Government: Stock Markets and Economic Regulations

Introduction

It is the essence of every economic system that the businesses and entrepreneurs bring together the natural resources, capital, labor, and technology to produce and distribute goods and services for the well being of the people and development of the economy as well. The ways in which these factors of production are organized and deployed reflect truly the political ideas and the culture of a country. The United States is often described as a ‘capital economy’ in which a small group of people who has the largest control over capital takes economic decisions. However in order to prevent the concentration of economic power in a fewer hands which may result in actions detrimental to a larger section of the people in the economy the governments often intervene and install regulatory systems which govern the functions of various institutions and individuals in the economy so that the governments are able to address the social problems effectively. This has made many economies of the world including the American economy is a mixed one. Though it has been found difficult to clearly define the role of the government in the regulation of the economy and decide exactly where to draw the line between free enterprise and government interference, the mixed economy developed early has so far been functioning successfully. However at times it becomes important for the government to bring new regulations to control and monitor business activities and institutions to curb excessive actions which may affect the social well being of the other constituents of the economy. In this context this paper outlines the role of the government in bringing about regulations to control the functioning of the stock exchanges being one important segment of the economy responsible for the growth of corporate activities in the economy.

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Role of the US Government in Regulating the Economy

While America points to its free enterprises as a model for other capitalist countries to follow by allowing the business and individuals to act freely, it cannot be said that the enterprises are entirely free to operate in the economy. A complex web arrangement of governmental regulations controls and monitors the activities of the businesses and industries to shape them up. It has been observed that numerous regulations involving almost every size of the business organizations are brought out by the government everyday to dictate what the businesses should or should not do. There is no settled policy of the government to the extent to which the government should interfere in the business activities for the purpose of regulating them with the result that some regulations have been made tighter while some others have been relaxed. This had also given rise to the process of continued debates on when and how extensively the government should define its role in the matter of control of businesses and the organizations involved in the business and industrial activities.

Laissez-faire versus Government Intervention

The US governmental policy towards businesses can be considered to follow the economic theory of ‘Laissez Faire’ meaning free trade, But the practice of laissez faire has not prevented either the industry to look to the government for some assistance for furtherance of their business interests or the government intervening in the operations of the business enterprises in the form of various regulations governing the functioning of such organizations. The help to the industries from the government had in some occasions taken the form of protection to the domestic industries from competition from foreign firms and also some subsidies, and other allowances. For instance the agriculture industry of America which is in the private hands has largely benefitted from the governmental support. It has been the case that many other industries have also requested and provided assistance from the government in the form of subsidies and tax holidays.

On the other hand the regulations from the government may take place in two ways; one in economic regulations and the other in social regulations. Economic regulations have the primary objective of controlling the prices. The economic regulations are also designed to protect the customers and smaller companies. The protection to smaller companies are justified on the ground that fully competitive market conditions do not exist and therefore there is always the danger of the bigger companies obstructing the growth of smaller companies which are also essential for a balanced development of the economy and to avoid the concentration of economic power in few hands. In many occasions economic regulations are also developed to protect companies from what is described as ‘destructive competition’ of companies with each other. The ‘antitrust’ regulations formulated by the US government are examples of the economic regulations designed to protect the interests of smaller companies.

Anti-Trust Regulations of the US Government

It has been the first priority of the US government to regulate the monopolies which may act against the public interest. Consolidation of smaller companies into bigger business houses helped some larger corporations to indulge in unethical business practices and to escape from the market discipline by manipulating prices to the disadvantage of smaller firms by the undercutting of the prices as well as creating problems for the consumers in the form of higher prices and restricted choices of products. The Sherman Antitrust Act, passed in the year 1890 is a major breakthrough, in the history of economic regulations of the US. This Act has specifically prohibited any business from monopolizing trading activities in any industry and also prevented any person or company from combining or conspiring with others in restraint of trade. In the early 1990s the US government with the help of the provisions of this Act could break into the monopolistic trade activities of Standard Oil Company owned by John D. Rockefeller and several other companies which were found to involve in actions which were detrimental to the practice of free trade.

In the year 1914, US Congress brought in two more legislations to supplement the Sharman Anti trust Act. These are the Clayton Antitrust Act and the Federal Trade Commission Act. The Clayton Antitrust Act was instrumental in brining about a clear definition of the actions that may amount to illegal restraint of trade. The Clayton Act ruled against the price discrimination which enabled some buyers to take advantage over other businesses. The Act also prohibited agreements under which the manufacturers specify that the supplies will be effected to only those dealers who sell the company’s products exclusively without dealing in the products of other rival companies or manufacturers and also prohibited some schemes of mergers and acquisition that may have the effect of affecting competition.

Under the Federal Trade Commission Act a government commission was established to deal with the issues connected to unfair and anti-competitive business practices that curtail free competition.

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However it was believed that even these additional measures were not effective in controlling the monopolistic trade practices. The landmark judgment given by the US Supreme court in the year 1920, in the case of United States Steel Corporation declaring that the corporate bigness is not bad in itself forced the government and the regulators to give fresh thoughts to the anti-monopolistic regulations.

The US government through the Federal Trade Commission and the Antitrust Division of the Justice Department continued to pursue its efforts in preventing the anti-competitive activities of US corporations. These authorities watch those acts which may amount to monopolies or mergers which may have a detrimental effect to the interests of the consumers by preventing them. The following four instances demonstrate the efforts taken by the US government in this direction:

  • The case involving the Aluminium Company of America decided by a federal appeals court in the year 1945 settled the quantum of the market share a company should possess to be termed as a monopoly. The court settled that a corporation possessing 90 percent of market share may amount to monopoly.
  • The year 1961 witnesses a large scale compensation paid by a number of companies in the electrical equipment industry for charging the customers more by fixing the prices in illegal restraint of trade. This also resulted in some of the executives of the company being sentenced to imprisonment.
  • The case of Philadelphia National Bank settled in the year 1963 is another instance of a major anti-monopoly drive by the government. In this case the US Supreme court ruled that when a merger enables a company to control an undue share of the market and there are no evidences to prove that such merger would not be harmful to the public or other business entities the merger is bad and can not have the legal sanction.
  • In the year 1997, a federal court ruled against the merger of two substantial firms competing in two different economic markets may also result in anti-competitive situations and the merger was dropped. The court in this case considered the merger of Staples, a home office supply company and Home Depot, a building supply company.

