Reform of American Business Law

This 1929 crisis led to the Glass-Steagall Act of 1933, which introduced deposit insurance and required the separation of commercial and investment banking operations. In addition, the Banking Act of 1935 extended the powers of the Federal Reserve System and changed the way it operated.

Taken together, they make sense: Banks should not be allowed to toy with deopsitors' money, refundable on demand. In particular, if deposits were guaranteed by Federal money (in the long run, taxpayers' money).

Often forgotten, if not deliberately omitted, in 1938, an Act of Congress came to split the Federal National Mortgage Association into a Federal National Mortgage Association (try and say the acronym fast, and you will see it sounds something like "Fanny Mae") and the Government National Mortgage Association ("Ginnie Mae").

The purpose of these Federal Agencies was, obviously, to make up for the inability or unwillingness of private lenders to ensure a reliable supply of mortgage credit throughout the country. They would purchase, hold, or sell mortgage loans that had been originated by private lenders.

In some countries the government intervened directly in the financial system to allocate resources directly instead of letting market forces allocate them. In others, the tight control of interest rates suppressed competition between banks, which both assured them of making a profit and eliminated their inclination to take risk.

Back to Bank regulation or even tighter State intervention, for example direct State ownership, countries such as France, Germany, Italy and Japan did very well between 1945 and 1971.

Naturally recessions were not suppressed, but at least banking crises were.

There were two costs to this advantage: one is that when the State, and not the market, allocates resources, the outcome is never very efficient. The other is that there is always suspicion of political scandal, with funds reserved to those close to the Government.

In the immediate postwar period, both costs were imperceptible in Europe. First, everything had to be reconstructed, and the allocation was relatively clear. Second, many key sectors of the economy were nationalized, so the suspicion of favoritism was marginal.

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