A Technocratic Free Market: How Courts Paved the Way for Administered Deregulation in the American Financial Sector, 1977–1988

In 1981, a Wall Street trade group named the Securities Industry Association (SIA) made what its members believed was a humble request. Two commercial banks—Banker's Trust and Bank of America—had begun selling certain types of financial securities and petitioned regulators at the Federal Reserve to approve their entry into the securities market. To the concerned SIA, the illegality of these moves was beyond question. New Deal banking regulations were crystal clear in prohibiting depository banks from the turbulent but very lucrative business of Wall Street investing. Since the 1930s, the Glass-Steagall Act had given Wall Street a legislatively enforced monopoly on the sale of securities, and relegated commercial banks to comparatively unexciting pursuits. Banker's Trust and Bank of America were now laying siege to this regulatory fortress, and the SIA's request was simple. The Federal Reserve needed to enforce the laws on the books. The agency needed to deny the banks' petitions, maintain the barriers to entry required by statute, and send a clear signal it was upholding the New Deal regulatory order.¹

The Fed understood the requirements of the law differently. Indeed, the agency decided the relevant statutes were not so perfectly clear. They were ambiguous, the agency argued, and contained enough wiggle room to sanction the new line of work at both commercial banks. Regulators announced this interpretation in the early 1980s, and the SIA predictably challenged the agency's reading in federal court. The multi-billion-dollar issue was the scope of the Fed's authority as an administrative agency charged with construing and implementing federal law. Should "generalist" judges give credence to the decisions of "expert" banking regulators? Should they hesitate to upend legal interpretations made by administrators familiar with industry rules? Or should judges be skeptical of agency discretion and—in the tradition of Marbury v. Madison—"say what the law is"? Should they put their foot down, overturn the Fed's ruling, and, as the SIA hoped, redraw lines that had historically partitioned American finance?

These were questions of administrative law that were eventually resolved by an emergent legal doctrine known as Chevron deference.² Chevron crystallized as a legal framework in the mid-1980s and wrought significant changes to the inner workings of the American administrative state. Most important, Chevron lessened the degree to which courts scrutinized agency interpretations in judicial review. In this relaxation of judicial scrutiny, a cohort of federal judges saw an opportunity to orchestrate deregulation. When these judges applied Chevron in the SIA controversy, they bolstered the Fed's acts of legal penmanship, ultimately allowing the agency to loosen the requirements of Glass-Steagall and deregulate an important part of the financial sector. By the end of the 1980s, Chevron had strengthened the independent powers of bureaucrats in the Reagan administration, enabling them to erode New Deal regulations and move bureaucratic government in a rightward direction.

Historians have begun to recognize that what happens at the agency-level matters tremendously in modern American politics.³ Recently, scholars have used the term "administrative constitutionalism" to focus attention on the enormous amount of lawmaking that takes place within the federal bureaucracy—after Congress delegates its authority and once the regulatory process begins. Reuel Schiller, Sophia Lee, Karen Tani and others have deepened our understanding of twentieth-century governance by uncovering the ways various agencies have shaped public programs through acts of legal interpretation. They have also pointed historians to the important and ever-evolving relationship between administrators and reviewing courts. These are welcome contributions, but they deserve to be taken a step further. The burgeoning literature on administrative actors has focused predominantly on how agencies mediated the programs of postwar liberalism, especially in the realm of civil rights. This article takes the subfield to a new arena—financial regulation—and to a new context—the 1980s, when "big government" and its policy commitments were under attack—to offer new perspective on how agencies wielded their discretionary authority in the late twentieth century.

Developments in American...