The Banking Environment of the 1960s

On June 27, 1970, Dr. Charls Walker, the under secretary of the Treasury, addressed the newly appointed members of the Presidential Commission on Financial Structure and Regulation (the Hunt Commission). During his opening remarks, Walker noted that the commission was meeting because of the “over-heating and the tight money situation of 1966 and 1969.”^{Footnote 14} Inflation peaked in these two years at 3.8 percent (1966) and 6.9 percent (1969) and pushed borrowing costs to a level not witnessed since the Civil War.^{Footnote 15} To Walker, 1966 and 1969 were examples of “trends ever since World War II with respect to the flow of investments” away from areas heavily dependent on credit and deemed of high social priority, such as housing.^{Footnote 16} As a result, the Nixon administration tasked the commission with reviewing the banking laws and regulations that were first introduced in the Bank Acts of 1933 and 1935.

These acts placed regulatory limits on bank powers through several provisions, including decoupling of commercial banking from investment banking and revising branching restrictions. Other provisions introduced federal deposit insurance and interest rate ceilings on deposits, and provided the Federal Reserve with the authority to adjust reserve requirements.^{Footnote 17} George Moore (president of First National City Bank, 1959–1967) recalled that in 1933, at the age of 28, he was assigned by First National City Bank to go to Washington, DC, to limit the potential damage of proposed bank changes. By his own admission, he was a “junior officer of National City Bank, no threat to anyone,” who was allowed to participate in the congressional markup sessions for the Bank Acts, but was not expected to provide a comprehensive explanation, or translation, of the U.S. economy and financial system.^{Footnote 18}

According to Moore, the most significant part of the banking legislation passed in the Bank Acts was Regulation Q, which prohibited the payment of interest on demand deposits and gave authority to the Federal Reserve to set the interest rate for what banks could pay on time deposits.^{Footnote 19} (There are essentially two kinds of bank deposits: a time deposit cannot be withdrawn before a set date or for which notice of withdrawal is required; a demand deposit represents funds held in an account that can be withdrawn at any time.^{Footnote 20}) Banks are financial intermediaries that channel funds from depositors to borrowers. They offer to pay depositors interest on their savings to attract funds to their bank; these funds are then lent to borrowers who pay back that money along with interest and fees. Banks make money by keeping an interest rate differential between the amount of interest they pay depositors and the amount they charge borrowers.^{Footnote 21} Regulation Q was essentially an imposition of a price control on commercial banks and was introduced to protect smaller banks and reduce excessive competition among commercial banks for deposits.^{Footnote 22}

These banking acts coincided with the introduction of New Deal policies that sought to use regulatory controls and policy innovations to create new markets for home mortgages, as the government considered affordable housing its highest social objective.^{Footnote 23} To ensure the flow of funds into the housing market, legislators provided thrifts with an interest rate ceiling differential over commercial banks. This differential, combined with tax laws and exemptions from deposit insurance, was meant to protect thrifts from commercial bank competition and promote the housing objectives central to New Deal policy. In return for these regulatory protections, thrift institutions could not direct their deposits toward investments outside of mortgage lending. The financial system emanating out of the New Deal era worked to prevent larger banks from entering into direct competition with smaller commercial banks and thrifts.

From January 1, 1936, to January 1, 1957, the interest rate ceiling imposed on financial institutions remained unchanged at 2.5 percent.^{Footnote 24} However, in 1957 and 1958, an economic recession befell the U.S. economy, and the Federal Reserve raised interest rates as a means to slow down inflation.^{Footnote 25} When interest rates began to rise, both banks and thrifts started to see deposits move into Treasury bills and commercial paper, a phenomenon referred to as disintermediation. The Federal Reserve’s expansionary monetary policy in the early 1960s helped to keep interest rates low and prevent disintermediation.^{Footnote 26}

However, in December 1965, in a 4:3 vote, the Federal Reserve Board approved an increase in interest rates to preemptively combat what it viewed as inevitable increases in inflation due to the fiscal policies of the Johnson administration.^{Footnote 27} In 1966 a disintermediation crisis followed this rate increase. Corporate bonds and Treasury bills were paying 8 percent interest, a rate much higher than the legally permitted 5 percent and 4.5 percent rates for passbook deposit accounts offered by thrifts and banks, respectively.^{Footnote 28} As business historian Richard Vietor explains, “Short-term rates exceeded both long-term rates and the interest rate ceilings for deposit accounts set by the Federal Reserve under Regulation Q.”^{Footnote 29}

The Housing and Urban Development Act of 1968 only increased the pressure to keep capital flowing toward housing.^{Footnote 30} The act, in response to protests taking place across the nation, called for the production of twenty-six million new and rehabilitated housing units over the course of a ten-year period.^{Footnote 31} The Johnson administration, to meet these housing objectives, proposed to expand the power of thrifts to offer nonhousing forms of credit, hoping to increase the flow of funds into thrifts and of affordable credit into the mortgage market.^{Footnote 32}

Charls Walker, serving at the time as the ABA’s chief lobbyist, told bankers at the 1967 annual ABA conference that he would lead the greatest “grassroots campaign” in the association’s history to prevent the passage of any bills that sought to expand the powers of thrifts.^{Footnote 33} However, this proposed expansion of thrifts into nonhousing forms of credit was predominantly a concern of the smaller banks. At that conference, First National City Bank laid out its position on the state of bank regulations.

First National City Bank hosted the 1967 conference because its vice chairman, John Howard Laeri, had become ABA president. In his address, Laeri warned the bankers in attendance that the “archaic restrictions and antiquated attitudes” of bank regulators had “hobbled” commercial banks. He declared that he foresaw his year as president as “largely an opportunity to speak out on the question of excessive banking regulation.”^{Footnote 34} Herein was the divide in the banking community: managers at small banks feared the loss of regulatory protections while bank officers at large commercial banks welcomed the increased competition. This is because the officers had caught the Chicago School’s “virus”; that is, only reducing regulatory constraints and stressing monetary policy and government austerity will combat inflation. The New York Times even reported that James Meigs, a former doctoral student of Milton Friedman, had brought the Chicago School virus to First National City Bank in the 1960s when he was hired as the vice president of the bank’s Economics department.^{Footnote 35} Laeri, infected with the Chicago School virus, saw the concerns over disintermediation as an opportunity to expand bank powers and reduce the regulatory constraints placed on financial institutions first enacted in the bank acts of the 1930s.^{Footnote 36}

One-Bank Holding Companies

There were three primary ways that large commercial banks dealt with the regulatory constraints on their ability to acquire deposits: (1) introducing negotiable certificates of deposit (CDs), (2) opening foreign branches, and (3) forming one-bank holding companies (OBHCs). The last option drew intense scrutiny from legislators in the late 1960s and was instrumental to the formation of the Hunt Commission.

Introduced by First National City Bank in 1961, CDs were time deposits that allowed the bank to pay competitive interest rates and left the depositors free to claim their money at any time. CDs with a $100,000 minimum for deposits did not benefit smaller individual depositors; instead, they were designed to attract large corporations. The second way was through the Eurodollar market. Thanks to an exemption on foreign branch restrictions, a small number of American banks, such as First National City Bank, Bank of America, and Chase Manhattan, could use their foreign branches or bank subsidiaries to collect deposits. Between 1960 and 1967, First National City Bank opened eighty-five new foreign branches and acquired ninety-three bank subsidiaries and affiliates in an attempt to take advantage of these market opportunities and increase its deposits in the United States. These overseas units did not have reserve requirements, interest rate ceilings, or deposit insurance premiums, essentially providing a market for U.S. banks free of strict American banking regulations created in the 1930s. American banks without interest rate ceilings bid in foreign markets for deposits and then repatriated those funds. ^{Footnote 37}

One-bank holding companies formed out of an exemption in the 1956 Bank Holding Company Act, which sought to address the growth of corporations holding a 25 percent stake in two or more commercial banks.^{Footnote 38} The act required holding companies to divest from the control of all nonbanking and nonbank-related corporations. OBHCs—holding companies that owned 25 percent or more of the stock of only one commercial bank—were exempt from the provisions set out in this act.