While the anti-trust regulations were made with the intention of improving competition there were other economic regulations which had the opposite effect of reducing the competition in certain sectors of the economy. This has seriously affected the prospects of achieving a balanced development of the economy as a whole.

Deregulatory Measures of the US Government

In the US economic development transportation was the first industry that suffered deregulatory measures. Under the regime of President Jimmy Carter during the years 1977-1981 the Congress passed several legislations had the effect of removing the most of the regulatory shields hitherto available to the aviation, trucking, and railroads. The firms in these sectors had been allowed to use any air, rail or road route of their choice also with the freedom to set their own price levels for the services being rendered by them. In this process the regulators, age old Interstate Commerce Commission and the Civil Aeronautics Boards were abolished. Though the effect of such deregulatory measures was difficult to assess the action stimulated major upheavals in the industries concerned. The customers were also confused due to the emergence of new companies and new services with varying fares. Nevertheless the deregulation in fact helped the industries especially the airline industry to flourish. The deregulation had its effect mainly in the airline industry with a boom in the airline business with the increase in the number people using the air route for their travel. This is evidenced by the increase in the number of passenger miles to 605,400 million in the year 1997 as compared to 226,800 passenger miles in the year 1978 which shows an increase of almost threefold within a span of two decades (US Info).

Telecommunication Industry

American Telephone & Telegraph (AT&T) and its regional subsidiaries being the regulated monopoly in the US controlled nearly all aspects of telephone business in the US, till the year 1980. The deregulation in the telecommunication industry came in two sweeping stages, with the order of a court in the year 1984 that directed AT&T to spin off its regional subsidiaries. However AT&T continued to hold a substantial share of the long-distance telephone business. But there were some other firms like MCI Communications and Sprint Communications could win some share of the business and this went to prove that competition could bring some reduction in prices and improvement in services.

Banking

Even though banks form private businesses like any other industry, because of the nature of their business they are central to the effective functioning of the economy and therefore they can affect the well being of all the members of the society in addition to their own customers. The US government continued to have regulations since the year 1930 to have the functioning of the banks regulated to the betterment of the society. One of the important aspects of these regulations was the Deposit insurance which was intended to protect the banks from an unexpected event of a run on the banks. During the late 1999 there were legislations like the Financial Services Modernization Act, 1999 which was enacted by the Congress in replacement of the earlier Glass-Steagall Act. The new Act gave enormous freedom to the banks to develop and offer new financial services products to their customers.

Stock Markets and the US Economy

The capital markets in the US represent the lifeblood of the capitalist system of the nation. The companies usually depend on the stock markets for mobilizing funds for the creation of infrastructural facilities as well as for carrying out expansion of their regular business activities. Much of the capital required for these activities is provided by major institutions like pension funds, insurance companies, banks, foundations, and colleges and universities. Of late the contribution by the families and individuals to the stock exchange transactions also has been in the increasing trend. It is interesting to note that by mid 1990s 40 percent of the US families have taken part in the stock exchange transactions of the country. The Americans are proud of the efficiency of their stock and other capital markets and this has attracted more number of sellers and buyers of stocks involving millions of dollars and transactions each day. But during the last few decades the federal government has played an increasingly important role in ensuring honest and equitable trading activities in the stock exchanges. As a result the market has thrived as a continuing source of investment that keeps the economy growing and as a mechanism which enables the Americans to share the wealth of the nation.

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Regulation of Stock Market Activities

The Securities and Exchange Commission (SEC), created in the year 1934 is primarily responsible for the regulation of stock markets in the US. The huge stock market crash of 1929 forced the government to enact new legislations like the Securities Act of 1933 and the Securities Exchange Act, 1934 mainly to protect the interests of small investors from frauds and made it easier for the smaller investors to understand the financial reports of the companies. This had lead to a phenomenal increase in the stock market transactions and the development of various stock exchanges including the New York Stock Exchange established in the year 1792.The transformations happened in the American stock markets due to various favorable and unfavorable legislative measures have made the NY Stock Exchange to develop into one of the world’s foremost securities market place (Answers.Com).

As a part of regulating its commission income the NY Stock Exchange had applied for a change in the system of charging the commission on the transactions being effected in the exchange. The NY Stock Exchange wanted to replace the fixed minimum commission by a transaction based commission which required the approval of the SEC. The new system of charging was found to affect the smaller investors detrimentally and also was benefiting larger investors doing high volume transactions. (John Evans) On May 1 the Securities Exchange Commission banned the fixed minimum commission rates and the NY Stock Exchange claimed this decision as a major breakthrough in the US securities market. But there was severe criticism against this decision as being against the interests of the small investors (NYSE Euronext).

Conclusion

Thus the contribution of labor, small businesses, agriculture, large corporations, financial and stock markets, the Federal Reserve System and the Government have made the economic system of the United States work efficiently. In this respect the role of the economic regulations cannot be undermined as evinced by this paper.

References

  1. Answers.com ‘New York Stock Exchange’. Web.
  2. John Evans ‘Securities and Exchange Commission’. Web.
  3. NYSE Euronext ‘Timeline’.
  4. US Info ‘Continuity and Change’.
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