ABSTRACT
This chapter argues that the underlying forces driving regulation are the upsurges in productivity growth, rather than periodic crises. More precision can be given to the timing and direction of regulation by treating the financial system as primarily a provider of information rather than liquidity or diversification. It focuses on the origins of the regulatory impulse over the course of the American century. The inherited system of regulation in 1914 had changed little since the middle of the nineteenth century. Commercial banks sought to modify the regulations governing their operations, while other markets and institutions expanded to provide alternative forms of financing. Consequently, state legislatures responded with regulations that took the most extreme form of complete separation and restricted asset portfolios. The collapse of the stock market and the economy, coupled with new securities regulations, both contributed to the decline of public issues. Thus the financial system plays a key role in fostering economic growth.
