Back to the Future in Finance

FLORENCE – Former Federal Reserve Board Chairman Paul Volcker provided the central inspiration for President Barack Obama’s proposal for overhauling banking. Without question the most successful central banker of the twentieth century, Volcker was an early and persistent voice warning of the problems of what he called “the bright new financial system.”

But Volcker has also been a prominent critic of the dangers of currency volatility. What is the link between nostalgia for a simplified and less risky banking sector and the wish to reintroduce a currency system that also seems a relic of the past?

There was already much discussion about reviving 1930’s-style regulation of banks before Obama’s dramatic and combative announcement on January 21. The proposals for what is now called the “Volcker rule,” which would ban proprietary trading and prevent banks from “owning, investing in, or sponsoring” hedge funds or private equity funds, is an updated version of the Glass-Steagall Act, the law enacted in the United States in 1933 to separate investment banking from commercial banking.

The drive in the 1930’s to restrict banking activities occurred in many countries. In Belgium, where the first universal banks had been established in the early nineteenth century, investment and commercial banking were also separated. Italian banks were banned from holding securities in industrial corporations.