OBHCs were relatively inconsequential up until the mid- to late 1960s because they were small. In 1955, 115 OBHCs held a total of $12 billion in bank deposits; a decade later, there were 500 OBHCs, yet the deposit base grew to just $15 billion. With OBHCs each holding on average less than $30 million in deposits, Congress did not buy the Federal Reserve Board’s claim that the OBHC loophole presented a danger to U.S. financial and economic structures.^{Footnote 39} However, in 1967, large banks such as the Union Bank of Los Angeles and the Wachovia Bank of North Carolina formed OBHCs.^{Footnote 40} In July a year later, First National City Bank announced the formation of the First National City Corporation, an OBHC that it claimed gave the bank “greater flexibility” and the ability to expand its geographical reach.^{Footnote 41} This meant there would be new ways to provide financial and other business services through its subsidiaries that it could not as a commercial bank, thus increasing the supply of capital to lend to borrowers. By 1968 multibillion-dollar banks had formed nearly 800 OBHCs that controlled more than $100 billion in deposits, which was an $85 billion increase in deposits held by OBHCs in 1965.^{Footnote 42}

At this same time, Richard Nixon was elected into office. The New York Times reported that Nixon maintained close personal relationships with commercial bankers such as George Champion (former chairman of Chase Manhattan Bank), Gabriel Hauge (president, Manufacturers Hanover Trust), and George A. Murphy (chairman, Irving Trust). These men were reported as serving as his advisors.^{Footnote 43} Charls Walker, soon to be confirmed as the under secretary of the Treasury, recommended David Kennedy for the position of Treasury secretary. Kennedy was known as a moderate, but he was also the chairman of Continental Illinois Bank, the eighth-largest U.S. bank and a large OBHC.^{Footnote 44} Joining Kennedy and Walker were Robert Mayo, also from First Continental Illinois, as director of the Budget, and Paul Volcker, who was vice president at Chase Manhattan, as under secretary for Monetary Affairs.^{Footnote 45}

Following the appointment of these bankers to the top positions in the Treasury Department, Nixon named Paul McCracken in early December 1968 as chairman of the Council of Economic Advisers.^{Footnote 46} McCracken had graduated with a doctorate in Economics from Harvard University in 1948.^{Footnote 47} He represented a form of “liberal Republicanism,” describing himself as Friedman-esque, and he advocated for the Chicago School’s position of reduced regulatory constraints and that governments should place more importance on monetary policy and government austerity to combat inflation.^{Footnote 48}

Nixon’s other central economic advisers were Arthur Burns and Peter Flanigan. Burns held a doctorate in Economics from Columbia University,^{Footnote 49} and was considered a Keynesian due to his promotion of the business cycle; in many ways, he was an opponent of Milton Friedman and the Chicago School’s translations of the economy.^{Footnote 50} Flanigan was a Princeton University-educated investment banker, who in 1968 served as Nixon’s deputy campaign manager before being appointed as a presidential assistant.^{Footnote 51} These newly appointed officials had the difficult task of navigating the OBHC issue and the emerging questioning by the large commercial banks of the structure and regulations of the U.S. financial industry.

In January 1969, the New York Times reported that OBHCs held more than 40% of bank deposits in the US.^{Footnote 52} A month later, Congressman Wright Patman, a populist Democrat from Texas and chairman of the House Banking Committee, introduced a bill to legislate OBHCs. As historian Nancy Beck Young explains, Patman was concerned about what he viewed as the increasing “concentration and combination of bank ownership with insurance providers, credit card companies, and other competing entities. … He looked at the holding company … as the source of this trend.”^{Footnote 53} The Patman bill sought to force all OBHCs to divest themselves of any businesses not related to banking, to make any new bank acquisitions subject to review by the Federal Reserve, and to make the bill’s provisions retroactive for thirteen years, or to 1956.^{Footnote 54} Patman’s bill was deeply unpopular with the OBHC community, as it could have potentially forced all of the new large OBHCs to disband. To counter the Patman bill, Walker drafted an administration version of OBHC legislation.^{Footnote 55} Both the Patman bill and the administration bill went into committee in the House of Representatives on April 15, 1969, with hearings running until May 9.

The dueling OBHC bills resulted in an intensification of bank lobbying on Capitol Hill. George Moore, chairman of First National City Bank, adhered to his bank’s lobbying strategy of gaining public support for their translations of the economy. He flew to Washington twice to meet with reporters from the Washington Post, the Wall Street Journal, and the New York Times to discuss the OBHC bills. Bank of America, Chase Manhattan, and other large banks increased their lobbying presence in Washington by hiring more lobbyists, a move that grew the number of registered commercial bank lobbyists from less than a handful in 1968 to more than 30 by the end of 1969.^{Footnote 56} Lobbyists representing small and large banks filled the committee hearing room, and during a markup session for the Patman bill succeeded in moving the prohibition date from the June 1968 date proposed in the administration bill to February 1969, a date that would allow Citibank’s OBHC to survive.^{Footnote 57} First National City Bank’s chief Washington lobbyist, Jack Yingling, called this victory a fluke, which he did not expect to go unaddressed.^{Footnote 58}

The Intensification of Bank Lobbying

On November 5, 1969, Patman introduced amendments to his bill that saw the grandfather date moved back to 1956. Yingling pointed to the “bad odor of banking” as the prime reason that the amendments were able to pass through the House of Representatives.^{Footnote 59} In the wake of these amendments, the Christian Science Monitor reported in December 1969 that “a better reading on the strength of the big bank lobby will come next year when the Senate takes up the one-bank holding company bill.”^{Footnote 60} The article claimed that banks planned to “redouble their efforts and a key tactic will be delay.”^{Footnote 61} The banks hoped this would allow time for interest rates to go down and public opinion to shift favorably.^{Footnote 62}

In the interim before the Senate hearing on the Patman’s amendments, magazine articles portrayed bank lobbying as an act of translation. For instance, in November 1969, amid the amendment debates, William Bogie wrote, “When Is a Lobbyist Not a Lobbyist?” Adding to Bogie’s attempted reframing of lobbying, Willis Alexander, president of the ABA in 1969, suggested that lobbyists were “a resource which the legislatures use in an effort to regulate, equitably and fairly, various industries.”^{Footnote 63} Alexander said, “The availability of expertise, experience, and knowledge of a given industry to members of a legislative committee … is certainly a matter of importance to the American people,” and he reiterated that “the availability of people with … some expertise … to those committees is frequently a benefit to the country.”^{Footnote 64} He also pointed out such expert translators (meaning the lobbyists) can offer “information to the members of a committee and their staff upon the potential impact which a given piece of proposed legislation will have.”^{Footnote 65}

The National Journal also joined the bank lobbying discussion by running a five-page article on the subject in December 1969. It noted that the ABA had grown its lobbying efforts to include six lobbyists and forty-one employees working in Washington, DC.^{Footnote 66} However, it stated that the ABA was largely ineffective in its lobbying efforts, which included applying pressure to individual congressional representatives and providing campaign contributions.^{Footnote 67} Frank V. Fowlkes, the journalist, also interviewed Yingling to gain insights into the lobbying strategies of the largest commercial banks. Yingling said that his main task was to act as an intermediary between the Executive branch, key congressional leaders, and George Moore.^{Footnote 68} He noted that Moore considered the executives at his bank as lobbyists and using executives as such was a common tactic of other large banks.

A second integral element of the large bank’s lobbying effort was to advocate for administration bills that were the product of “long and expert study,” usually with heavy consultation with banking interests.^{Footnote 69} Banking interests did not just refer to bank executives but also a cadre of officials representing the interests of commercial banks. For example, Fowlkes noted, “The fourth arm of the commercial banking lobby is the big Washington Law firms: Arnold and Porter; Covington and Burling; Corcoran, Foley, Youngman and Rowe; Clifford, Warnke, Glass, McIlwain and Finney; Leva, Hawes, Symington, Martin and Oppenheimer, and others.”^{Footnote 70} This statement highlights how bank lobbyist included not only executives and professional lobbyists but also lawyers and economists.

