A History of U.S. Regulation, by Matthew Lee, © 1999

A Brief and Selective History of U.S. Regulation

by Matthew Lee,© 1999 - 2003
Inner City Public Interest Law Center

The history books tell us that federal regulation was born with the Interstate Commercial Commission, in 1887. The railroads were viewed as a natural monopoly; the ICC would set rates, providing ample predictable profits to the trusts. History records that the industry initially opposed this regulation, until a U.S. Attorney General advised them that they’d profit more by working with and USING the Commission than by fighting it. This turned out to be true, and has held true in virtually every other regulatory scheme enacted since by Congress. Doubling their money, in the 1930s the railroads lobbied for and got regulation of the trucking industry -- not rationalized in terms of any natural monopoly or market failure, but simply a tit-for-tat, “if you regulate us, you should regulate our competition.” The truckers STILL fight back, mutely, with bumper sticks bemoaning the taxes they pay, telling the flea-like passenger cars they swarm around that it is THEY, the truckers, who have paid for this Interstate highway.

The ICC’s creation in 1887 was followed, 26 years later, by the creation of the Federal Reserve System. Another federal bank regulator, the Comptroller of the Currency, had existed since 1863, but only regulated nationally-chartered banks. The real power was in state chartered banks, most of them based on Wall Street in New York. History books tell us, in their wooden tone, that Congress passed the Federal Reserve Act of 1913 to bring stability to the financial system, to create a central bank which would ensure the flow of credit and money to foster economic growth. Congress relied on its constitutional authority “to coin money and regulate the value thereof.” 85 years later, still with its original structure of seven “governors,” serving 14-year terms, the Fed meets in secrecy to decide when to raise or lower interest rates, by changing the rate paid to banks on short term deposits. The stock and market analysts on Wall Street wait breathless for the first word out of these meetings, flashed across Reuters and Bloomberg screens by cub reporters in the Fed’s stone temple on C Street. Alan Greenspan mumbles a joke, and the markets crash. Stability, indeed. Now they don’t even have to “coin money” -- they can coin a phrase (for example, de-flation), and regulate all value that way.

The Federal Trade Commission was set up in 1914, something called the Federal Radio Commission (soon to be the FCC) in 1927, the Federal Power Commission (later called the Federal Energy Regulatory Commission) in 1930. The dam of regulation broke, however, with the Great Depression, and Franklin Delano Roosevelt and his team. Here’s how it went:

In 1932, the Federal Home Loan Bank Board was set up, to regulate and “assist” savings and loan associations, to make building and mortgage loans. In the 1980s, when, de-regulated, most savings banks crashed and failed, with little known businessmen making off with billions, the FHLBB had to change it name, to erase this history. The new name? The Office of Thrift Supervision, OTS, a backwater agency with its New York office not even IN New York, but across the Hudson in Jersey City. In 1999, Congress is closing in on eliminating the savings bank charter, and the OTS along with it. The agency is down to a skeleton staff, the rats sensing before the captain that the boat’s about to sink. The OTS is throwing out its law library, into dumpsters on G Street.

The Banking Act of 1933 established the Federal Deposit Insurance Corporation, to regulate state chartered banks which were not members of the Federal Reserve System, and to offer cut-rate insurance to banks of all kinds. The FDIC has a statutory right to borrow up to $50 billion from the U.S. Treasury to bail out failing banks; thus banking is one of the few industries that is explicitly insured by the government, and by the taxpayers behind them. Nice work, if you can get it...

1934 was a year of mega-legislation: The Security and Exchange Act established the SEC, the jurisdiction of which was soon extended to investment companies and public utilities holding companies. The Communications Act of 1934 established the FCC, merged the old Federal Radio Commission into it, and allowed the FCC to license, examine and regulate communications of all kind, telephonic, radio, and whatever would in the future come.

The Wagner Act of 1935 set up the National Labor Relations Board (soon to be used as a Red-scare tool, refusing to certify any union whose officers would not swear under oath to not be or even have been a member of the Communist Party).

The Civil Aeronautics Board was set up in 1940, and died an unceremonious death in 1985.

In 1946, Congress passed the Administrative Procedure Act. While citizens and consumer groups now often cite to this law, as giving them a right to fairness in the process, the APA was REALLY passed at the instigation of business, to set up a procedural thicket which would allow them to delay proposed regulation for years, and to have grounds to appeal any decision they didn’t like. The Washington law firm Covington & Burling, representing a peanut industry trade association, delayed labeling rules for peanut butter for more than decade.

The Civil Rights Act of 1964 established the EEOC.

In 1966, the APA was amended to add the Freedom of Information Act, granting citizens (and, of course, corporations) a presumptive right to inspect any document in the possession of government. There are, of course, a whole series of exception, include exemption eight which covers virtually anything having to do with banks and bank regulation. “Wouldn’t want those depositors to know when their bank might fail...” Of course, in most other contexts, corporations claim that mere disclosure should take the place of regulation: just put on fine print, “this product kills you,” and let the customer buy it -- caveat emptor, it’s a free country, ain’t it?

Regulation took off in the 70’s. The Environmental Protection Agency was created in 1970, without fanfare (though it was soon to become the most complex, and one of the most attacked, of all government agencies). 1971 saw the creation of OSHA; the CPSB was established by the Consumer Product Safety Act of 1972. The Commodity Futures Trade Commission was set up in 1974, the Nuclear Regulatory Commission in 1975, as well as the International Trade Commission and the Federal Elections Commission.

