Abstract

The 1966 and 1969-70 credit crunches were the first instances of near-panic in American banking since the 1930s. Unlike later crises, financial stress was engineered by the Federal Reserve which forced commercial banks to cut lending it deemed inflationary. In both 1966 and 1970, the Fed abandoned this approach when it appeared to contribute to financial instability outside banks (in 1966 in the municipal securities market, in 1970 in the Commercial Paper market). These turns and subsequent liquidity injections have rightly been associated with the re-emergence of the central bank’s lender of last resort function. This paper argues they were part of a larger shift in the relationship between banks and the state. The banks exploited the period’s financial instability to lobby successfully for the end of their subsidiary status in the nation’s credit policy system. In the words of a contemporary banker, they sought ‘to re-enter the mainstream of private enterprise’. They first fought back what they perceived to be selective credit controls in the form of Regulation Q ceilings. They then achieved a loosening of restrictions on their activities in the 1970 amendments to the Bank Holding Company Act. Finally, through their influence on the 1971 Report of the President’s Commission on Financial Structure and Regulation and expanded presence in Washington, they pushed the legislative agenda towards the elimination of New Deal era banking regulations. A careful study of the period’s banking politics illuminates later developments in banking practice and regulation.