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A Century with a Gold Standard

Washington D.C.

May 6, 2022

Thank you. It’s good to join the Annual Conference on Financial Market Regulation once again alongside my SEC colleagues, including Chief Economist Jessica Wachter and Commissioner Allison Herren Lee.

The field of economic research is central to our work at the SEC. It helps shape every aspect of our policymaking, from the early design phase to the proposing releases to the consideration of public comments to the adopting releases. It helps us determine the size of fines for enforcement actions. It provides important context for every one of our meetings. I look forward to hearing more about the presentations from today’s conference.

As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

I want to begin by noting a big birthday. Tomorrow happens to be the 100th anniversary of my dad’s birth.

Sam Gensler was the first of his siblings to be born in the U.S. My grandmother was so proud to be in the U.S. that she decided to name her first American-born child after Uncle Sam (at least, that’s the family lore). During World War I, the U.S. government raised money from the public through “Liberty Bonds,” marketed on posters featuring Uncle Sam. Americans turned to our capital markets to support the war efforts.

The Roaring Twenties brought about the rise of the automobile, the electrification of factories, and the large migration of Americans to cities. The retail public started to invest, in part thanks to that Uncle Sam advertising. At the time, though, there were basically no federal protections for those investors, leading to a lot of pain in the Great Depression.

President Franklin Delano Roosevelt and Congress addressed this crisis through a number of landmark policies. Amongst these policies, in 1933, President Roosevelt formally suspended the use of the gold standard.[1] Then, in 1934, the Gold Reserve Act was enacted, prohibiting government and financial institutions from redeeming dollars for gold.[2]

Additionally, in 1933 and 1934, when my dad was in junior high, Congress and FDR came together to craft the first two federal securities laws. These statutes created requirements and regulations around disclosure, registration, exchanges, and broker-dealers, and established the SEC to oversee the markets.

In other words, in those two key years, one could say we replaced one gold standard with another gold standard: the securities laws. Unlike the literal gold peg, these federal securities standards have stood the test of time. The regulated marketplace has led to economic growth through greater efficiency, competition, transparency, access to capital, and fairness.

A number of principles informed these statutes. I’ll highlight three principles:

First, a basic faith that investors could make decisions if there was full, fair, and truthful disclosure.

Second, exchanges needed particular regulations to promote the integrity and functioning of the market.

Third, there should be additional laws and rules for individuals and companies that managed other people’s money.

These core principles of the securities markets not only were important for issuers and investors in our domestic markets. I believe they also contributed to America’s geopolitical standing around the globe. When my dad was coming of age, the world started to turn to the U.S. dollar as the world’s reserve currency. I don’t think that timing is entirely a coincidence.

I believe the SEC and the federal securities laws have been a major part of America’s economic success.

We are blessed with the largest and most innovative capital markets in the world. The U.S. capital markets represent 38 percent of the globe’s capital markets.[3] This exceeds even our impact on the world’s gross domestic product, where we hold a 24 percent share.[4]

We also benefit from both private and public markets. Private capital markets, such as venture capital, have brought new ideas to market faster and more flexibly than other capital markets. After serving in World War II, my dad used his mustering-out pay to open a small pinball machine business in Baltimore. As a business owner, he never tapped the public markets, but when I was in junior high, he began to invest.

“Wise Restraints”

A generation after my dad started his business, I had to make my own career decision: law school or Wall Street?

I chose the latter. It was on Wall Street that I, a pro-markets person, came to believe in the benefits of rules of the road.

An example from the path not taken — law school — might help explain. Each spring, during their graduation exercises, newly minted JDs at Harvard Law School hear the following declaration: “You are ready to aid in the shaping and application of those wise restraints that make men [people] free.”

What is a “wise restraint”? In the context of the SEC, we turn to our mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

For the economists in the audience, a wise restraint might be a law or regulation that promotes economic growth, competition, efficiency, and access. Product safety and investor protection lower risks and increase trust.

For example, it’s like the seatbelts in our cars and the speed limits on our roads. Those rules of the road facilitated innovation when my dad was a kid, turning Detroit into the center of the automobile industry.

Though I chose not to go to law school — I didn’t get into Harvard Law! — it doesn’t surprise me that the graduation tradition about “wise restraints” dates to the late 1930s.[5] James Landis, who later served as Chairman of the SEC, had helped Congress and FDR draft the securities laws: our first “wise restraints.” He later became Dean of Harvard Law School in 1937. I can’t help but wonder if that’s more than coincidence.  

