Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Questioning the benefits of 1930s US securities reforms

Cheffins, Bank and Wells posted an interesting paper earlier this month on SSRN (“Questioning ‘Law and Finance’: US Stock Market Development, 1930-70”) arguing that the creation of the US SEC and the associated legislation did not energize the development of the US securities markets.

  • The number of stockholders flat-lined and maybe even fell between the early 1930s and the early 1950s, despite the US population increasing by over 20%.
  • The total equity market capitalization was less than 10% of GDP in the 1940s and 1950s, while it had been much higher in the mid 1930s.
  • There were hardly any issuance of stock by new companies (IPOs) in the 1930s, 1940s and 1950s.

After this long period of stagnation and decline, the US stock markets began to recover and grow in the late 1950s and early 1960s. Cheffins et al. argue that the SEC cannot claim any credit for this: Seligman’s influential history describes the SEC during the 1950s as having “reached its nadir” when “its enforcement and policy-making capabilities were less effective than at any other period in its history.” (Seligman, Joel. The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance. Boston: Houghton, Mifflin, 1982, page 265).

One counter-argument could be that the decline of the stock market development in the two decades after the formation of the SEC was due to the Great Depression and the World War and not due to the reforms themselves. Unfortunately for this view, the under-regulated “over the counter” (OTC) market grew from 16% to 61% as a percentage of total national stock exchange sales between 1935 and 1961.

Cheffins et al. add to the sceptical literature going back to Stigler and Benston about the contribution of the SEC and the 1930s reforms for the securities markets (Stigler, George J. (1964) “Public Regulation of the Securities Markets”, The Journal of Business, 37(2), 117-142 and Benston, George J. (1973) “Required Disclosure and the Stock Market: An Evaluation of the Securities Exchange Act of 1934”, The American Economic Review, 63(1), 132-155).

One could also argue that broader macroeconomic governance reforms have played a bigger role than micro regulatory reforms. Sylla, for example, gives credit to the Hamiltonian reforms of the 1790s for the remarkable growth of securities markets in the US. Sylla points out that by the early nineteenth century, “the United States led the world in the proportion of financial assets held in the form of corporate stock.” and that “By the third and fourth decades of the nineteenth century, there was probably no place in the world as ‘well banked’ and ‘security marketed’ as the northeastern United States.” (Sylla, Richard (1998) “U.S. Securities Markets and the Banking System, 1790-1840 ”, Federal Reserve Bank of St. Louis Review, May/June 1998, 83-98).


masters in financeIf I may now indulge in some self promotion, MastersinAccounting.info have put my blog in their list of Top 10 Finance Professor Blogs. Their review says: “… Varma writes a comprehensive series of posts on his subject of choice and does so with real insight and obvious passion for the topic. A professor at the Indian Institute of Management, Varma studies financial markets and the regulation of markets throughout the world and uses his knowledge and experience to give readers a perspective on current issues as well as the history of world markets.”

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