Collaborative Research: Should Regulators Have Independence from Political Pressures? Politics, Banking, and Bankruptcies During the Progressive Era, 1890s to 1920s

Should government regulators, particularly those that supervise financial institutions, be subject to the whims of politicians, who might demand actions in their personal or partisan interests, or should regulators operate independent of politicians in the short run? Independent regulators are appointed by politicians to accomplish tasks defined by legislatures but can only be fired for "good cause", which means that the regulators serve their terms in office as long as they fulfill their duties and do not violate the law. Today, regulatory independence is the norm. It forms a cornerstone of the financial system. All federal agencies that regulate banks, like the Federal Deposit Insurance Corporation and Federal Reserve System, operate independently. Questions, however, have been raised about the effectiveness and constitutionality of regulatory independence. The effectiveness of regulatory independence is difficult to study today. So, we study historical analogies, particularly during the Progressive Era, when U.S. state governments experimented with the structure of regulatory agencies and transitioned from politically independent to politically dependent regulators. To assess the impact of these political experiments, we gather new data that will allow scholars to better understand the history of the Progressive Era and the impact of government intervention on the financial system and rest of the economy.

This research will examine how political control of bank supervision affected financial institutions and firms, and how financial and political instability contributed to the spread of political polarization during the Progressive Era. To answer these questions, the project will build a new dataset on business and bank foundation and failure rates by state and quarter from the 1890s through the 1930s as well as the aggregate liabilities and assets of these institutions. The project will also build a new dataset on the structure of financial regulation in the 50 states. This information will be merged with existing data on politics, political structures, voting by the public and political representatives, and the state of the national and local economies. The new dataset will advance knowledge of the Progressive Era, lifting a veil on relationships between economics and politics that existing data obscures. The data will also advance knowledge related to current policy debates, particularly the optimal design of institutions regulating financial institutions.