Effect of inflation of 1960’s and 1970’s
Effect of inflation of 1960’s and 1970’s
Economic system of free enterprise has contributed to economic success of United States. Success or failure of business enterprise or individual is determined on merit in free and competitive market with least government intervention. Most of the banks operate to make profit. However, unlike other industries banking industry plays a central role in country’s economy. Its performance affects the economic wellbeing of the society. Since 1930’s, the government has devised regulations to control operations of banking industry (U.S. Department of State, n.d.). In the wake of great depression and nationwide failure of commercial banks, Glass-Steagall Act was enacted in 1933 that separated investment and commercial banking activities, set up Federal Deposit Insurance Corporation and regulated interest rate on deposits (Sylla, n.d.). In 1956, the Congress passed the Bank Holding Company Act that further separated financial activities between insurance and banking. These rules prevented banks from operating in the insurance and the securities businesses. These banking reforms brought in stability in the banking but at the cost of innovation and competitiveness. These measures insulated the banking industry from risk.
Inflation rate from mid-60’s started rising and 1970’s saw inflation skyrocketing. The Fed increased interest rate with rising inflation. This led to a disintermediation process to occur. Many depositors withdrew their savings from banks and invested in market funds and non-bank assets seeking higher returns. This adversely affected health of banking industry.
The banking industry reacted and called for deregulation. Limitations posed by GSA were stifling banking industry. In 1980s, the government gradually phased out interest ceiling on bank. This helped banks to attract deposits again. In 1999, the Congress passed Gramm-Leach-Bliley Act in an attempt to modernize financial industry. This act repealed the Glass-Steagall Act.
Based on the above observations, we can infer that a higher inflation rate in the 1960s and 1970s adversely affected the health of the banking industry. Since then the financial sector along with the banking industry has evolved and gone through reforms. Further, rate of inflation is cyclic in nature. It periodically rises and falls. It cannot be said with certainty that banking industry might be healthier today if inflation had not risen in the 1960’s and 1970’s. However, it can be said with certainty that the lessons learnt since 1960’s with banking regulation has made the government, the federal reserve system and the banking industry wiser. The banking industry today has emerged stronger and its future looks healthier.
References
Sylla, Richard. (n.d.). The US Banking System: Origin, Development, and Regulation. The Gilder Lehrman Institute of American History, New York. Retrieved January 25 2016, from https://www.gilderlehrman.org/history-by-era/economics/essays/us-banking-s ystem-origin-development-and-regulation.
U.S. Department of State. (n.d.). The Role of the Government in the Economy. Retrieved January 25 2016, from http://countrystudies.us/united-states/economy-6.htm
“What is Fed: History”. (2015). Education, Teachers Resources. Federal Reserve Bank of San Francisco. Retrieved January 27 2016, from http://www.frbsf.org/education/teacher-resources/what-is-the-fed/history.