I think we, at the SEC, need to look for opportunities to freshen up our rules to ensure America remains the gold standard of the world’s capital markets. We can’t take our leadership in capital markets for granted. New financial technologies and business models continue to change the face of finance for investors and issuers. More retail investors than ever are accessing our markets. Other countries are developing deep, competitive capital markets as well, seeking to surpass our own.

I’ll mention three areas of particular focus: efficiency, disclosure, and resiliency.

Efficiency

First, I’ll turn to how “wise restraints” enhance efficiency and competition in our markets.

Congress made significant amendments to our statutes in 1975. In the very first line of that bill, it said they were “amend[ing] the Securities Exchange Act of 1934 to remove barriers to competition.” That word, “competition,” appears 20 times in the text.[6]

Congress returned to this idea of competition again in 1996. In rulemaking, Congress said, the Commission must consider efficiency, competition, and capital formation, in addition to investor protection and the public interest.[7]

In my view, the principles underlying the wise restraints from the 1930s, ‘70s, and ‘90s promote efficiencies where economic rents, or excess profits above market competition, might otherwise accrue. This efficiency benefits investors, innovators, issuers, and intermediaries alike.

Fundamentally, finance is about the pricing and allocation of risk and money in our economy. Our capital markets sit in the middle — between those who want to lay off risk and those who want to bear it, between issuers seeking to raise capital and investors seeking to grow their nest eggs.

We have a $100-plus trillion market. Trillions of dollars’ worth of transactions flow through our capital markets each day. Thus, it becomes ever more important to promote efficiency in the middle, using the tools of competition, access, and transparency.

That’s why I’m so committed to our ongoing projects designed to drive efficiencies in the $23 trillion Treasury market, $28 trillion non-Treasury fixed income market, nearly $50 trillion equity markets, and $18 trillion of assets under management by private funds.[8] We must always remain vigilant to opportunities to enhance efficiency. That is critical to our maintaining that gold standard, even as markets, global competitors, and technologies evolve.

Disclosure

Next, I’d like to discuss how we can update rules of the road related to disclosure and transparency.

Markets don’t stand still. Our disclosure and transparency rules can’t stand still, either. Thus, over the generations, the Commission often has updated disclosure and transparency regimes.

Going back to the 1930s, we have a disclosure-based regime, not a merit-based one. The core bargain is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures.

Disclosure and transparency reduce the advantages of asymmetric information. For example, the academic research overwhelmingly finds that post-trade transparency improves efficiency and competition in the markets they serve, from the stock market to bond markets.[9]

The Commission has proposed to enhance disclosures in a number of ways. For example, we’ve proposed to mandate climate-related and cybersecurity-related disclosures by public companies. Further, we also have transparency projects related to short selling, stock buybacks, the stock loan market, and security-based swaps.

We’ve also proposed to enhance disclosures around special purpose acquisition companies (SPACs) so that they are subject to similar disclosure requirements as traditional initial public offerings.[10] Speed limits apply to all cars, whether they’re electric or gas-powered. This consistency generates greater efficiencies.

We must always remain vigilant to opportunities to enhance transparency, which helps foster innovation and growth, and helps maintain our markets as the world’s gold standard.

Resiliency

Finally, we use “wise restraints” to strengthen the resiliency of our financial system. Financial stability is a critical part of our work at the SEC, alongside other regulators. Resiliency gets to each part of our mission, especially as it relates to maintaining fair, orderly, and efficient markets.

When it comes to markets, the test of a gold standard is that such markets can function in orderly times and in stress times.

Market participants can continue to allocate capital and price risk. Such resiliency helps ensure that shock waves don’t propagate into the real economy. It also allows the rest of the world to rely on our capital markets, helping the U.S. dollar best retain its status as the reserve currency.

Cycles and stress are a part of economic and financial history. That’s what led to the reforms when my dad was a kid. Even though our markets are the gold standards, ups and downs are inevitable.

We saw this, unfortunately, in living through the 2008 financial crisis. More recently, during the start of the COVID crisis, we saw how prime money market funds, municipal bond funds, and taxable bond funds can raise issues of financial stability.[11] We also observed challenges in the Treasury market.

Today, we are in the midst of uncertain geopolitical events. Furthermore, around the globe, central banks have started to transition from an accommodating to a tightening policy stance. In such times of uncertainty and transition, we are reminded of the importance of financial resiliency. We cannot take it for granted.

I think we have opportunities to strengthen the resiliency of our capital markets. Over the years, Congress has given the SEC oversight of broker-dealers and funds, along with market infrastructure such as clearinghouses and exchanges.