Finally, Yingling claimed in the National Journal, “The most important factor determining Congress’ reaction to a bill … is not the number of contacts and the amount of pressure the lobby can bring to bear, but the climate of public opinion prevailing at the time the bill is considered.”^{Footnote 71} Yingling’s response highlights the banks’ key strategies, which included collectively using translation as a lobbying tactic and expanding the network of congressional and public support for the their preferred translation of the U.S. financial system. These strategies, deployed by large commercial banks, aligned with the tactics used by other advocates of monetarism. As historian Daniel Stedman Jones explained:

Coinciding with these new lobbying strategies that sought to popularize a monetarist understanding of the economy, by the late 1960s large commercial banks had implemented a more aggressive management style.^{Footnote 73} For example, at First National City Bank, Walter Wriston set a bold objective of a 15 percent yearly earnings growth.^{Footnote 74} Meanwhile, Alan Browne, a vice president at Bank of America, noted that the appointment of A. W. Clausen as bank president resulted in a focus “toward profitability at the expense of its public service.”^{Footnote 75} The potential expansion of commercial bank powers offered these large banks significant opportunities to meet their aggressive profit objectives.

Proposing a Long and Expert Study

As the amended Patman bill, which contained the 1956 date and seemed destined to restrict bank powers, made its way in the Senate, the Nixon administration made a concession to the large commercial banks.^{Footnote 76} On January 8, 1970, Paul McCracken, David Kennedy, and Robert Mayo—the Troika—sent a memo to Nixon that claimed that the time had come “to consider seriously a Presidential Commission on Financial Structure and Regulation.”^{Footnote 77} Economist Roland Robinson, once in consideration as an expert staff member for this commission, claimed that presidential commissions acted as platforms for the “wide dissemination of “expert” or better informed opinion. … A commission thus may aim at long-run persuasion rather than short-run action.”^{Footnote 78} As Robinson outlined, these expert studies, through scientific legitimacy and mass dissemination of expert translations, would help grow congressional and public networks of support for economic issues.

The Troika perceived two fundamental problems of the financial industry that required expert study and necessitated the formation of a presidential commission. The first centered on thrift institutions and was related to disintermediation and its effects on housing.^{Footnote 79} In a memo they wrote to Nixon making their case for a presidential commission, they said, “What is at stake here is nothing less than the viability of the thrift industry,” and claimed that the rise in interest rates after 1965 discriminated against small savers.^{Footnote 80} The second related to the commercial banking industry. The memo was careful to note that commercial banks warranted “special limits on their functions,” but that “excessively narrow boundary lines kill innovation.”^{Footnote 81} While the commission would eventually produce the blueprint for deregulation, it was made clear from the beginning that removing these regulatory lines did not entail the complete withdrawal of the state from overseeing and regulating the actions of financial firms and markets. As business historian Mark Rose explains, “Deregulation was less a process of state withdrawal from firms and markets than it was a process of by which lawmakers and regulators devolved their authority from the state to the firm.”^{Footnote 82}

On January 23, 1970, at the first meeting to discuss the organization of the commission, the Troika decided that Walker would oversee the formation and activities of the commission.^{Footnote 83} At the second meeting, on February 3, they and Walker began to lay out the commission’s mandate and agenda and a list of possible members. Early names included such notables as Gabriel Hauge (Manufacturers Hanover Trust), David Rockefeller (Chase), and Milton Friedman (monetarist).^{Footnote 84} They also decided that an Economists Brainstorming Session including both academic and industry economists would help “assist in defining a mandate” and “assist in defining appropriate issues and methodology.”^{Footnote 85} This session would also “provide some candidates for staff director.”^{Footnote 86} This critical position would be responsible for providing expert translations of the financial system to other commission members.

Kennedy argued that the chairman had to reflect the Troika’s desire to shift the “locus of this study—chairman and top staff man—from the Eastern Establishment (Harvard, etc.) to the West Coast.”^{Footnote 87} Reed Hunt met this West Coast qualification. The first recommendation for Hunt came in a letter dated February 11, 1970, from Richard Cooley, president of Wells Fargo, to Peter Flanigan, Nixon’s assistant.^{Footnote 88} Hunt’s name appeared again in a letter to Flanigan from Walker, who quoted Cooley as suggesting that Hunt was hard-headed, and not a financial man even though he was a commercial bank director.^{Footnote 89} Hunt had served on the board of directors of large commercial banks, including Pacific National Bank, Crocker Citizens National Bank, and the Canadian Imperial Bank of Commerce.^{Footnote 90}

On April 4, Bryce Harlow, counselor to Nixon, wrote to Flanigan to inform him that Hauge had lobbied him to convince Flanigan to announce the appointment of Hunt as chairman in time for the April 6 and 7 meeting of the Association of Reserve City Bankers.^{Footnote 91} Hauge’s recommendation is notable because Nixon did not approve Hunt until April 7. The president was convinced to accept Hunt as chairman only after consulting with Rockefeller on April 7.^{Footnote 92} Thus, the Presidential Commission on Financial Structure and Regulation would become the Hunt Commission.

A letter from First National Bank of Chicago Chairman Gaylord Freeman to Flanigan also reveals the importance placed on the “objectivity” or scientific legitimacy of this proposed commission. Freeman wrote that at the Reserve City Bankers meeting, Alabama Senator John Sparkman, chairman of the Senate Banking Committee, “created the impression that he was quite willing not to hold hearings if anyone in a position of influence suggested a postponement pending the work of the President’s Commission.”^{Footnote 93} Thus, to delay OBHC legislation, Freeman lobbied Flanigan to announce the commission members quickly because he felt that the “Commission’s objective analysis … might very properly warrant a postponement of the consideration of that legislation.”^{Footnote 94} Restating the importance of “objective” analysis based on the translations of economic experts, Freeman described the congressional attitude as “more punitive than objective.”^{Footnote 95} The involvement of Hauge, Rockefeller, and Cooley in the selection of the commission’s chairman, and Freeman’s emphasis on the so-called objective analysis, demonstrates two key tactics of the commercial bank lobby: the importance placed on establishing a close relationship with the Executive branch, and the banks’ preference for a long and expert study conducted with heavy bank consultation.

Based on these bank executives’ advice, on April 21, 1970, Nixon sent a letter to Senator Sparkman discussing the relationship between the commission and OBHC legislation.^{Footnote 96} The letter informed Sparkman of the president’s intention to release interim reports as they became available from the commission to assist in the Senate committee’s deliberations. Nixon’s letter found its way to the press, with the Wall Street Journal claiming, “Nixon’s letter to Sparkman was designed to form the basis of a last minute effort to delay Senate action on a bill to regulate one-bank holding companies.”^{Footnote 97} Adding credibility to this claim, the Associated Press reported that around Capitol Hill, Owen Frisby, the chief Washington lobbyist for Chase Manhattan, was informing legislators that the commission was the bank lobby’s last significant effort to delay and potentially block holding company changes.^{Footnote 98}

The Hunt Commission

The Economists Brainstorming Session took place on April 29, 1970, and included twenty-three academic and industry economists who discussed the aims of the commission.^{Footnote 99} Walker reported that the economists in attendance were “almost unanimous in agreeing that Regulation Q … should be eliminated.”^{Footnote 100} The other issues discussed were the regulation of bank branching, interest payments on demand and on savings deposits, and OBHCs.

As planned, Walker identified the economists from the brainstorming session he wanted to serve as the staff directors for the commission. Of these economists, Walker hired Donald Jacobs, from Northwestern University, and Almarin (Al) Phillips, from the University of Pennsylvania. These two were, in Walker’s opinion, the “most impressive contributors at the brainstorming session.”^{Footnote 101} He also noted that Jacobs was a registered Republican, but that Phillips was a registered Democrat. To alleviate any concerns over Phillips’s political affiliation, Walker added that he had been a classmate of Phillips at Wharton in 1947 and 1948. Flanigan also marked on the memo next to Phillips’s name, “He is also a close personal friend of mine.”^{Footnote 102} The selection of these economists as staff directors provided a further reaffirmation of the direction and agenda of the commission. Phillips and Jacobs each had a track record of acting as spokespersons, or lobbyists, for the Chicago School’s translation of the U.S. economy.

