The Origins of a Capital Market Union in the United States

27 Pages Posted: 3 Apr 2018 Last revised: 17 Apr 2018

See all articles by Jeffrey N. Gordon

Jeffrey N. Gordon

Columbia Law School; European Corporate Governance Institute (ECGI)

Kathryn Judge

Columbia Law School

Date Written: March 31, 2018


EU policy-makers have focused on the creation of a “Capital Market Union” to advance the economic vitality of the EU in the aftermath of the Global Financial Crisis of 2007-09 and the Eurozone crisis of 2011-13. The hope is that EU-wide capital markets will help remedy the limitations in the EU’s pattern of bank-centered finance, which, despite the launch of the Banking Union, remains tied to Member States. Capital market development will provide alternative channels for finance, which will facilitate greater resiliency, more economic integration within the EU, and more choices for savers and firms. This chapter uses the origins of the US capital market union to explore how law can advance the creation of a CMU. The chapter shows the importance of expanding the focal lens beyond investor protection to reveal the full array of ways that the legal choices of repression, substitution, and facilitation shape the private funding of economic activity.

Central to the US story was a mismatch between growing enterprises and a stunted banking system. Political choices led to a banking system populated primarily by small local banks that were ill suited to provide financing in the amounts, or with the risk, needed to fund the railroads and the follow-on industrial film expansion. The bond market stepped in, creating national and international channels for debt and then equity finance. Depression-era legal enactments strengthened these markets, through a strong disclosure regime, a powerful market regulator and enforcer (the SEC), and, through the separation of commercial and investment banking (“Glass-Steagall”), the creation of a set of private actors, investment banks, with strong incentives to develop ever more robust capital markets. These developments also helped deter states from interfering excessively in the issuance of debt or equity securities, a core challenge for any capital market union.

In arguing for a richer understanding of “financial structure law,” the chapter makes some EU-specific suggestions. These focus on facilitating the growth of EU-wide asset managers, which can engage in credit intermediation similar to banks but with lower systemic risk. In marshalling individuals’ retirement savings, the asset managers can provide a funding supply side to CMU.

Keywords: Capital Market Union, banking fragmentation, Glass-Steagall, Blue Sky Laws, railroad bonds

JEL Classification: G21, G23, G28, N21, N22

Suggested Citation

Gordon, Jeffrey N. and Judge, Kathryn, The Origins of a Capital Market Union in the United States (March 31, 2018). Capital Market Union and Beyond (Franklin Allen et al., eds. (MIT 2018)); Columbia Law and Economics Working Paper No. 584; European Corporate Governance Institute (ECGI) - Law Working Paper No. 395/2018. Available at SSRN:

Jeffrey N. Gordon (Contact Author)

Columbia Law School ( email )

435 West 116th Street
Ctr. for Law and Economic Studies
New York, NY 10027
United States
212-854-2316 (Phone)
212-854-7946 (Fax)

European Corporate Governance Institute (ECGI)

B-1050 Brussels


Kathryn Judge

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States


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