The separation of banking and commerce: Origin, development, and implications for antitrust

• DOI: 10.1177/0003603X8302800110
• Date: 01 March 1983
• Author: Bernard Shull
• Published date: 01 March 1983
• Subject Matter: Article

The Antitrust Bulletin/Spring 1983

The separation

of

banking

and commerce: origin, development,

and implications for antitrust

BY BERNARD SHULL *

I.

Introduction

255

Modern banking originally developed as an adjunct

of

private

commercial firms.' In the United States, however, it has long been

the policy

of

the federal government to keep banks separate from .

other forms

of

commerce; i.e., from directly engaging in com-

mercial and industrial enterprise. Recent developments, including

the acquisition

of

domestic banks by both foreign and domestic

conglomerates, the availability

of

close substitutes for banking

services through investment firms, the ownership of savings

institutions with "commercial banking" powers by commercial

and industrial firms, new policies implemented by bank regula-

tory agencies, and efforts in Congress to permit commercial

•Professor, Department of Economics, Hunter College of the City

University of New York.

IOn the development of modern banking, see A. P. Usher, The

Early History

of

Deposit Banking in Mediterranean Europe, vol. 1 (New

York: Russel and Russel, 1967); Raymond deRoover, Business, Banking

and Economic Thought (Chicago: University

of

Chicago Press, 1974);

and The Dawn

of

Modern Banking (New Haven, Conn.:

Yale

University

Press, 1979).

©1983by Federal Legal Publications, Inc.

256 The antitrust bulletin

banks

to

expand

into

new activities, suggest

that

the

policy

may

not

long be sustained.'

Those

who

favor the elimination

of

activity restrictions pro-

fess to see no reason why commercial

banks

should be treated

differently

than

other

private firms.

It

is

not

obvious to

them

that

their safety would be jeopardized additionally by

further

diversi-

fication,

and,

in fact,

that

it might be without. They assume

that

market

forces,

antitrust

and

other

restraints

can

be relied

upon

to

sustain competition in

both

banking

and

nonbanking

markets.'

Needless to say, existing legislation is based on

contrary

assump-

tions.'

In evaluating the changes taking place, it is useful to under-

stand

why activity restrictions were originally imposed.

The

early

history clarifies existing relationships between commercial

banks

and

the government.

It

provides abetter understanding

of

why

the

liberalization

of

activity restrictions has expanded

rather

than

2For a review of recent developments, see Donald T. Regan,

"Remarks Before the Manuel F. Cohen Memorial Lectureship," George

Washington

u.

Law School (September 8,

1981);

and Lyle Gramley,

"Financial Innovation and Monetary Policy," Federal Reserve Bulletin,

July

1982.

See also FinancialInstitutions Restructuring and Services

Act

of

1981, Hearings Before the Committee on Banking, Housing and

Urban Affairs,

u.S.

Senate, 97th Cong., 1st Sess. (October

1981).

3For an explicit statement of this position, see Robert A. Ham-

mond III, One Bank Holding Company Legislation

of

1970, Hearings

Before the Committee on Banking and Currency, House of Representa-

tives, 91st Cong., 2d Sess. (May

1970),

pp.

247-50

[hereinafter cited as

One Bank Holding Company]. For a more recent analysis in a similar

vein concluding that commercialbanks need not be separated from the

securities business, see Franklin R. Edwards. "Banks and Securities

Activities: Legal and Economic Perspectives on the Glass-Steagall Act,"

in The Deregulation

of

the Banking and Securities Industries (Lex-

ington, Mass.: Lexington Books,

1979),

pp.

273-94.

4Antitrust inadequacy was recognized in the passage of the Bank

Holding Company Act in

1956

and in amendments to that Act in

1970.

For an explicit statement on antitrust inadequacy, see Richard

W.

McLaren, One Bank Holding Company, supra note 3, at 238.