Both Jacobs and Phillips in the mid-1960s had declared that the commercial banking industry needed more competition and less regulation.^{Footnote 103} Phillips was by far the more outspoken on the issue of the liberalization of bank regulations and controls. In April 1966, speaking in front of the Wilmington Economic Discussion Group, in Delaware, Phillips argued that to “remedy the problem of American banking,” he would “give free rein to the same competitive forces allowed other business firms.”^{Footnote 104} Later that year, serving as an expert at a symposium in Florida on the merits of branch versus unit banking, Phillips agreed that one bank-holding companies did represent a move toward concentration and monopoly, but that this was not a bad trend. He stated that in his expert opinion, “The real treasure of monopoly is the quiet life.”^{Footnote 105} The translation of the economy espoused by Phillips and Jacobs reflected the political and intellectual framework of the Chicago School of Economics.

Essential to this translation of the economy was a faith in the efficiency of liberalized free markets coupled with the profit-maximizing intentions of rational economic actors. Political scientist Marc Allen Eisner points out that this faith rested on the belief that “rational economic actors working within the confines of the market seek to maximize profits by combining inputs in the most efficient manner. A failure to act in this fashion will be punished by the competitive forces of the market.” Accordingly, to protect consumer welfare in the form of low prices, the authority of lawmakers and regulators should be transferred from the state to the firm, allowing for a type of self-policing guided by competitive market forces and the profit motive.^{Footnote 106}

After selecting the staff directors, the next task for the commission organizers was to comb through the list of 700 nominees for commission membership.^{Footnote 107} Of all the candidates to make it to the final stage of selection, only one was Democrat: Lane Kirkland, of the AFL-CIO. Kirkland’s recommendation came from Arthur Burns, who had been impressed with Kirkland’s knowledge of finance.^{Footnote 108}

Morris Crawford was selected to represent mutual savings banks because he led the nation’s largest mutual savings bank.^{Footnote 109} Howard Edgerton and Richard Gilbert represented the savings and loan associations. Gilbert came highly recommended from Preston Martin (chairman of the Federal Home Loan Bank), and Edgerton was the president of the largest savings and loan association in the country.^{Footnote 110} Walter Holmes was selected to represent finance companies. Holmes was recommended by Flanigan, Walker, and Maurice Stans (secretary of Commerce) because his company had “branched out considerably, including manufacturing and banking.”^{Footnote 111} Representing the insurance industry were Donald MacNaughton and William Grant. Flanigan and Walker recommended these two for their “progressive policies” and affiliations with the Republican Party.^{Footnote 112}

William Morton (president of American Express), Ralph Regula (an attorney from Ohio), Atherton Bean (president of International Multifood Corporation), and Edward H. Malone (vice president, General Electric) were selected as community representatives. Morton was selected because Walker and Flanigan believed that he was widely respected for his expertise in investment banking.^{Footnote 113} The nomination of Malone was based on his expertise in investing large pension funds, and Bean—despite being originally circled as a no—had served as chair of the Federal Reserve Bank of Minneapolis.^{Footnote 114} Recommended by Frank Bow, a House Representative from Ohio, Regula was a commercial bank director and had been instrumental in liberalizing Ohio’s banking regulations when he was state senator.^{Footnote 115}

The commercial bankers nominated for the commission included Robert Stewart, Ellmore C. Patterson, K. A. Randall, and Rex Morthland. In their report, Walker and Flanigan described Stewart as a “dynamic executive who is given full credit for the progress” of the large First National Bank of Dallas.^{Footnote 116} Walker described Patterson as “the president of a major wholesale bank with a one-bank holding company.”^{Footnote 117} Randall had served as the chairman of the Federal Deposit Insurance Corporation, supported the administration’s OBHC bill, and was now an executive at a “major bank holding company.”^{Footnote 118} Finally, Morthland was recommended by Sparkman and identified as one of the best “informed and progressive small bankers in the country.”^{Footnote 119} Walker noted that Morthland was the commission’s small bank representative, “but don’t let him fool you; he has a Ph.D. from the University of Chicago” (in Economics).^{Footnote 120}

Three more economists were appointed to the commission. Joining as staff directors were Alan Greenspan, Raymond Saulnier, and Ezra Solomon. Solomon, a former Economics professor at the University of Chicago, was recommended by Walker and considered an expert economist in finance.^{Footnote 121} Saulnier had served as the chairman of the Council of Economic Advisors during the Eisenhower administration, and Walker described Greenspan as “widely respected for his imaginative and constructive approach to economic and financial problems.”^{Footnote 122}

All told, of the commission’s nineteen members (members, staff directors, and organizers), there were seventeen Republicans, two Democrats (Lane Kirkland and Almarin Phillips, a staff director), and more than 30 percent had ties to the commercial banking industry. This composition was not unique to the Hunt Commission. A similar commission structure was witnessed with the New National Industrial Pollution Control Council. The Washington Post noted in late April 1970 that Nixon had searched “among some of the nation’s leading polluters to find men to keep an eye on the pollution problem.”^{Footnote 123} The newspaper reported that the council was composed of chairmen and presidents of major oil, automobile, coal, timber, electric, power, airline, and manufacturing companies.^{Footnote 124}

On June 27, 1970, the Hunt Commission held its first meeting. Walker’s opening address started the meeting. In it, Walker told the members that there were three principle reasons for the formation of the commission. The first reason Walker pointed to was the Troika’s belief that the “financial system has not been working very well.”^{Footnote 125} The second reason was the demand and distribution of financial savings, and the final reason was that there was a “problem of getting legislation through the United States Congress.”^{Footnote 126} By providing a perceptibly objective study guided by expert economists, Walker felt confident that the commission could supersede the “partisan realm of the Republican President trying to “one-up” a Democratic Congress.”^{Footnote 127}

Meanwhile, Patman’s OBHC legislation passed uneventfully on New Year’s Eve 1970 with the administration bill’s grandfathered date of June 30, 1968.^{Footnote 128} The amended Bank Holding Company Act gave the Federal Reserve a set of general guidelines to follow to determine “the business of banking.”^{Footnote 129} The bill forced First National City Bank to divest itself of its travel agency, consulting, and insurance business interests, but did allow the large New York City bank to stay in the finance and leasing businesses.^{Footnote 130}

Crafting the Blueprint for “Deregulation”

On March 22, 1971, Walker wrote to Flanigan to provide an update on the progress of the commission.^{Footnote 131} The memo noted that in January several members were unhappy with the group’s progress, and it included that Patterson and Morton had contacted Walker in January to voice their displeasure with Hunt, who they felt was not providing the proper direction.^{Footnote 132} Walker told Flanigan that he was not surprised by this reaction because he had deliberately planned with Hunt to move the commission “through a careful but thorough settling down period” designed to achieve two goals.^{Footnote 133}

The first goal was to educate the members. As Walker noted, “Since the background and knowledge of the members were very uneven, an educational period was necessary.”^{Footnote 134} Enfolded into this educational objective was the second goal that Walker had planned with Hunt: ensure that the “members would not get the idea that the report would be a staff rather than member-prepared document.”^{Footnote 135} As a result, while some members were frustrated that the educational sessions seemed directionless, the staff “laid low intentionally” at the direction of Walker and Hunt.^{Footnote 136}

Walker and Hunt’s strategy illustrates how expert translations are not only explanations of complex social or natural phenomena but also processes that seek to create networks and recruit a variety of supportive actors. Walker and Hunt deliberately had Jacobs and Phillips first provide an expert translation of the U.S. financial system to get commission members to buy into the network that accepted Chicago School-inspired translations. As noted above, the direction given to staff directors to lay low was also to make sure that members did not form the impression that the report would be the exclusive domain of the expert economists, but rather a product of collaborative deliberations.

Nixon met with the Hunt Commission in May 1971 to discuss the progress and importance of their work. Walker recommended that the president instruct the commission members that “strong consideration would be given to developing a 1972 legislative program.”^{Footnote 137} On November 26, 1971, Treasury Secretary John Connally wrote to Nixon to inform him that the Hunt Commission had completed its report. Connally explained, “Charly Walker tells me that it is not only a fine report from a conceptual standpoint, but that it is ‘do-able’ legislatively.”^{Footnote 138} The perception of the so-called do-ability of the report stemmed from Connally’s belief that the members representing commercial bankers and thrift institutions on the commission had reconciled their differences, leading to close agreement on all of the report’s recommendations.^{Footnote 139}

Released on December 15, 1971, the final report stated that its recommendations were intended to help the United States “move as far as possible toward freedom of financial markets and equip all institutions with the powers necessary to compete in such markets.”^{Footnote 140} Written by Jacobs and Phillips, the report represented a blueprint for the reduction of regulatory constraints, or deregulation, of the U.S. financial system.^{Footnote 141} Freedom in the report, as a practical matter, referred to the overarching recommendation to grant commercial banks and savings and loan associations the authority to move into each other’s former areas of concentration, removing many of the regulatory constraints on the powers of financial institutions first enacted in New Deal era legislation.

