Economic Regulation

Economic Regulation. The objectives of economic regulation are usually mixed: to achieve an appropriate balance between efficiency and equity, to steer acquisitive human urges into productive channels, and to strike reasonable trade‐offs between economic growth and environmental protection. The United States has had an uneven history of regulation, one that was relatively good in comparison to many other countries. For most of its history, the United States featured the world's most entrepreneurially “free” economy with the least amount of public regulation. Such generalizations, however, disguise a more complex reality.

In the Colonial Era, religious considerations limited entrepreneurial impulses, yet the spread of a pervasive market economy in the eighteenth and nineteenth centuries worked a dramatic change. Although such old customs as the “just price” (the maximum allowable price for a basic necessity) ended, that did not preclude all regulation. The developing American capitalist economy still required a strong regulatory framework. Commercial transactions depended on a system of contract law enforced through courts. Other public and private regulatory mechanisms were essential as well.

The Monetary System and the Capital Markets

. All cash‐and‐credit economies, including the American one, also require a monetary authority—typically a central bank—to regulate the supply and value of money. In colonial America, banks were almost nonexistent, but after independence Alexander Hamilton's First Bank of the United States (1791–1811) served some functions of a central bank until its twenty‐year charter expired. The Second Bank of the United States (1816–1836) was even more successful, but it too fell victim to politics and its charter was not renewed. Thereafter, the United States had no central bank until the creation of the Federal Reserve System in 1913. During those three generations, the government generally maintained the gold standard, state authorities regulated banking haphazardly, and the nation experienced a chronically deficient money supply. All of these conditions changed under the Federal Reserve System. By the 1930s the “Fed,” assisted by other bodies and officials such as state banking commissions and the Controller of the Currency, had become a modern regulatory agency overseeing the monetary system.

The nation's securities (stock and bond) markets, which developed during the nineteenth century and then blossomed in the twentieth, have benefited from one of the world's most modern and effective regulatory systems. A series of laws passed during the 1930s (including the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, and the Trust Indenture Act of 1939) created a system in which regulation was overseen by the Securities and Exchange Commission and the federal courts, but implemented largely through third parties. These included hundreds of thousands of private lawyers and accountants, officials of the New York Stock Exchange and other exchanges, plus the National Association of Securities Dealers (NASD).

Labor Markets and Conditions of Work

. Efficient, equitable, and flexible labor markets require systematic wage scales, rules for the number of hours and days to be worked, and numerous other regulations. In America, some of these had long been enforced through apprenticeship systems. With industrialization, however, the exploitation of factory labor became commonplace, and it lasted for many decades. During the Progressive Era, most states instituted workers' compensation laws and some enacted unemployment insurance, but effective national resolution of the labor question awaited the New Deal Era. The National Labor Relations Act of 1935 gave organized labor the power to bargain collectively; other laws passed during the 1930s ended child labor, set maximum hours, and established minimum wage levels.

By the 1990s some aspects of the American labor market were heavily regulated through antidiscrimination laws designed to protect women, minorities, the handicapped, and others. But in areas such as layoff policies and paid vacation time for employees, American practice granted fewer benefits to workers than those of some other countries, especially in Western Europe.

Product Markets and Competition

. The United States has always had one of the world's most intensely competitive economies. There are many reasons why. For one thing, the entrepreneurial spirit of its ethnically mixed population has been remarkably vigorous. Also, for the first 150 years of the nation's history few countervailing forces existed to challenge business interests. The United States had no strong guild tradition, no established church, no hereditary aristocracy, and no powerful peacetime military. Until the mid–twentieth century, it had only a minuscule government. All of these conditions interacted to intensify business competition.

With the rise of “big business” in the 1870s and 1880s, state legislatures responded by enacting antitrust legislation. In 1890, Congress passed the landmark Sherman Antitrust Act, which outlawed cartels and monopolies. Since then, the Sherman Act, in combination with the Federal Trade Commission Act and the Clayton Antitrust Act (both passed in 1914), has had mixed results. But on balance, economists conclude that these antitrust measures have increased the level of competition within the American economy. Perhaps the truest index of the effectiveness of U.S. antitrust laws has been their widespread emulation by other nations since World War II.

