Financial Deregulation, Monetary Tightening, Oil Crises and Transnational Capital Flows: The United States and the Origins of Neoliberal Financial Policies

Abstract

This article pinpoints the anti inflationary measures and financial deregulation policies passed by the Congress and the White House since early 1980 to establish a linkage between such soaring cost of financing the U.S. economy, a declining competitive edge of U.S. manufacturing during the 1970s, and the deregulation of the financial system by the turn-of-the-decade. It is suggested that such deregulation was an instrument to recast the competitive position of American manufacturing and trading companies. Furthermore, unlike the literature on financialisation of corporate America, this study argues that deregulating the American banking and financial system was not only a way to compensate the shortfall in profits caused by highs in interest rates through the promotion of unregulated financial activities by corporations and other non-banking companies. Rather, the Reagan administration deregulated the financial system to favour the outflow of money from the United States: by unleashing the American banking system the White House promoted an increase in the foreign investments of U.S. banks as an instrument to compensate the decline in banks’ profits caused by rising interest rates and the effect it had in terms of decreasing domestic borrowing by companies and consumers. Such decrease also hit hard the domestic profits of U.S. banks. The Reagan administration-turn to introduce a legislation to deregulate the financial sector was intended to let the American financial system increase their overseas investments in European money markets to restructure its banking profits.

At the same time Reagan advanced deregulation policies to restore domestic money stock in combination with a foreign economic policy aimed at favouring capital-seeking strategies for U.S. corporations.