INTRODUCTION

In the decade between 1935 and 1945, the U.S. financial system was transformed from a system in structural collapse to one which provided a stable and effective underpinning to economic expansion, both domestically and abroad. At the outset of the 1990s, the U.S. finds itself with a financial system that once again exhibits growing instability, that is developing without direction, and that is increasingly out of sync with the nation's most pressing capital needs.

The postwar financial system was shaped by New Deal legislation which reorganized finance after its collapse in the Great Depression and by the Bretton Woods international monetary system, which established new monetary ground rules after World War II. It is generally thought to have worked well in meeting the needs of U.S. economic growth up to the late 1960s, when inflationary pressures caused internal contradictions within the financial system to emerge. Since then, the financial system has undergone a market-driven restructuring process which has significantly changed the financial landscape. The financial system in place in the early 1990s reflects on the one hand the tremendous ability of private finance to adapt to changing macroeconomic conditions, and its questionable ability to lead the U.S. economy out of decline on the other.

This chapter will explain how New Deal legislation created a new financial infrastructure for postwar growth, how the macroeconomic environment of finance was transformed over the course of the postwar period, and how financial institutions responded to changing macroeconomic conditions.