Feed on

FDR and his Administration aggressively promoted the passage of the bill that included Regulation Q. In general, this regulation put a limit on the interest rates that banks could pay on deposit accounts (to zero percent). Why would the government enforce such a regulation? Because the omniscient planners thought that they could direct resources in an economy better than private companies could. How so? Well, FDR believed that if banks were permitted to pay interest on deposit accounts, it would attract corporate treasurers to park their cash in bank deposits rather than deploying their funds in more productive investments (like banks just sit and eat those deposits anyway).

He believed at the same time that banks really wanted these funds (to sit on and admire of course), and therefore would engage in “destructive” competition by offering higher and higher interest rates to attract depositors. He needed to put a stop to this dastardly practice! If he made it illegal to offer interest on deposits, than corporate treasurers would look elsewhere to park their cash – hopefully in more “productive” investments than just leaving them in bank accounts.

I am not interested in analyzing whether it was a good idea (a simple examination of what happened to financial intermediation in the 1970s should answer that for you), nor am I interested in the ignorance of what banks do with their short-term liabilities. Rather, I want to focus simply on the nature of the complaint. Statists adore the idea that competition is destructive. But one of their major points of contention is that factor markets are not competitive, and therefore you should not expect to see evil corporations paying higher rents and wages. But that is exactly what FDR and his gang of corporatists were arguing – that there was too much rewarding of rents to the holders of financial capital. How funny then that these very same people believe that competition among firms in the labor market, and among countries via trade, would lead to a reduction in the wages that workers receive. If they readily admit that big bad greedy banks have an incentive to pay people for their services (i.e. to attract their deposits), then why would they behave any differently when they are hoping to attract workers?

One Response to “Regulation Q(uestionable)”

  1. Harry Wood says:

    Anybody trying to get interest from the bank remembers it well. When you called the bank about how come they were allowed to pay you nothing on your company’s checking account (and hypothecating it manyfold), they’d cite Regulation Q. Regulation Q was not a creation of Barney Frank or Chris Dodd — they had not been born yet.

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