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Throughout most of American history, bank failures occurred with dismal regularity, and consumers had no protection from them. Even in the booming 1920s, banks closed at the rate of about 500 a year. The failure rate rose sharply during the four years following the 1929 stock-market crash, when a total of 9,000 banks closed. With the entire financial system in shambles, President Franklin Roosevelt in March 1933 closed all the nation's banks for four days to quell the panic. Institutions declared sound by federal and state officials were reopened, and Congress began writing new banking laws. The resulting Glass-Steagall Act established the Federal Deposit Insurance Corporation to guarantee the safety of savers' money and banned banks from conducting the lucrative but risky business of underwriting securities.
Bankers at the time vociferously objected to federal regulation, but over the years they grew to enjoy the cozy protection it afforded. The business, wrote Martin Mayer in The Money Bazaars, became "a stuffy and oversocialized world, where lending officers got their jobs through family connections."
In 1963 Texas Democrat Wright Patman, then chairman of the House Banking Committee, antagonized financiers when he said, "I think we should have more bank failures. The record of the last several years of almost no failures is to me a danger signal that we have gone too far in the direction of bank safety." Big-city bankers bitterly opposed Patman's novel ideas for allowing more competition.
The financial world, though, soon began shifting underneath the bankers. Money-market mutual-fund accounts, for example, which were invented in 1971 by Wall Street Mavericks Bruce Bent and Henry Brown, offered interest rates of 8% or more at a time when passbook savings accounts at banks paid only 4½%. In 1977 Merrill Lynch jolted bankers with its Cash Management Account, which combined stock brokerage with savings and checking accounts.
Consumers were initially reluctant to take their money out of traditional savings accounts, but bankers were offering such low rates that depositors soon came to realize they were missing out on substantial income. Before long, people began transferring cash from savings and checking accounts to money-market funds. Total deposits in those accounts jumped to $231 billion in 1982, when banks began winning some of it back by offering similar services. Says C. Todd Conover, the Comptroller of the Currency, a top federal banking regulator: "The public wants financial services, but it couldn't care less whether it gets them from banks."
Over the past five years financial powerhouses, including Prudential-Bache and Shearson Lehman/American Express, have become banks in everything but name. Said Walter Wriston, former Citicorp chairman: "The bank of the future already exists, and it's called Merrill Lynch." Three weeks ago, Equitable Life, the nation's third-largest insurer, joined the parade by paying about