With regard to the primary objective of improving the flow of funds into the housing market, the report recommended a ten-year phase-out of Regulation Q, as well as interest ceilings on time and savings deposits to provide market rates for FHA and VA loans.^{Footnote 142} It also called for the removal of interest rate ceilings for conventional mortgage loans.^{Footnote 143} Along with its interest in meeting housing goals set out in the late 1960s, the report also recommended a single tax formula, uniform reserve requirements, mandatory membership to the Federal Reserve, and the ability for commercial banks to operate mutual funds and engage in the same activities as OBHCs.¹⁴⁴As a trade-off for the removal of these competitive protections, the report recommended giving thrifts expanded lending and operational powers, including the ability to invest in stocks and to offer checking accounts and credit cards.^{Footnote 145}

Throughout its report, the commission made clear its philosophical orientation and close adherence to the Chicago School translations of the economy. Its starting point in formulating its recommendations was the belief that in “our free society, although Congress may establish national goals, the marketplace must, in one fashion or another, provide the means to pursue these objectives.”^{Footnote 146} According to the commission, which echoed the sentiments of executives from large banks, the solution to the inflationary crises of 1966 and 1969 was to “strip away [the] large body of law and regulation” guiding the banking industry in an attempt to “abolish specialization forced by statute and by regulation.”^{Footnote 147}

At an abstract level, the report reflected the translations of the economy offered by the Chicago School that claimed that the best way to prevent inflation and enhance consumer welfare was to transfer the authority of lawmakers and regulators from the state to the firm. However, at a practical level, the recommendations set the stage for wider banking powers through the removal of regulatory restrictions on interstate banking and commercial banks not being allowed to purchase savings and loan associations. Under this policy framework, supported by Chicago School translations of the economy, large commercial banks could enter into direct competition with or buy smaller banks and savings and loan associations.

Response and Analysis

Walker noted in a memo to Flanigan that the Treasury would be taking on an experienced “Washington hand” to help develop “recommendations with Congressmen and staff, within the Executive Branch, and with the industries that will be affected by legislation.”^{Footnote 148} The skilled Washington hand referred to Richard Erb, who had received his doctorate in Economics from Stanford University and had worked for Salomon Brothers before joining the Nixon administration in 1971 as the assistant director of International Monetary Affairs.^{Footnote 149} After receiving feedback from the heads of several regulatory agencies whose operations would be affected by the proposed changes, Erb wrote to Flanigan with his initial analysis of the legislative do-ability of the finished report.

Erb claimed that the uniqueness of the report was not its ideas; there were in fact very few new ideas. Instead, its uniqueness was its attempt to combine the recommendations into a logical whole that provided a “blueprint for future changes in the financial system.”^{Footnote 150} However, in contrast to Walker and Flanigan, Erb claimed that the atmosphere was not right for a complete overhaul of the U.S. financial system. He warned Flanigan that any attempts to implement these recommendations as a package would result in the continued “political war” among large banks, small banks, and nonbank depository institutions.^{Footnote 151}

Erb stated that the main task for the administration was to try to translate effectively the recommendations to nonexperts. Erb explained, “The report was written by economists and thus is at a relatively high level of abstraction. This is a disadvantage when trying to explain it to the business community or Congress.”^{Footnote 152} Erb was apprehensive that the business community and Congress would misunderstand the translations of the financial system found in the report. He recognized that gaining support for the commission’s legislative agenda required a concentrated effort from government spokespersons to translate the commission’s recommendations to avoid these “misinterpretations.” Erb recommended that the administration translate the abstract government policy recommendations in such a way that emphasized consumer welfare, such as “savers” were as important as “borrowers.”^{Footnote 153} In other words, he advised Flanigan to translate the commission’s report in a way that could grow a public network of support for the translations of the financial system found in the commission’s report. He also said no one should expect support from most of the institutions that would be adversely affected by the recommendations.

Erb’s analysis proved to be correct. The thrifts immediately voiced their concerns over the report’s recommendations. Grover Ensley, the head of the National Association of Mutual Savings Banks, wrote to Patman to lobby that the commission had put forward proposals that would create a system in which “other financial institutions could not compete with big commercial banks.”^{Footnote 154} Ensley argued that the commission came to these results because it was largely composed of members with ties to large commercial banks, and they held only secret meetings with no public hearings or public voice.^{Footnote 155}

Norman Strunk, of the U.S. Savings and Loan League, remarked that the commission’s report mistakenly credited government financial regulations as the driving force behind the 1966 and 1969 inflation crises.^{Footnote 156} In his opinion, the Vietnam War and fiscal mismanagement caused the inflation of those years.^{Footnote 157} Morgan Earnest, of the Home Builders Association, also spoke out against the report. He claimed that the phase-out of interest rate ceilings “would continue and possibly exacerbate an unstable flow of funds into the mortgage credit market,” and suggested that the commission had not properly understood the realities of mortgage lending.^{Footnote 158} These representatives of the institutions adversely affected by the report offered a vastly different translation of the U.S. financial system than the one published by the Hunt Commission.

Meanwhile, 160 bankers came to the Chicago Marriott Motor Hotel in early January 1972 to get an interpretive analysis of the report from the ABA. Hunt Commission member K. A. Randall provided the explanation, telling the attendees that “the housing problem was like a ghost at the side of the room for a year and a half.”^{Footnote 159} Unlike the report itself, which stressed the importance of housing, Randall told the bankers that during deliberations the “Commission decided … that housing should not be the dominant factor in restructuring our financial system.”^{Footnote 160} He said that the focus of the commission instead was to find a way to “better serve social needs by not warping the financial system simply to serve housing, but rather by developing a free, competitive market and focusing on how we can make the system work better.”^{Footnote 161} Randall’s presentation to ABA members presented an image of a commission focused on crafting a blueprint for expanding the powers of financial institutions and removing regulatory constraints—that is, deregulation.

Randall argued that to meet this goal, the commission recognized that it would need to produce a report filled with compromises, especially to the small banks and thrifts, and as a result, “no member of the Commission likes the report in its entirety.”^{Footnote 162} Randall’s statement was a direct contradiction of the report given by Connally to Nixon of complete unanimity and of the commission’s narrative that improving the flow of funds for housing was the primary objective of the commission. Initially, the ABA offered its support for the recommendations.^{Footnote 163} However, that soon changed after it met with its membership. The Los Angeles Times reported that when the ABA later voiced its opposition to the Hunt recommendations, it was because “the little banker had the bigger voice within the association and the ABA did not wish to present two faces to the public.”^{Footnote 164}

Even some Hunt Commission members came forward after the report’s release to criticize the policy package, although Lane Kirkland was the only member to dissent to the report as a whole. He stated in January 1972 that the “basic thrust of these recommendations is designed to promote the interests of private financial institutions without any genuine regards for the most urgent problems and needs of the nation.”^{Footnote 165} Community representatives Edward Malone (General Electric) and William Morton (American Express) took issue with a proposed tax credit offered to mortgage lenders, believing that this subsidy would “seriously distort normal credit flows and relationships among various types of credit instruments.”^{Footnote 166}

Howard Edgerton and Richard Gilbert, who served as representatives of the savings and loan associations, also released statements that contradicted Walker’s earlier reports to Flanigan that early education sessions had produced close agreement among members. Edgerton claimed, “Divergent opinions on some issues in the report were held by individual commissioners. These differences existed when the commission began its work, and they still exist.”^{Footnote 167} In particular, Edgerton claimed that there was not unanimous agreement over removing regulatory protections and interest rate differentials between financial institutions. Gilbert asserted that had deliberations not taken place immediately after the inflationary crisis of 1969, the final report would have looked much different.^{Footnote 168}

With the release of these statements, it became clear that there was little support from adversely affected members for the commission’s blueprint for restructuring the financial system. Trade associations representing commercial banks, mutual savings banks, and savings and loan associations joined five of the commission members in publicly voicing their dissent. A policy package once viewed as doable appeared lifeless, even before the administration had time to put forward legislation for consideration. Notwithstanding vocal opposition, the Treasury Department moved forward with its attempt to present Nixon with legislation borne out of the Hunt recommendations.

