On this day in economic and financial history ...
President Carter signed the Depository Institutions Deregulation and Monetary Control Act of 1980 -- the DIDMCA -- into law on March 31, 1980. Now widely recognized as landmark legislation -- perhaps the single most important legislative change to banking-sector regulations since the New Deal -- the DIDMCA's ultimate impact could not have been known at the time. Here's a list of some of the DIDMCA's key provisions. See if you can spot the ones that would have the greatest impact on America's financial system.
- All depository institutions (banks, thrifts, savings and loans, and credit unions) were required to report to the Federal Reserve -- previously, only about a third of U.S. banks did so.
- All depository institutions were required to maintain reserves of at least 3% for smaller transaction amounts, and up to 14% for larger cumulative transactions (over $25 million).
- Federal Reserve member institutions would have eight years to amass the reserve levels required under the new law (four years for member institutions joining later).
- Any financial institution that deals only with other institutions (bankers' banks, so to speak) would be exempt from reserve requirements.
- Interest-rate ceilings on deposits would be eliminated.
- Checking accounts would be eligible to receive interest on their deposits.
- The functions of savings and loans were expanded to be roughly equal to those of traditional banks, which included making loans, investing in money market funds, issuing credit cards, and the like.
- Federal deposit insurance was raised from $40,000 to $100,000 per account.
- State usury restrictions on interest charged for bank loans were eliminated, and interest was pegged at a level set a certain amount over the Fed's discount rate.
- Lending processes were simplified.
Changes to interest-rate ceilings had a notable effect on the American financial industry. The late '70s had seen a stagflationary economic environment raise both inflation and real interest rates far beyond the interest ceilings then in place. This scenario caused a credit crunch, as depositors sought out market rates of return on their finances, often moving money from savings accounts to investment vehicles. However, other changes combined with the removal of interest ceilings to create problems for later administrations.
The increase in deposit insurance helped create a greater level of risk and moral hazard in the financial system when combined with looser lending restrictions and higher interest rates on deposits. Reassured savers added money to higher-yielding accounts -- particularly those offered by thrifts and savings and loans -- and these deposits swelled the reserves of financial institutions, allowing greater levels of lending. More than 500 new savings and loans were chartered from 1980 to 1986. The removal of interest-rate caps on loan offerings also gave institutions the incentive to provide mortgages and other financial products to riskier borrowers.
You'll recognize these elements as familiar causes of a more recent financial crash, but it wouldn't take long for the effects of risky lending and looser interest rates to cause problems in the 1980s. Within a decade of the DIDMCA's passage, the savings and loan industry was in a full-blown crisis, one that required more than $100 billion in bailouts from the federal government.
However, a greater level of federal oversight and insurance undoubtedly helped swell the holdings of the financial system, which in turn contributed to the enormous wealth expansion of the 1980s and 1990s, as larger reserves were used to finance businesses and homeowners across the country. The Dow Jones Industrial Average (DJINDICES:^DJI) didn't bottom out for another two years -- but once the revamped financial system began to act, stocks were off to the races. The Dow's rise from 1982 to 2000 was by far the greatest period of growth in its history, roughly three times as large (in either nominal or real terms) as even the remarkable gains of the Roaring '20s. The DIDMCA was not solely responsible for this growth -- nor was it the sole cause of the later financial crises -- but its impact on the American financial system is simply too important to overlook.
The dawn of the computing industry
The first UNIVAC was delivered to the U.S. Census Bureau on March 31, 1951. Built by J. Presper Eckert and John Mauchly and sold by Remington Rand (which is now part of Unisys (NYSE:UIS)), the UNIVAC was the first successful purpose-built and mass-produced commercial computer ever sold in the United States. The sale marked the beginning of an American computing industry that would quickly become the dominant force in global high-tech. UNIVAC itself was to prove the value of computing over earlier punched-card systems when it successfully defied conventional polling wisdom in the 1952 presidential election, predicting a landslide victory for Dwight Eisenhower when most pollsters expected Democrat Adlai Stevenson to win the White House.
Between 1951 and 1954, Remington Rand sold 46 of the original UNIVAC systems, but it consistently trailed early industry leader IBM (NYSE:IBM), which boasted a stronger financial position and was able to offer its mainframes at cost, or even for free. IBM soon overtook Remington Rand with its own mass-produced computing machines, and by the mid-1950s, several different IBM mainframes were available on the market. IBM would continue to lead the computing industry for decades to come, while Remington Rand sold itself to Sperry in 1955. Further UNIVACs were developed after the merger, with some models sold well into the 1970s, but they never managed to unseat IBM from its leadership position. Being the first mover doesn't always matter in the fast-paced computing industry.
The age of patented genetics
Ananda Chakrabarty gained the first patent ever issued for a genetically modified organism on March 31, 1981, a year after winning a landmark case on the subject in the Supreme Court. Chakrabarty, a General Electric (NYSE:GE) researcher, had developed a bacterium capable of cleaning up toxic oil spills by breaking crude oil into non-toxic substances that aquatic life might harmlessly consume. In proving that his work was the result of scientific modification, Chakrabarty forced the Patent Office, via his Supreme Court victory, to accept the fact that patentable subject matter might include "anything under the sun that is made by man."
The advent of lower-cost genome sequencing has added a new layer of complexity to this argument, as a fifth of all human genes (more than 4,000 of them) were patented by 2005. A new precedent may be required in the near future, as no genes have been modified in novel ways -- they are not, like Chakrabarty's bacterium, "made by man." His bacterium was more groundbreaking in the courts than in the lab, but Chakrabarty continues his research into microbiology to this day. Chakrabarty has since become one of the most decorated microbiologists-cum-genetic-engineers in the world, and today he serves as a Distinguished Professor at the University of Illinois at Chicago College of Medicine.