Much Ado about Regulation q: Banking Innovations and the Unravelling of the New Deal Financial Order

Conrad Jacober, Johns Hopkins University

In 1961, Citibank created the first secondary market for Certificates of Deposit (CDs), establishing a private money market to circumvent the Federal Reserve’s limit on depository interest rates, enshrined in Regulation Q. Financial journalist Philip Zweig described the magnitude of Citibank’s innovation as “a shot heard around the world… this new instrument would spark a revolution in banking and finance whose effects would be felt for decades.” The creation of the secondary market for CDs was, in Zweig’s words, “the opening salvo” in Citibank’s war against Regulation Q and the Federal Reserve’s system of regulated competition. Citibank’s innovation contributed to the growth of private money markets, such as Eurodollars and commercial paper, which circumvented the Federal Reserve’s depository regulations and anti-inflationary credit restrictions. In the 1970s, Regulation Q interest rate limits combined with high inflation to cause depositors to lose money on their savings, adding popular pressure to bank efforts to phase out Regulation Q and ultimately leading congress to deregulate Regulation Q in 1980, dealing one of the greatest blows to the New Deal financial order. While scholarship has emphasized the role of the consumer-saver movement in the demise of Regulation Q, the role of banks has been largely overlooked. I argue that bank responses to Regulation Q are critical in two regards: first, banks developed innovative political interventions, using public relations campaigns to magnify the demands of small savers towards deregulation; secondly, banks developed financial innovations that not only circumvented existing regulations but also created the architecture for a new financial order. Drawing on my research into the Walter B. Wriston papers at Tufts University, I reconstruct how banks’ political and market innovations developed within and against the New Deal financial order, consolidating the political and market power of finance well before financial deregulation was fully realized.

No extended abstract or paper available

 Presented in Session 20. The Dynamics of Finance, Wealth, and Inequality in Macrohistorical Perspective