Drafting the Legislation

The Treasury Department assembled a research team to put together legislation based on the commission’s report. Members included Walker, Flanigan, Richard van Dusen (under secretary of Housing and Urban Development), Ezra Solomon (economist, Hunt Commission member), Arthur Laffer (economist, recent doctoral graduate from Stanford University), and Howard Beasley (assistant to the Treasury secretary, doctorate in Finance).^{Footnote 169} Walker led the task force, with Beasley as his second in command. In his research of the commission’s findings, Beasley uncovered empirical evidence that contradicted the central claims and translations found in the commission’s report.^{Footnote 170}

On February 1 Beasley wrote a memo to Walker with the subject line, “Banks Participation in Mortgages—1966, 1969.” Beasley started the memo by claiming, “Data do not support the commonly held view that banks cease making mortgage loans during periods of tight money.”^{Footnote 171} In its research, the Treasury Department’s task force found that in 1966 real estate loans made by banks had increased by 9.5 percent, while total deposits had only increased by 6.4 percent.^{Footnote 172} These findings meant that real estate loans as a percentage of total deposits had increased during the inflationary crisis of 1966, from 14.9 percent to 15.3 percent. Thus, for 1966, Beasley concluded, “Banks did not withdraw from the mortgage market, but rather increased their lending 7.7%.”^{Footnote 173} Regarding savings and loan associations, the research indicated that they had increased their real estate loans by 3.5 percent in 1966.^{Footnote 174}

These surprising findings were also valid for the inflationary crisis of 1969. Beasley’s memo to Walker stated, “As in 1966, banks did not withdraw from the mortgage market in 1969, but increased their mortgage lending 7.5% which was equaled by the savings and loan associations’ increase of 7.5%.”^{Footnote 175} The findings showed that financial institutions not only did not decrease the flow of funds into the mortgage markets but actually “maintained a relatively constant rate of growth in conventional mortgages.”^{Footnote 176} In fact, conventional mortgage holdings of banks increased by 54.5 percent from 1965 to 1970.^{Footnote 177}

These findings highlighted a significant trend in mortgage lending in the high inflation periods of 1966 and 1969. Banks steadily increased their conventional mortgage lending, which maintained a steady rate of growth overall regarding the percentage of deposit funds directed to real estate loans. The Treasury Department’s task force found that grounding the claims of a lack of funds directed to mortgage lending was the “lack of interest by lenders in FHA and VA insured mortgages.”^{Footnote 178} These insured mortgages carried inflexible rates and were designed primarily to help lower-income Americans reach the social objective of homeownership, which increased by 2.9 percent from 1965 to 1970.^{Footnote 179} It was evidence that undercut the central narrative behind the importance of the Hunt Commission and ran counter to the translations of the economy promoted by its staff directors.

To make sense of this data, the Treasury Department’s task force met on February 25 to discuss changes in the late 1960s mortgage market. The meeting notes highlight the “creation or significant expansion of agencies and financial instruments designed to tap the securities markets to obtain the funds for mortgage lending.”^{Footnote 180} In particular, the group pointed to the expansion of the Federal National Mortgage Association (Fannie Mae, FNMA) to include conventional mortgages, and the permission granted in 1968 to the Government National Mortgage Association (Ginnie Mae, GNMA) to guarantee mortgage backed-bonds.^{Footnote 181} The task force concluded that these agencies and their new instruments were able to tap new sources of funds that put the financial industry in a better position than when it was primarily reliant on deposits for financing mortgages.^{Footnote 182} With the formation of these new instruments and agencies, housing starts doubled by 1972.

Jay Woodworth, assistant deputy to the Treasury secretary and former economist at the Chemical Bank of New York, later remarked that the “broadened activities of FNMA, GNMA, and the Federal Home Loan Bank Board of the past two years have sometimes outpaced specific recommendations of the Hunt Commission.”^{Footnote 183} He commented later in his analysis of the commission report’s recommendations that “there is some evidence which suggests that the need for major surgery within the housing industry has now been obviated.”^{Footnote 184} Woodworth also asserted that the federal government and its agencies, along with various states, had already enacted legislation and regulations that reflected the commission’s proposals.^{Footnote 185}

The evidence presented by these economists demonstrated that mortgage lending from commercial banks and thrifts—thanks to new nondeposit sources of funds—had maintained a steady level of growth from 1965 to 1970, even growing during the inflationary crises of 1966 and 1969. Also, the research by these economists revealed that the measures taken in 1968 to improve the flow of credit to real estate lending had, by and large, worked as intended. The translations offered by the Department of the Treasury suggested that the stated central objective guiding the commission was not based on empirical evidence. Instead, it became evident its objective was based on a translation of the economy that claimed that banks cease making mortgage loans during periods of tight money. With this evidence in hand, coupled with public statements from trade associations and commission members voicing their opposition to the Hunt package, the chances of passing a sweeping legislative package through Congress seemed nil to none.

According to the Research Institute of America, a leading expert in finance policy and legislation, by late spring the Hunt Commission’s report was “suffering from rigor mortis.”^{Footnote 186} However, interest in it and its recommendations resurfaced when the Federal Reserve decided in late July 1972 to deny the attempt by OBHCs to purchase savings and loan associations. The press release from the Federal Reserve noted that it had decided “not to include at the present time operation of savings and loan associations on its list of activities in which bank holding companies may engage.”^{Footnote 187} It is within this climate that the first large commercial bank offered its assessment and lent its public support to the Hunt Commission recommendations.

In the July 1972 issue of First National City Bank’s Monthly Economic Newsletter was an article titled “The Hunt Report—an Agenda for Counterreformation.” The story began by providing a translation of the U.S. financial system that claimed that overprotective regulations had “long hobbled the savings and credit markets” and emerged out of the Great Depression due to a “gross misunderstanding of the working of monetary and fiscal policy.”^{Footnote 188} The story made clear that this misunderstanding, or “mistranslation,” of the economy had produced regulations such as interest rate ceilings that had amplified and aggravated the “money crunches of 1966 and 1969.”^{Footnote 189}

The story claimed that the Hunt Commission, guided by a proper translation of the economy, had recommended proposals for “diminishing the heavy reliance on government regulation.”^{Footnote 190} It was careful to note that the major beneficiary of these comprehensive reforms to reduce government regulation would undoubtedly be the general public, “which probably does not much care whether banks or thrift institutions grow faster.” It added that the “efforts of the Hunt Commission will not be lost if the Congress can maintain”^{Footnote 191} the perspective that a reduction in regulations that fosters greater competition between banks and thrifts would lower prices and enhance consumer welfare. This, unsurprisingly, pushed the translation in the Hunt Commission’s report.

Richard Stewart, the bank’s senior vice president and general counsel, sent this story to Richard Erb. Erb, despite the evidence produced by the Treasury Department’s task force, praised the commission’s recommendations offered by the writer, who, also unsurprisingly, was a lobbyist for First National City Bank. In late July Erb responded to Stewart, stating that the article was “well written, as usual, and strengthened our convictions that it is worth the effort we are putting into it.”^{Footnote 192} Erb proposed that the two “meet and talk again” when the Walker-led Treasury research task force responsible for putting together Hunt-based legislation had a firmer idea of what recommendations it would like made.^{Footnote 193} Despite major opposition to the Hunt Commission’s report and the empirical evidence produced by its own research task force, the Department of the Treasury used the newsletter to strengthen its convictions to assemble a legislative package based on the Hunt Commission’s recommendations.