In 1976, the APA was amended again, this time adding the “Government in the Sunshine Act,” declaring all meetings of “multi-member” agencies presumptively open to the public. The bank regulators, however, declare all of their meetings closed, because they discuss, in part, bank supervisory information.

In 1977, the old Federal Power Commission was turned into the Federal Energy Regulatory Commission, a unit of the Department of Energy, with power to set rates for gas, oil and electricity.

“In connection with” (a wonderful phrase, sidestepping the question of causation, the chicken and egg)-- in connection with the upsurge of regulation in the 70’s, numerous consumers’, environmental and so-called public interest groups sprung up, began collecting and presenting evidence of unsafe cars, of industrial polluters, of defrauded borrowers, and demanding new and more targeted regulations. “There oughta be a law.”

In the banking field, from 1968 to 1976, Congress passed the Truth in Lending Act, the Equal Credit Opportunity Act, and the Fair Debt Collection Practices Act.

A growing outcry against “redlining,” the practice of banks being unwilling to lend in poor or minority (or what was euphemistically called “older”) neighborhoods led to the 1975 passage of the Home Mortgage Disclosure Act, requiring banks to disclose where they made their mortgage loans. The resulting maps, showing huge gaps in the central cities, in the South Side of Chicago, Brooklyn, the Bronx, and East L.A., led to Congress’ passage, in 1977, of the Community Reinvestment Act (CRA). A compromise bill more akin to a resolution or an executive order than a real enforcement statute, the CRA simply states that banks have a “continuing affirmative duty to serve the credit needs of their whole communities, including low and moderate income neighborhoods,” and that their record of serving their communities shall be considered by their regulators when they apply for deposit facilities. Even the bill’s sponsor, William Proxmire, said this law wouldn’t tell banks where they had to lend, it would just ensure that they informed themselves of the profit potential in low and moderate income neighborhoods. And there was no real enforcement mechanism: banks couldn’t be fined for not serving their communities; the law simply clarified that regulators COULD (but were not required) to deny a bank’s application for a new branch if it hadn’t served the community around its existing branches.

The CRA was to gain strength a decade later, when the banking industry began to be de-regulated, setting off a chain of mega-mergers in 1991, and another in 1995 and beyond. The number of banks in the United States has been cut in half in less than ten years, and on each of these mergers, community groups can (but most often don’t) put in comments urging the regulator to deny the merger either (1) because the bank doesn’t lend to the poor, or (2) unless the bank commits to lend more to the poor in the future. By 1993 the banks were calling for a safe harbor, making their merger applications bullet proof if they were among the 98% of banks deemed “satisfactory” by their regulators. When the Republicans re-took both houses of Congress in 1994, they put CRA on their hit list of the ten most industry-hated laws, and vowed to repeal it. Community and civil rights groups’ opposition, joined by the mayors of some cities which had benefited from CRA, and even a veto threat by the President, fought off the drive to repeal CRA outright. But the industry kept scheming, first getting the regulatory agencies to streamline their applications procedures, to deem applications automatically approved 60 days after filing, and then adding provisions to other de-regulation legislation which would simply remove the pre-consummation application required for most acquisitions. Now, in 1998, Republican Senators Phil Gramm of Texas and Richard Shelby of Alabama are characterizing CRA as "extortion," and are seeking to scale back or repeal the CRA.

But that’s jumping ahead -- back in the 70’s, in the hey-day of regulation, the consumers and environmental groups proposed, and begin to get, “intervention” or “public participation” funding, to cover their costs for advocating before federal agencies and vindicating the public interest. It seems obvious enough: if Congress passes laws requiring the regulators to solicit and accept comments and testimony from the public, and if the regulated industries are invariably represented by high-powered (and high-priced) counsel in these proceedings, citizens groups need funding to be able to hire expert witnesses, lawyers, to cross-examine, to raise the “voice of the voiceless.” The Federal Trade Commission began awarding public participation funding, the FCC considered it, until one of its Commissioners blew the whistle and claimed it was beyond their authority. Congress considered bills to expand and formalize public participation funding at all agencies in 1976, 1977 and 1978, but none of the bills passed. The MOMENT, is what had passed -- with the election of Ronald Reagan in 1980, big business and those citizens convinced that big government was suffocating them were ascendant. In late 1980, Congress voted to restrict the FTC’s intervention funding program, voted to PROHIBIT public participation funding at the NRC, CAB, FERC and the National Highway Traffic Safety Administration, and reached out and killed a $150,000 public participation pilot program at the EPA. The moment had passed. In 1981, the first of the twelve Reagan-Bush years, not a single new regulatory law was enacted; no new major rules were promulgated. “The federal dog has stopped biting,” said an industry pundit...

[To be continued...].

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Copyright 1999 - 2003 Inner City Public Interest Law Center and Matthew R. Lee. All rights reserved. For further information, or to request reprint or other permission, contact: Permissions Coordinator, Legal Administration, Inner City Public Interest Law Center, P.O. Box 580188, Mount Carmel Station, Bronx, NY 10458. Phone: (718) 716-3540. Fax: (718) 716-3161. E-mail: mlee [at] innercitypress.org