Staff and the Commission are considering resiliency with respect to the cybersecurity of the financial system. We have projects in the asset management space, including money market funds, open-end bond funds, and private funds. We also are working to strengthen the resiliency of the Treasury markets and central clearing.[12]

Conclusion

In conclusion, as we continue to navigate geopolitical challenges, we must always think about ways to enhance the efficiency, resiliency, and transparency of our markets. Which new rules of the road might we need to meet the promise of our modern markets?

As we make proposals and put them out for public comment, I encourage you all to weigh in. We benefit from your feedback and the economic analysis you provide.

In considering the appropriate rule sets for the 2020s and the 2030s, I can’t help but think about my dad’s birth in the 1920s and the “wise restraints” placed on our federal securities regime in the 1930s. Nearly a century later, these laws still help America maintain markets that are the envy of the world. These laws help us maintain our extraordinary competitiveness on the world stage. They are the gold standard. Let’s do our part to keep them that way!

Thank you.


[1] See Federal Reserve History, “Roosevelt’s Gold Program,” available at https://www.federalreservehistory.org/essays/roosevelts-gold-program.

[2] See Federal Reserve History, “Gold Reserve Act of 1934,” available at https://www.federalreservehistory.org/essays/gold-reserve-act.

[3] See Securities Industry and Financial Markets Association, “2021 SIFMA Capital Markets Fact Book,” available at https://www.sifma.org/wp-content/uploads/2021/07/CM-Fact-Book-2021-SIFMA.pdf.

[4] See World Bank data: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD. What’s more, U.S. market participants rely on capital markets more than market participants in any other country. For example, debt capital markets account for 80 percent of financing for non-financial corporations in the U.S. In the rest of the world, by contrast, nearly 80 percent of lending to such firms comes from banks.

[5] Quotation by John MacArthur Maguire. See Harvard Law School Library, available at https://asklib.law.harvard.edu/faq/115309.

[6] See Securities Acts Amendments of 1975, available at https://www.govtrack.us/congress/bills/94/s249.

[7] “Whenever pursuant to this title the Commission is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.” See Securities Act of 1933, Securities Exchange Act of 1934, Investment Advisers Act of 1940, and Investment Company Act of 1940.

[8] Market sizes (Treasury and non-Treasury fixed income markets) as of Q4 2021. See SIFMA, “Research Quarterly: Fixed Income – Outstanding,” available at https://www.sifma.org/resources/research/research-quarterly-fixed-income-outstanding/.

[9] See, e.g., Hendrik Bessembinder, Chester Spatt, and Kumar Venkataraman, “A Survey of the Microstructure of Fixed-Income Markets” (Journal of Financial and Quantitative Analysis, Vol. 55, No. 1, Feb. 2020, p. 1-45), available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/survey-of-microstructure-of-fixed-income-market.pdf, and Simon Z. Wu, “Transaction Costs for Customer Trades in the Municipal Bond Market: What is Driving the Decline?” (July 2018, MSRB), available at https://www.msrb.org/~/media/Files/Resources/Transaction-Costs-for-Customer-Trades-in-the-Municipal-Bond-Market.ashx.

[10] See Gary Gensler, “Remarks before the Healthy Markets Association Conference” (Dec. 9, 2021), available at https://www.sec.gov/news/speech/gensler-healthy-markets-association-conference-120921.

[11] During the two-week period of March 11 to 24, 2020, publicly offered institutional prime money market funds had a 30 percent redemption rate (about $100 billion). See https://www.sec.gov/rules/proposed/2021/ic-34441.pdf. In March 2020, bond mutual funds experienced $255 billion in net outflows while bond ETFs experienced $21 billion in outflows. Municipal bond funds and ETFs experienced $44.5 billion in outflows in that period. See https://dcm.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf.

[12] See Gary Gensler, “Cybersecurity and Securities Laws” (Jan. 24, 2022), available at https://www.sec.gov/news/speech/gensler-cybersecurity-and-securities-laws-20220124; “The Name’s Bond” (April 26, 2022), available at https://www.sec.gov/news/speech/gensler-names-bond-042622, “Prepared Remarks at the Institutional Limited Partners Association Summit” (Nov. 10, 2021), available at https://www.sec.gov/news/speech/gensler-ilpa-20211110; “Prepared Remarks at U.S. Treasury Market Conference” (Nov. 17, 2021), available at https://www.sec.gov/news/speech/gensler-us-treasury-market-conference-20211117; and “Statement on Rules Regarding Clearing and Settling” (Feb. 9, 2022), available at https://www.sec.gov/news/statement/gensler-statement-rules-regarding-clearing-settling-020922.

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