The Financial Institution Act of 1973

By early spring 1973, no legislative recommendations had been put forward by the administration, and large commercial banks were experiencing profit increases thanks to a “massive increase in loan volume.”^{Footnote 194} However, in June 1973, Burns wrote to Nixon to voice his concerns and impress upon the president the need to address domestic economic issues. Burns told Nixon, “The investor class—investment bankers, brokers, managers of investment funds, managers of pension funds, and the great body of individual investors—are in a seriously depressed mood.”^{Footnote 195} According to Burns, at the heart of the investor class’s concerns was the “sharply accelerated pace of our inflation” and its impact on reducing the value of investment capital or savings.^{Footnote 196} Large commercial banks held the largest aggregate of investment funds in the United States.^{Footnote 197} As financial journalist Chris Welles remarked in Institutional Investor, thanks to OBHCs, large banks were cornering the money management market, handling the capital of the investor class.^{Footnote 198}

On August 3, 1973, the administration finally released its report, Recommendations for Change in the US Financial System. However, the Treasury Department did not immediately release the specifics of its proposed legislation. Instead, it decided to release a simple narrative version, which Deputy Treasury Secretary William Simon said was because “the complex and controversial nature of the proposals assures that they won’t be enacted this year and perhaps won’t even be enacted next year.”^{Footnote 199} In presenting this narrative version of their legislative package, the Treasury Department was establishing itself as a spokesperson for the translations of the economy in the commission’s report. It was also an attempt by the administration to grow a public network of support for this translation and these recommendations.

The narrative presented by the Treasury Department reiterated the commission’s claim that a greater emphasis on free-market competition and less “rigid and unnecessary regulation” was in the public’s best interest.^{Footnote 200} It claimed that the “consumer-saver was denied a fair market return on his savings, while the consumer and small businessman, as borrowers, often could not obtain adequate funds to meet their requirements.”^{Footnote 201} It also again took aim at interest rate ceilings, claiming that they were “harmful to Americans both as savers and as borrowers in the late 1960s.”^{Footnote 202}

Through this narrative approach, the Treasury Department had translated the proposals aimed at restructuring the financial system and presented them in a way to appeal to ordinary Americans. The narrative stressed the need to consider the legislative proposals as a package, not as piecemeal recommendations.^{Footnote 203} The package included major legislative overhauls, such as the removal of Regulation Q over a five-and-one-half-year period; the removal of FHA and VA interest rate ceilings; expanded deposit, investment, and lending services for federally chartered thrifts and banks; and a modification of the tax structure for financial institutions.^{Footnote 204}

Later that month, the Independent Bankers Association of America (IBAA) announced in its newsletter that it would be mounting an all-out effort to protect small banks from the “whirlpool of legislative proposals distilled by the Administration from the Hunt Commission report.”^{Footnote 205} Presenting an alternative translation of the interest rate and inflation crises, Fred T. Brooks, the IBAA president, claimed that inflation was “aggravated by policies of the federal regulatory agencies which encourage concentration of control of resources in both banking and thrift institutions.”^{Footnote 206} The IBAA was not the only trade organization to come out against these provisions. The Home Builders Association, the National League of Insured Savings Associations, and the U.S. Savings and Loan League either rejected the Treasury’s narrative proposal outright or urged prolonged study before the introduction of any legislation.^{Footnote 207} Despite these concerns, the Department of the Treasury released its proposed legislation on October 11, 1973.^{Footnote 208}

In that same month, the Organization of Petroleum Exporting Countries (OPEC) decided to raise oil prices and introduce an embargo on oil to the United States because of U.S. support of Israel during the Yom Kippur War.^{Footnote 209} As historian Meg Jacobs demonstrated, the OPEC oil crisis triggered another inflationary crisis in the United States and confirmed for Americans that their “government didn’t work.”^{Footnote 210} Rising oil prices and the subsequent increase in inflation worked in favor of those advocating the Chicago School’s translation of the economy. Led by Milton Friedman, advocates of this translation worked to enroll members of the general public, regulators, and legislators into a network that supported the belief that “there would be no energy crisis if the government got out of the way and let the market work.”^{Footnote 211}

Even with the onset of the OPEC oil crisis, Business Week reported in early November 1973 that Nixon’s plummeting popularity and the lack of support from various trade associations “left the Hunt proposals with hardly a friend on the political horizon.”^{Footnote 212} Representative Thomas Ashley (Ohio), a Democrat on the House Banking Committee, told the magazine, “There’s no future to the Hunt Commission recommendations at this time—none.”^{Footnote 213} Opposition from the other depository institutions prevented the bill from moving out of the committee stage in 1973.^{Footnote 214} However, the Hunt proposals did not disappear, highlighting again that the widespread acceptance of a translation is often a long process of trial and error, reconfigurations, and reformulations.^{Footnote 215}

The Unyielding Quest for Deregulation and the Financial Institutions Act of 1975

On May 13, 1974, four days after being appointed as Treasury secretary, William Simon testified to the Senate Committee on Banking, Housing, and Urban Affairs that the financial institutions in the United States operated under an outdated regulatory system. Pointing again to the inflationary crises of 1966 and 1969, Simon claimed that the “only approach to solving the problem is through a fundamental restructuring of the financial system.”²¹⁶According to him, this restructuring involved the elimination of Regulation Q interest rate ceilings and a greater reliance on the market to determine the cost and availability of credit. Simon, an avid supporter of the Chicago School’s translation of the economy, stated that the administration wanted to remove these regulations to “assist the small saver.”^{Footnote 217}

Three days after Simon’s testimony, the New York Times published an editorial written by Walter Wriston, entitled, “No One Holds A Monopoly on America.” Wriston stated that “increasingly, small groups of men and women, elected by no one, announce that they alone are privy to the secret of what constitutes the public interest.”^{Footnote 218} He was appealing to the ordinary American, asking them to question the expertise of government officials, and telling readers to see these officials as both a threat to their individual freedom and unaware of what constituted the public interest.^{Footnote 219} However, more than an appeal to question government officials, it was a call for the general public to voice their support for fewer government regulations.

Wriston warned readers that their personal liberty was at stake if the “economic system is run by a government dictatorship.”^{Footnote 220} To conclude, he wrote that both he and sympathetic readers had the “obligation to preserve a governmental system based on belief in the worth of the individual. This means that you and I, not somebody else, must speak out and say that if we wish to preserve our political liberty, we must also preserve our economic freedom.”^{Footnote 221} At a practical level, the editorial also represented an attempt to enroll members of the public into a network that supported his bank’s efforts to reduce the regulatory constraints placed on their operations, such as the restrictions on interstate banking, on banks dealing in securities, and on commercial banks purchasing savings and loan associations.^{Footnote 222}

On July 9, 1974, A. W. Clausen (president, Bank of America) and Gabriel Hauge (chairman of the Board of Directors, Manufacturers Hanover Trust Company) joined economists Paul McCracken, Alan Greenspan, and Milton Friedman to impart to Nixon “better ideas” on how to confront rising inflation.^{Footnote 223} The New York Times reported that following these meetings, Nixon accepted the “now conventional view of monetarists.”^{Footnote 224} Unfortunately for these bankers and economists, Nixon resigned only one month after adopting the Chicago School’s translation of the economy.

Within days of Gerald Ford assuming the presidency, Arthur Burns wrote to warn him of the dangers of inflation. Burns advised Ford that the nation was in the “grip of a dangerous inflation.”^{Footnote 225} In particular, Burns remarked that the outlook for homebuilding was poor because thrifts were losing deposit funds.^{Footnote 226} As historian Richard Vietor explains, revenues for financial institutions were being “outstripped by the rising interest costs of attracting new deposits,” exposing these financial institutions to a high level of “interest-rate risk.”^{Footnote 227} Not long after receiving this letter, the Ford administration introduced the Financial Institutions Act of 1975. The act’s preamble includes: “Five years ago, a Presidential commission undertook the study of the problems experienced by financial institutions. In 1973, the conclusions of this study led to the introduction of the Financial Institutions Act.”^{Footnote 228}

Ford’s message to Congress maintained the narrative of the commission’s supporters. He told them, “The experience of the past several years shows that such ceilings penalize the small saver, and reduce the volume of savings available to finance homebuilding.”^{Footnote 229} Nevertheless, the 1975 bill failed to make its way through Congress. This time the Senate passed the bill, but the House did not.^{Footnote 230} Hunt-informed banking bills failed repeated attempts by the Nixon and Ford administrations thanks to the counter-lobbying efforts of dissenting groups, such as the adversely affected trade associations.^{Footnote 231} According to Norman Strunk, of the U.S. Savings and Loan League, the lobbying success of trade associations against Hunt bills was based on a cooperative relationship among organizations, such as the Federal Home Loan Bank Board and savings and loan associations.^{Footnote 232}

