Foundations of the Rise of Shadow Banking in the US in the 1950s and 1960s: Acts of Commission and Acts of Omission by the Fed and the Treasury

The second lecture pursues the theme of agency of state actors in an attempt to explain the rise of the shadow banking system in the US by focusing on the establishment of the core market for liquidity provision to the shadow banking system, namely the repo-market in the US after WWII. It introduces the crucial concept of the liquidity triangle between the fiscal agent, the central bank, and private market-makers in order to develop the reasons that drove state actors to lay the foundations for the expansion of the shadow banking system. It documents how the Federal Reserve consciously and against prevalent legal interpretations started to enter into the provision of liquidity to broker dealers via the repo-market.

Using archival data, in particular the archive of James Robertson, the only dissenting member of the Federal Reserve Board, the lecture documents the statecraft that went into this exemption, allowing the Fed to provide liquidity to non-banks and the driving forces behind it, namely the convergent interests of central bank, treasury, and broker dealers. I subsequently trace how this financial innovation moved to the banking sector and weakened the Federal Reserve’s control over the liquidity available to the banking system. The documentation of inter-agency conflict in the 1950s and 1960s allows me to show not only the different historical junctures at which the regulation of the shadow banking system could have taken a different route, but also the dominant coalition of public and private actors that persistently pushed for its expansion.

Matthias Thiemann is Professor of European Public Policy at the Center for European Studies and Comparative Politics, Sciences Po, Paris, and the MPIfG Scholar in Residence 2025. During his stay at the Institute, he presents a lecture series entitled "Technocrats, State Agency, and the Rise and Continued Expansion of the Shadow Banking System." The three lectures will take place on April 29, May 6, and May 13, 2025.

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