The Long and Bumpy Road to Glass-Steagall Reform: A Historical and Evolutionary Analysis of Banking Legislation - Other Articles - Glass-Steagall Banking Act of 1933

American Journal of Economics and Sociology, The, Oct, 2001 by Jill M. Hendrickson

Economists also offer perspectives on access to policy making. According to Becker (1983), individuals belong to groups, defined in this instance by industry, who attempt to improve their well-being by using political power and pressure to achieve certain goals. It is the competition between the interest groups that determine the political outcome, be it regulation, tax policy, or subsidy policy. In their model of interest group behavior surrounding branch-banking legislation, Abrams and Settle (1993) also begin with Becker's framework.

B. Economic Theory of Regulation

McChesney (1997) outlines the evolution of economic thought on the theory of regulation. Through 1970, the prevalent theories understood regulation to be necessary in order to correct perceived failures in the market. In 1971, George Stigler introduced a different way to look at regulation by modeling it through the process of exchange. If there were an effective demand for regulation as well as a supply, the outcome would be regulation. From this perspective, it is understood that firms may desire and benefit from regulation. Such benefits are known as rents or political rents (McChesney 1997). These benefits, however, often come at a high cost, particularly since there must be an incentive for those supplying the regulation. These costs, in addition to market distortions, may include votes, campaign contributions, and other lobbying costs paid by the beneficiaries of the regulation.

In Stigler's (1971) model, firms were hypothesized to benefit from regulation at the expense of consumers. More recently, this model has been expanded to recognize situations in which subgroups within a particular industry may search for infra-marginal rents through regulation at the expense of other subgroups in the industry. For example, small bankers may seek regulation that keeps all commercial banks isolated from investment banking because that will ensure them more of a competitive position against the large commercial banks. However, economic theory also suggests that the subgroup that may lose, for example, the large bankers, will find it worthwhile to also seek political rents. Thus, regulation may be viewed as an exchange process in which many groups have an incentive to lobby the political process for rents.

C. Contributions to the Literature

The political process and regulation literature complement each other from the perspective that the process literature examines how interested groups gain access to the political process while the regulation literature explains why they would be interested in doing so. This analysis borrows some of the theory from existing literature but is also critical of it for two reasons. First, this literature focuses primarily on the role of interested groups or subgroups and says little about the role markets often play in the legislative process. Yet, regulation or deregulation is frequently a response to market developments. Second, unlike Becker (1983) and Abrams and Settle (1993), who envision interest groups as maximizers able to achieve some political equilibrium, this paper argues that there is no equilibrium but, rather, an evolutionary process of adjustment. (1) In other words, as industries and the economy continue to evolve, the interests of the group continue to change and adapt. New knowledge, new product s, new ways of doing business, and new competition continue to change the industry so that the interests of the group evolve with the dynamics around them. From this perspective, one shared with Hayek (1937), it is neither desirable nor possible to reach an equilibrium. As this paper considers the long and often bumpy road of Glass-Steagall reform, it becomes clear that equilibrium has not been reached and, indeed, that more bumps may lie on the road ahead.