Constituencies and Legislation: The Fight Over the McFadden Act of 1927
Raghuram G. Rajan
University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)
Board of Governors of the Federal Reserve System
May 30, 2012
Forthcoming Management Science
The McFadden Act of 1927 was one of the most hotly contested pieces of legislation in U.S. banking history, and its influence was still felt over half a century later. The act was intended to force states to accord the same branching rights to national banks as they accorded to state banks. By uniting the interests of large state and national banks, it also had the potential to expand the number of states that allowed branching. Congressional votes for the act therefore could reflect the strength of various interests in the district for expanded banking competition. We find congressmen in districts in which landholdings were concentrated (suggesting a landed elite), and where the cost of bank credit was high and its availability limited (suggesting limited banking competition and high potential rents), were significantly more likely to oppose the act. The evidence suggests that while the law and the overall regulatory structure can shape the financial system far into the future, they themselves are likely to be shaped by well organized elites, even in countries with benign political institutions.
Number of Pages in PDF File: 43
Keywords: Competition, banking, legislation
JEL Classification: E44, G21
Date posted: December 30, 2012 ; Last revised: September 17, 2015
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