Depository Institutions Deregulation and Monetary Control Act (1980) history
Better known by its acronym, DIDMCA, the act was passed by Congress in 1980. It was the first major bank deregulatory legislation since strict regulations were passed during the NEW DEAL. The act had two sides. On one side, it deregulated some activities of banks, while on the other it gave the FEDERAL RESERVE more power to cope with all depository institutions in the new deregulated environment.
DIDMCA began the phasing out of Regulation Q, which allowed the Federal Reserve to cap interest paid on savings accounts. The original plan was to phase out the ceiling over a six-year period, with the actual mechanics controlled by a committee of federal officials. When the DEPOSITORY INSTITUTIONS ACT was passed in 1982, the phaseout was completed earlier than originally anticipated. Deposit insurance offered by the FEDERAL DEPOSIT INSURANCE CORPORATION was also increased to $100,000 per account at insured banks and in authorized NOW accounts (negotiated orders of withdrawal), a checking account that paid interest. NOW accounts had been offered for several years by a small group of banks, but they were legal only after the law was passed.
The Federal Reserve was given widened powers to deal with the high interest rate environment caused by oil-driven inflation. The Fed now set reserve requirements for all depository institutions in the country, not just for its member banks. This measure was designed to stop banks from withdrawing from membership in the Fed system and shore up the central bank’s authority in the marketplace. Banks had been withdrawing since the 1960s because the Fed traditionally paid no interest on the reserve balances it held, and many banks wanted to revert to a state charter in order to earn interest on their reserves. The new law substituted a mandatory requirement on all depository institutions, regardless of type or charter. It also shortened the time for check clearing. All banks in the country were now also allowed access to the Fed’s discount window, not just members as in the past.
Before the act was passed, the Fed’s authority extended only to banks that were members of one of the regional Federal Reserve Banks. Now, by allowing all banks access to the lender of last resort facilities at the discount window and imposing standard reserve requirements, the Fed’s authority was more uniform, extending to state-chartered banks and thrifts and the agricultural cooperatives as well. The act, along with the Eccles Act passed in 1935 and the BANK HOLDING COMPANY ACT passed in 1956, became a major building block in shoring up the authority of the Federal Reserve while liberalizing interest rates at the same time.
Further reading
- Timberlake, Richard H. “Legislation Construction of the Monetary Control Act.” American Economic Review 75 (May 1985): 97.
- West, Robert Craig. “The Depository Institutions Deregulation Act of 1980: A Historical Perspective Economic Review.” Federal Reserve Bank of Kansas City, Mo., February 1982.