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The Bank Act of 1933 is famous for the provision separating the investment and commercial banking activities of financial institutions. Another part of that act included what was known as Regulation Q. Fortunately it has since been repealed. What was Reg Q? Simply it was a law that forbid commercial banks from paying interest on demand deposits (think checking accounts).

The rationale for such a restriction? FDR did not want corporations to park their excess savings into these accounts (that is for another post). And why would this be attractive to corporations? Because commercial banks at the time competed like crazy to attract depositors. Let me restate that. There was some “input” in the economy that proved valuable to a firm (the bank). And because securing those inputs helped the firms (banks) achieve their objectives (either more profits, or a larger capital base and hence increased stability and confidence in their firm), companies bid aggressively against one another to obtain these valuable inputs. This bid the price of these inputs up. It threatened to bid them up so much that the President had to intervene to put a stop to it (he was actually trying to direct the investment activities of the corporations by doing this).

OK, I get it. But then let me ask: how is it possible to embrace a view of business that argues that when it comes to securing other valuable inputs (i.e. labor/workers) that not only do firms not compete hard to secure their services, but that they all manage to suppress the wages of these valuable inputs? Maybe interest rates get bid up because “excess savings” (i.e. the valuable input in my Reg Q story) threaten to walk away and go on strike or sabotage corporations if they are not paid their due? And maybe it is the case that workers have to sit idly by as corporations, who need their inputs to make profits, not only do not compete hard for them, but actually play a game of “who can pay workers less the fastest” without a single greedy firm, who aggressively bids up the price of excess capital, trying to bid for the services of flesh and blood humans.

Is there any way to reconcile those two views?

One Response to “Wicked Non-Exploiters of Savings”

  1. Harry says:

    I think Bastiat understood human nature better than Marx, but I am not going to condemn Marx for his twisted ideas of labor exploitation, but rather our progressive mother-keepers for their slavish clinging to Marx’s theories.

    They have no problem resolving the paradox.

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