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Constituencies and Legislation: The Fight over the McFadden Act of 1927

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  • Raghuram G. Rajan
  • Rodney Ramcharan

Abstract

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. Unlike previous work, we find strong evidence of elite influence. 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17266.

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Date of creation: Aug 2011
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Handle: RePEc:nbr:nberwo:17266

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  1. Economides, N. & Hubbard, R.G. & Palia, D., 1995. "The Political Economy of Branching Restrictions and Deposit Insurance: A Model of Monopolistic Competition Among Small and Large Banks," Papers 95-14, Columbia - Graduate School of Business.
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Cited by:
  1. Raghuram Rajan & Rodney Ramcharan, 2012. "The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 1920s," NBER Working Papers 18027, National Bureau of Economic Research, Inc.
  2. Nicholas Borst, 2013. "Shadow Deposits as a Source of Financial Instability: Lessons from the American Experience for China," Policy Briefs PB13-14, Peterson Institute for International Economics.

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