Regulatory skirmishes have been part and parcel of the United States since the country was founded, and have led to past financial panics and economic downturns.
Indeed, to know the history of regulation in the United States is to know American history itself.
Even before the 1781 Articles of Confederation brought together the original 13 colonies, battle lines were drawn between the would-be states as to the issuance of money, the use of government debt and credit, and how these important necessities would be regulated and by whom.
The creation of the First Bank of the United States, chartered by Congress in 1791, at the urging of Alexander Hamilton, the first secretary of the U.S. Treasury, and with the blessing of U.S. President George Washington, itself began a destructive battle that bitterly divided Washington and Hamilton from two of the young nation's other founding fathers, Thomas Jefferson and James Madison. The main focus of that fight: Regulation.
The charter for the First Bank of the United States expired in 1811 and the Second Bank of the United States came into being in 1816. After letting the charter for the Second Bank expire in 1836, a lengthy period of banking instability culminated in the Panic of 1907.
In response to the Panic, a third attempt at creating a "central bank" in 1913 yielded the Federal Reserve System under the guidance of Woodrow Wilson. The new Federal Reserve System was supposed to end financial panics, but more than a few notable economists, including the late Milton Friedman and current Federal Reserve Chairman Ben S. Bernanke, believe the Fed actually helped cause the Great Depression.
The Great Depression and Franklin D. Roosevelt's New Deal policies yielded substantial legislation and regulation aimed at every aspect of finance, banking and capital markets. Notable legislation included The Securities Act of 1933, The Securities Exchange Act of 1934, which created the U.S. Securities and Exchange Commission (SEC), the Glass-Steagall Act, The Investment Company Act of 1940, and the Investment Advisors Act of 1940.
As the pace of American economic growth accelerated, new markets and products would yield new regulations - and led to the eventual patchwork of regulatory agencies charged with keeping their respective products and players safe and on the level.
All of this helped feed the ongoing financial crisis by creating the regulatory morass we're still dealing with today.
[Editor's Note: For more insight on the Obama administration's effort to overhaul the financial regulatory system that led to the ongoing financial crisis, please click here to check out a related story that appears elsewhere in today's issue of Money Morning. That story - also by Contributing Editor Shah Gilani - is free of charge.]
News and Related Story Links:
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Yale Law School Avalon Project:
Articles of Confederation. -
Wikipedia:
First Bank of the United States. -
WhiteHouse.gov:
Thomas Jefferson. -
Wikipedia:
Alexander Hamilton. -
WhiteHouse.gov:
George Washington. -
Wikipedia:
Federal Reserve System. -
WhiteHouse.gov:
James Madison. -
Wikipedia:
The Securities Act of 1933. -
USHistory.org:
Second Bank of the United States. -
WhiteHouse.gov:
Franklin D. Roosevelt. -
Wikipedia:
Glass-Steagall Act. -
Amazon.com:
The Panic of 1907: Lessons Learned From the Market's Perfect Storm. -
WhiteHouse.gov:
Woodrow Wilson. -
Wikipedia:
Milton Friedman. -
Wikipedia:
New Deal. -
English.Illinois.edu:
Great Depression. -
Investopedia:
The Securities Exchange Act of 1934. -
The Free Dictionary:
The Investment Company Act of 1940. -
SEC.gov:
Investment Advisors Act of 1940.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.