Mintz and Schwartz - The Power Structure of American Business (original) (raw)

THE POLITICS OF AMERICAN FINANCE AND THE BANKING ACT OF 1933

Industrial organization and corporate governance varies considerably across developed countries. The most measured comparisons are between the U.S., Germany, and Japan. One of the more notable differences in forms of corporate governance relate to the role of financial institutions. In Germany and Japan, large and powerful financial institutions play an active role in monitoring corporate decisions. These institutions, predominantly commercial or universal banks, accomplish this through seats on the Board of Directors as representatives of both creditor and shareholder interests. In the U.S. financial institutions are fragmented by legislation and regulation. Commercial and investment banks, trust companies, mutual funds, and pension funds are all severely constrained in their ability to monitor firm behavior. The general proposition of this paper is that the laws and regulations that have shaped American finance are rooted in the political process. More simply, politics has, to a significant extent and a variety of ways, shaped finance. A political theory of American finance has been advanced by Roe (1991) where he identifies legislation and regulations that have directly affected the activities of U.S. financial institutions. One of the most significant pieces of legislation, the Banking Act of 1933, or Glass-Steagall, is the case study analyzed in this paper. My intention is to show how politics has helped to shape finance through a legislative history of Glass-Steagall. The political process can be seen as a function of group interests played out through the political structure. This paper identifies and evaluates these group interests in shaping the different parts of the bill and also shows how unfolding historical events affected the final outcome of the legislation. By this analysis this study hopes to provide one link in the chain of a more comprehensive political theory of American finance with its implications for comparative corporate governance, industrial organization and economic performance.