The Economic Infrastructure

. Active economic regulation has been most conspicuous in the areas of transportation, electric utilities, and telecommunications, where conventional competition seemed inadequate to achieve its usual function of automatically regulating prices and quality. The years from the 1870s through the New Deal saw a proliferation of state and federal commissions charged with regulating these industries. First railroads, then gas and electric utilities, streetcars, pipelines, telephones, trucking, and finally airlines came under regulation by public commissions, which oversaw prices and sometimes actually set them. Almost every state established a railroad and utility commission. The most prominent federal agencies were the Interstate Commerce Commission (created in 1887), which regulated first railroads, then pipelines and trucking; the Federal Power Commission (established in 1920, strengthened in 1930, and in the 1980s renamed the Federal Energy Regulatory Commission), which oversaw gas and electric utilities; the Federal Communications Commission (1934, radio, telephones, and television); and the Civil Aeronautics Board (1938, airlines). This complex regulatory structure proved controversial, however, in part because the “cost‐plus” formula employed by regulators in some of these agencies provided little incentive for efficiency for cost cutting, and in part because some of the industries regulated (trucking, for example) had few of the “natural monopoly” characteristics of early railroads and electric utilities. During the years after World War II, and particularly after the economic downturn of the 1970s, the “cost‐plus” type of economic regulation began to be discredited.

Deregulation

. The deregulation movement began in a serious way during the presidential administration of Jimmy Carter. It rapidly gathered force in many industries and spread to other countries as well. During the 1980s, the election of such “free market”–oriented politicians as Ronald Reagan in the United States, Margaret Thatcher in the United Kingdom, and Helmut Kohl in Germany underscored the apparent popularity of deregulation. “Privatization” schemes moreover, marched alongside deregulation, as governments in Great Britain, Germany, Japan, and several other countries sold nationalized industries to private investors. In the United States, “privatization” often meant spinning off what had been public functions (such as garbage collection) to private contractors. Meanwhile, deregulation in the federal government included the outright abolition of several agencies, such as the Civil Aeronautics Board and the Interstate Commerce Commission. By the end of the twentieth century some of the industries mentioned above (railroads, trucking, airlines, radio, and television) were scarcely regulated at all, and others, such as electric power and telephones, were being moved toward deregulation.

Toward the end of the 1980s, as if to underscore the apparent triumph of free‐market economics, the collapse of socialist economies and the breakup of the Soviet bloc seemed to complete the cycle of deregulation and privatization. This development, coupled with the superior growth performance of capitalist economies, seemingly demonstrated once and for all the virtues of minimal regulation.

Conclusion

. But it would be a serious mistake to pronounce an end to the need for economic regulation, let alone regulation applying to health, safety, and the environment. At the end of the 1990s experience with deregulated industries remained brief by historical standards, and economic history has a way of taking unexpected turns. Even so, several general conclusions concerning the history of economic regulation in the United States seem warranted:

First, the United States has regulated its economy less than most industrialized countries have done, although it has created large numbers of regulatory agencies. Second, the onset of regulation in America was usually associated with periods of political reform: the Progressive Era, the New Deal, and the New Frontier and Great Society Era of the 1960s. Finally, and paradoxically, the enactment of consumer protection, health and safety, and environmental laws accelerated during the 1970s and 1980s, an era of economic deregulation. Regulatory bodies such as the Environmental Protection Agency (1970), the Occupational Safety and Health Administration (1970), and the Consumer Product Safety Commission (1972) were created during the Richard M. Nixon administration. These latter laws differed from traditional economic regulation despite their powerful economic impacts. In some respects they resembled Progressive‐Era legislation such as the Pure Food and Drug Act and the Meat Inspection Act (both passed in 1906), and similar measures having to do with forestry and other environmental concerns. They represented a nonpartisan consensus that people and the environment must be protected from the excesses of the unfettered market.
See also Airplanes and Air Transport; Banking and Finance; Bank of the United States, First and Second; Capitalism; Environmentalism; Factory System; Industrial Diseases and Hazards; Industrialization; Interstate Commerce Act; Laissez‐faire; Monetary Policy, Federal; Stock Market.

Bibliography

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Alfred E. Kahn , The Economics of Regulation, 1971.
Jonathan R. T. Hughes , Social Control in the Colonial Economy, 1976.
James Q. Wilson, ed., The Politics of Regulation, 1980.
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Thomas K. McCraw , Prophets of Regulation: Charles Francis Adams, Louis D. Brandeis, James M. Landis, Alfred E. Kahn, 1984.
Martha Derthick and and Paul J. Quirk , The Politics of Deregulation, 1985.
Morton Keller , Regulating a New Economy: Public Policy and Economic Change in America, 1900–1933, 1990.
Richard H.K. Vietor , Contrived Competition: Regulation and Deregulation in America, 1994.

Thomas K. McCraw