Strong Managers, Weak Owners: The Political Roots of American Corporate Finance

By Mark J. Roe | Go to book overview

CHAPTER 7
Banks Again

IN 1932, when Berle and Means “discovered” the modern corporation, with its distant shareholders and centralized managers, they were discovering a business organization partly produced by weaknesses in the organization of the early twentieth century's principal intermediaries, banks and insurers. While one might attribute the splintered American financial system to the New Deal, the origins of fragmentation lie deeper in the country's past.


THE NEW DEAL

The New Deal law's importance is in confirming, and not so much in creating, a fragmented banking structure by (1) keeping bank branching restrictions; (2) severing commercial from investment banking, thereby creating two deep but separate financing channels; and (3) adopting deposit insurance, which propped up small banks by stopping deposits from running off to large banks and encouraged all banks to weaken their own equity (to the point that they could not safely hold much stock). A chief propellant behind the laws was the preexisting strength of small-town banks, which got many of the benefits, and the public's predisposition both to protect them and to punish money center banks.1


The McFadden Act

Congress confirmed the state-by-state, separate banking systems first in 1927 by passing the McFadden Act, which allowed national banks to branch, but only as state law permitted, and again in 1933, when the New Deal Congress revisited the issue. The 1927 act allowed national banks to branch within a city or town, if state law permitted branching; the 1933 act allowed them to branch within the entire state, if state law permitted it.2

____________________
1
Donald Langevoort, Statutory Obsolescence and the Judicial Process: The Revisionist Role of the Courts in Federal Banking Regulation, 85 Michigan Law Review 672, 694, 697, 720–23 (1987); Jonathan Macey, Special Interest Group Legislation and the Judicial Function: The Dilemma of Glass-Steagall, 33 Emory Law Journal 1 (1984); George Benston, The Separation of Commercial and Investment Banking (1990).
2
McFadden Act, ch. 191, 44 Stat. 1224; Banking Act of 1933, ch. 89, § 23, 48 Stat. 162 (1933) (codified at 12 U.S.C. § 36 [1988]).

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