The repeated failures to actualize a less-regulated financial system demonstrated that the public and congressional network of support for the commission’s translations of the U.S. financial system continued to remain somewhat diminutive. These failures only further motivated the lobbying efforts of the largest commercial banks. At the 1975 ABA annual meeting, Wriston, Freeman, and Clausen sat on a special panel in front of two thousand commercial bankers.^{Footnote 233} The three bankers chastised the banking community for being too passive and not serving as community leaders. All three concurred that the public needed to be made aware of the contributions of capitalism and the benefits of the profit motive in growing the nation’s economy.^{Footnote 234}

Freeman urged the attendees to realize that they were uniquely qualified to advise regulators and legislators on financial and economic matters.^{Footnote 235} Clausen proposed that the solution to regulatory challenges was to communicate “accurately the complexity of our world.” ^{Footnote 236} Bank executives received translations of complex financial and economic analyses from their own in-house experts, which they shared with government leaders. For example, New York House Representative Edward Koch, a Democrat, wrote to Citibank in September 1974 asking about Regulation Q. Peter Crawford, a Citibank economist, provided an analysis for Koch’s question to Citibank President William Spencer. Crawford wrote to Spencer: “I would suggest the following points for your reply to Congressman Koch: effective application of indexing would require abandonment or substantial increases in present Reg. Q ceilings if indexing is applied to savings accounts.” In his reply to Koch, Spencer translated Crawford’s analysis to: “The whole subject of indexing and inflation is a very large one, as you well know, but the one thing that is clear is that the current application of Reg. Q is unfair to the small consumer and forces him to subsidize other sectors of the society.” Spencer’s translation of Crawford’s analysis to Koch framed the issue as exceedingly complex while reaffirming that it was in the public interest to address the application of interest rate ceilings.^{Footnote 237}

Meanwhile, in March 1976, the Wall Street Journal reported that bank lobbyists were presenting consistent and unyielding pressure on Capitol Hill.^{Footnote 238} A staff member on the House Banking Committee admitted to the newspaper, “Many Congressman are afraid of bankers. They don’t understand banking, but they know the world can collapse if the bankers turn the screws on lending.”^{Footnote 239} Senator William Proxmire (D–WI) stated simply that the bank lobby was “viewed as the toughest strongest lobby in Washington.”^{Footnote 240} Between 1973 and 1978, it had grown fourfold.^{Footnote 241} The New York Times reported that banks were now spending millions of dollars on an interrelated group of lobbying specialists, including lawyers, economists, and public relations officers.^{Footnote 242} While the ABA introduced Operation Unravel in 1977 to roll back or modify “burdensome laws and regulation” and prevent the enactment of further regulations, Wriston lobbied W. Michael Blumenthal, President Carter’s Treasury secretary.^{Footnote 243}

On June 26, 1978, Wriston wrote to Blumenthal to both applaud him for making inflation a top priority and warn him of the dangers of implementing price controls to combat inflation. In his letter, Wriston recalled his experiences during New York’s 1975 fiscal crisis, stating, “When in the end it turned out we were right, the question was then raised as to why we did not exercise our expertise earlier and ‘blow the whistle’ faster.”^{Footnote 244} Building on this point, he warned Blumenthal that the bank would not “fail this time on a national level to call attention to a situation on which we have much knowledge and expertise.”^{Footnote 245} He closed the letter by stating bluntly that “only an attack on the fundamentals will work” to combat inflation.^{Footnote 246} Thus, according to Wriston, the only solution to the inflationary crisis was this attack and the adoption of the Chicago School’s translation of the economy advocated by his bank’s experts.

From Blueprint to Reality: Passing the Deregulation Agenda into Law

In July 1979 Carter nominated Paul Volcker to serve as chair of the Federal Reserve Board.^{Footnote 247} According to historian Peter Conti-Brown, Volcker started his tenure tentatively.^{Footnote 248} However, on September 7, 1979, the Federal Advisory Council (FAC), a committee comprised of a dozen bankers, met with Federal Reserve governors. Wriston was a member of the FAC, and at this meeting urged the Federal Reserve governors to change the operating procedures of the Federal Open Market Committees to ensure that “monetary aggregates take priority over concerns about further upwards moves in domestic interest rates.”^{Footnote 249} A month later, on the evening of October 6, Volcker took a monetarist turn and announced that the Federal Reserve was no longer going to attempt to manage the day-to-day level of the federal fund rate. Instead, it would shift its focus to controlling the amount of bank reserves in the system.^{Footnote 250}

The policy drove the country into a severe recession and inflation peaked in March 1980 at 11.6 percent.²⁵¹Amid this environment of increased lobbying pressure, skyrocketing interest rates, rising consumer debt, and accelerating unemployment, the network of supporters for the Chicago School’s translation of the economy grew. Carter and prominent liberal leaders such as Ted Kennedy and Ralph Nader lined up in support of deregulating the airline, trucking, and telecommunication industries.^{Footnote 252} Financial deregulation measures, building from this support for less regulation in other industries, finally made their way through Congress.

On March 31, 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act (DIDA), which was immediately heralded as the most significant change to bank regulations since the 1930s.^{Footnote 253} The act contained many of the recommendations of the Hunt Commission, including allowing savings banks to not only increase the interest rates they paid depositors but also to diversify their lending practices to include consumer loans and credit cards.^{Footnote 254} In exchange for these expanded powers would be a phase-out of the regulatory protections provided to savings and loan associations, such as interest rate differentials and controls. DIDA was a significant modification to the banking environment and carried with it substantial profits. After the passage of the bill, commercial bank portfolios experienced on average a 3.9 percent gain in their returns, whereas other depository institutions lost approximately 4.4 percent of their value.^{Footnote 255}

DIDA was only the beginning of commercial banks’ efforts to expand powers and reduce regulatory constraints. In May 1981 Wriston wrote to Utah Senator Edwin “Jake” Garn, the chairman of the Senate Banking Committee. Wriston applauded the Republican senator for his inquiries into the problems of the financial industry and reiterated that deregulation was in the nation’s best interest.^{Footnote 256} The next month Wriston wrote to Donald Regan, Reagan’s Treasury secretary. He noted in his letter: “At the invitation of certain of your staff, we have been developing with representatives of other banks proposals for legislative change which would modestly expand the powers of commercial banks and simplify the procedural steps to exercise existing powers.”^{Footnote 257}

Lawyers from Citibank worked with compatriots from Chase, Chemical Bank, Irving Trust Co., Bank of America, Mellon Bank, and the First National Bank of Chicago on a set of sweeping recommendations.^{Footnote 258} They drafted legislation that would enable the large commercial banks to underwrite and sell revenue bonds issued by state and local governments; organize, sponsor, and control mutual funds; and own stock in nonbank companies comparable to what was permissible for OBHCs, but with a substantial simplification of procedural requirements.^{Footnote 259} The recommendations worked to further eliminate distinctions among commercial banks, investment banks, and brokerage houses, as well as distinctions between commercial banks and thrifts.

In fall 1981 this lobbying work came to fruition on Capitol Hill. In September 1981 Regan announced his plan to put forward sweeping changes geared to deregulate financial institutions.^{Footnote 260} A year later, on October 15, 1982, Congress passed the Garn–St. Germain Depository Institutions Act. The act set a deadline of 1986 to remove interest rate limits, and it eliminated all price restrictions for commercial banks, allowing them to freely compete for deposits with thrifts, nonbank financial institutions, and other commercial banks for the first time since 1933.^{Footnote 261} As finance professors David B. Humphrey and Lawrence B. Pulley demonstrated, after an initial period of adjustment to the new regulatory atmosphere of the early 1980s, large commercial banks began to experience significant profits gains.^{Footnote 262} After multiple attempts over many years, bank lobbyists advocating for the Chicago School’s translation of the economy, used in the Hunt Commission’s report, had actualized a financial regulatory regime that reflected these translations.