Earlier this year, we published an essay titled "Banking's Middle Ground:
Balancing Excessive Regulation and Taxpayer Risk." Several points were
made in that essay: We cautioned against relying excessively on regulation
and supervision to maintain a safe and sound banking system; we advocated
enhanced market discipline of banks; and we urged continued attention
to antitrust issues as consolidation proceeds in banking. The bottom
line, as suggested by the title, was that there were a number of legitimate
objectives that must be balanced in formulating banking policy if the
public were to be well served in the years ahead.
Throughout the year, we repeatedly have heard calls for action to help
banks. Allegedly, banks are overregulated and cannot compete effectively
with other providers of financial services. Proponents of deregulation
typically advocate removal of or relief from interstate expansion
restrictions, expansion of the range of activities in which banks may
engage, and relief from capital regulation and from Community Reinvestment
Individually or collectively, these calls for action may have
considerable merit, but in our judgment they should not be implemented
solely because of concerns about the fate of the banking industry. The
welfare of the banking industry per se should not be an objective of public
policy. Imagine how the development of the automobile and airline
industries would have been retarded had we been willing to devote
substantial resources to protecting and preserving the railroads. And would
the public interest have been well served by such a policy?
In this spirit, the following letter, provided by a colleague here at the
bank, is instructive.
* * *
To: President Andrew Jackson*
The canal system of this country is being threatened by the spread of
a new form of transportation known as "railroads." The federal
government must preserve the canals for the following reasons:
One. If canal boats are supplanted by "railroads" serious unemployment
will result. Captains, cooks, drivers, hostlers, repairmen and lock
tenders will be left without means of livelihood, not to mention
the numerous farmers now employed in growing hay for horses.
Two. Boat builders would suffer and tow-line, whip and harness
makers would be left destitute.
Three. Canal boats are absolutely essential to the defence [sic]
of the United States. In the event of the expected trouble with
England, the Erie Canal would be the only means by which we could
ever move the supplies so vital to waging modern war.
For the above-mentioned reasons the government should create an Interstate
Commerce Commission to protect the American people from the evils of
"railroads" and to preserve the canals for posterity.
As you may well know, Mr. President, "railroad" carriages
are pulled at the enormous speed of 15 miles per hour by "engines"
which, in addition to endangering life and limb of passengers, roar
and snort their way through the countryside, setting fire to crops,
scaring the livestock and frightening women and children. The Almighty
certainly never intended that people should travel at such breakneck
Martin Van Buren
Governor of New York
January 31, 1829
* * *
Let me be clear. We are not comparing banks to the canals of the 1820s.
But, as argued in our earlier essay, it is far more appropriate to ask
if customers, broadly defined, of financial services firms would be
significantly better off were various restrictions to be lifted from
banks than to focus on the benefit of such action to banks. Unfortunately,
it is not easy to gauge the effects on customers. To be sure, it is
virtually certain that bank customers will gain as a result of deregulation,
since under the current regime bankers are precluded by regulation from
taking advantage of some opportunities, and thereby of meeting some
consumer demand. But the quantitative significance of remaining restrictions
may be small. After all, customers already have a wide range of options
when seeking financial services, and the fact that bankers feel they
are at a competitive disadvantage implies that many non-bank providers
have been successful.
The magnitude of these gains to customers is a critical issue. If
the gains are sizable, then the case for deregulation is necessarily
strengthened because these gains may compare favorably to the taxpayers'
costs of potential increases in bank risk-taking. If, on the other hand,
they are negligible, then all that remains is just another of the perennial
examples of an industry that pleads its case on marginal merit.
*Editor's note: A reference is made in this column
to a letter allegedly penned by Martin Van Buren to President Andrew
Jackson. It was critical of railroad growth. We later learned that others,
like us, had attributed such a letter to Van Buren, but that biographical
experts have never found the letter and suspect that it may not exist.