Upending the New Deal Regulatory Regime: Democratic Party Position Change on Financial Regulation

Abstract

Why did congressional Democrats upend the financial regulatory regime they had maintained since the New Deal? I argue that the congressional reforms of the mid-1970s paved the way for the Democratic Party’s turn against financial regulation. Prior to congressional reform, Democrats in Congress were especially parochial, and Southern populists dominated the House and Senate banking committees. These parochial and populist orientations complemented the radically decentralized banking system by New Deal financial regulations. The elimination of the seniority rule and other reforms reduced parochialism and strengthened Democratic leadership, enabling the party to enact deregulatory reforms that provided (short-term, at least) benefits to the diffuse interests of American savers and consumers at the expense of entrenched local industry groups. In the long run, however, these deregulatory reforms significantly accelerated the concentration of economic power held by the nation’s largest firms and wealthiest individuals.