It’s insightful to delve into the pivotal shift within the U.S. financial sector during the 1950s and early 1960s, moving from a highly regulated environment to one that became increasingly unfettered and profitable. This transformation didn’t happen in a vacuum; it was a response to ingrained New Deal-era regulations and the ambitions of a new generation of bankers seeking to reclaim influence and wealth after decades of constraint.
Following the devastating Great Crash of 1929 and the subsequent Great Depression, Congress enacted systemic changes, such as the Glass-Steagall Act, to prevent a recurrence of financial nightmares. This legislation, alongside other regulations, aimed to erect strict walls between commercial banking (deposit collection and lending) and investment banking (speculative activities). The goal was to protect small investors from financial fraud and small businesses from large retail chains. Banking in the immediate postwar era, through the 1950s, was consequently quite “sleepy”. The culture of finance had changed, with bankers expected to be inoffensive, white, male, Protestant, and “dull”. There was even a “missing generation” in banking and Wall Street, as few entered the profession from 1929 to 1950. Investment banks, like Morgan Stanley, were small, conservative, and focused on being service outfits with a “stately, incorruptible image,” not engaging in speculative activities or taking principal positions in transactions.
However, by the early 1950s, signs of a loosening New Deal regime began to appear. A significant moment was the Federal Reserve’s break from President Truman’s direct control in 1951, which allowed its board to make independent decisions. This newfound autonomy, while initially aimed at maintaining stable growth and low inflation, subtly created an environment where the Fed’s powerful levers over the banking system could be less rigidly applied.
A key driver of change stemmed from the banks themselves. In the late 1950s, as interest rates began to rise, large corporations started engaging in “cash management,” moving their funds from interest-free deposits at New York banks to higher-yielding money market instruments. This threatened the core wholesale lending business of banks like the House of Morgan, which lacked a cushion of consumer deposits. Facing a potential decline in relevance, money center banks were prompted to seek new ways to attract funds.
The pivotal innovation that truly “emancipated” banking from its regulatory confines arrived in 1961: the negotiable Certificate of Deposit (CD). Conceived by George Moore and Walter Wriston of First National City (Citibank), the CD was a clever workaround to Regulation Q’s cap on interest rates for deposits held under thirty days. By selling CDs that matured in more than thirty days, banks could now pay competitive interest, and these instruments could be freely traded. This innovation dramatically transformed how commercial banks operated, freeing them from their reliance on traditional, localized deposits. Cash began to flood into the big banks, with CDs outstanding growing from $5.8 billion by the end of 1962 to $18 billion by August 1966, and $90 billion by 1974.
The implications were profound:
- Unlimited Lending Capacity: Banks were no longer “tethered to a local deposit base” and could “buy money anywhere in the world,” allowing them to lend without previous limits.
- Shift to High-Margin Businesses: With newfound access to capital, banks began to “break or bend” traditional barriers, venturing into high-margin areas such as credit cards, leasing, and mortgage services.
- Emergence of a Parallel System: This aggressive circumvention of New Deal constraints led to the development of a “new unregulated parallel banking system just for the powerful,” operating alongside the old regulated one.
- Dominance of Private Financiers: This early deregulation allowed private financiers to increasingly dominate the economic boom and grapple for power with public regulators. The old boom-and-bust cycle, once thought tamed, began to return, though with a new twist: “twentieth-century bank bailouts” rather than nineteenth-century failures, due to the regulated banking sector providing a safety net.
The regulatory environment, under figures like James Saxon at the Office of the Comptroller of the Currency (OCC), increasingly accommodated these changes. Saxon, seeing Citibank as a “client,” actively fought to strip away New Deal rules, approving the vast majority of bank merger requests despite antitrust concerns from the Department of Justice. The Federal Reserve itself was described as being “held hostage,” often raising Regulation Q ceilings to avoid conflict with money center banks rather than enforcing strict limits.
The Eurodollar market, which had been developing in Europe since the late 1950s as an unregulated dollar-based credit market, also played a significant role. It allowed banks to avoid deposit-insurance premiums and mandatory reserves, enabling them to lend dollars “as freely as they pleased”. This provided another avenue for growth, especially when the Fed tightened credit domestically.
This period of “managed liabilities” and regulatory accommodation led directly to a surge in the profitability of the financial sector. Banks could now access virtually unlimited funds and deploy them in increasingly profitable, often riskier, ventures. While the full scale of financial deregulation and its impact on Wall Street profitability would become even more pronounced in later decades, the 1950s and early 1960s undeniably laid the groundwork for this transformation, setting the stage for finance to become one of the most profitable industries in the U.S. economy.