Momentum Builds to Repeal Depression-Era Regulations

By Labaton, Stephen | THE JOURNAL RECORD, September 1, 1991 | Go to article overview

Momentum Builds to Repeal Depression-Era Regulations

Labaton, Stephen, THE JOURNAL RECORD

By Stephen Labaton N.Y. Times News Service WASHINGTON _ Momentum is building rapidly in Congress and among federal regulators to repudiate and rewrite many laws and economic regulations that were pillars of the New Deal of the 1930s.

The changes, advanced by the Bush administration and moving quickly through Congress, which returns from its summer recess today, represent a fundamental shift in the philosophy of regulation.

Earlier in this century, rules were formulated to restrict the growth of financial powerhouses; the new view holds that conglomeration is better for the economy and helps the nation to compete internationally.

The House and Senate Banking Committees have already adopted important legislation to repeal Depression-era regulations that restrict the ability of banks to grow and enter new businesses, and other legislation making its way through Congress would overhaul laws restricting the growth of utilities.

Already the Banking Committees have approved legislation that would eviscerate the Glass-Steagall Act, which broke up the House of Morgan by restricting commercial banks from underwriting corporate securities.

The committees' swift approval of the legislation has been taken as a sign by many officials and lawmakers that Congress will adopt sweeping banking legislation this fall.

"We think it's very likely that there will be Glass-Steagall reform this year," Treasury Under Secretary Robert R. Glauber said.

"The only question is whether it's good reform or bad reform," he added, referring to the administration's preference for the Senate version, which would permit commercial banks to lend money to affiliated investment banks.

The final legislation is likely to constitute a refutation of the progressive populist movement that arose after the market crash of 1907.

The movement, one of whose intellectual fathers was Louis D. Brandeis, sought to decentralize economic power through laws that established a central bank and ultimately broke up the House of Morgan, the leading trusts of the day, and the public utilities that dominated economic life.

For more than a half century, those laws and regulations have framed the nation's financial system.

But now the Bush administration, many lawmakers and the regulators themselves have concluded that these laws are outdated and that they inhibit the United States' ability to compete.

The new philosophy, which is rapidly gaining widespread support, is that the Depression-era rules have lagged behind the realities of the marketplace, contributing to the crisis in the banking industry and hindering energy policy by restricting industrial companies from the power business.

"In the 1930s, we assumed that decentralization was the way to prevent mischief, and there was a basic mistrust of bigness, fueled by a period of populist upheaval," said Robert B. Reich, a professor of political economy at the John F. Kennedy School of Government at Harvard.

"Now the world has changed fundamentally, through advances in technology and the globalization of the marketplace. As a result, the concerns of the 1930s are not on anyone's mind. Washington is acting as if the Great Crash and many of the excesses of the 1920s never existed."

Lowell L. Bryan, head of the banking group at McKinsey & Co., the management consulting group, said the change reflects a shifting view from "the fear of bigness in the 1930s to the new fear that American institutions in the international sphere have become pygmies."

As a consequence, such cornerstones of the New Deal and its aftermath as the Glass-Steagall Act of 1933; the McFadden Act, which was amended in 1933; the Bank Holding Company Act of 1956, and the Public Utilities Holding Company Act of 1935, are coming under assault.

Another product of the Depression, the Investment Company Act of 1940, which regulates the enormous mutual fund industry, is also in the process of undergoing a thorough re-examination by the Securities and Exchange Commission, although changes in that law are not likely to be as radical as those in the other laws. …

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