck with severe banking crises during the 1920s and/or 1930s. It is safe to say that few industrialized countries emerged from the interwar period with their banking systems completely intact. the unprecedented severity of these crises led policy makers in many countries to adopt wide-ranging reforms aimed at both reducing

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