Interest Rate Controls (Regulation Q)

Interest rate controls were implemented after the Great Depression to prevent "excess competition" among banks.
Regulation Q (Source: Federal Home Loan Bank Board Journal, June 1979)
Image from the Federal Home Loan Bank Board Journal, June 1979 p. 12  
Published November 19, 2025
Beginning in 1933, federal law prohibited the payment of interest on demand deposits and required the Federal Reserve to regulate the rates of interest that banks could pay on other deposits. The law was motivated by the Great Depression and the idea that bank failures had been caused by "excess competition" among banks. Initially, the regulations did not have much impact because the prevailing level of interest rates was low. However, as interest rates rose in the late 1960s and 1970s, regulations frequently became misaligned with market conditions, placing great strains on the financial system. New financial activities emerged in part to avoid these regulations. Congress phased out controls on deposit interest rates from 1980 to 2011.

 

 

The Banking Act of 1933 (known as the Glass-Steagall Act) established interest rate controls at commercial banks. It prohibited the payment of any interest on demand deposits. In addition, it directed the Federal Reserve Board to issue regulations on the maximum interest rates that banks could pay on time or savings deposits, i.e., deposits subject to withdrawal restrictions or not payable on demand, such as passbook savings accounts or certificates of deposit. The Federal Reserve's regulation, known as Regulation Q, was first issued in September 1933. Initially, interest rate restrictions applied only to commercial banks that were members of the Federal Reserve System. Soon thereafter, the Federal Deposit Insurance Corporation (FDIC) also extended similar regulations to other banks that were not members of the Fed but were insured by the FDIC.1 The two agencies coordinated with each other to implement uniform regulations by early 1936.

 

One key motivation for interest rate controls was an influential theory that the Great Depression had been caused, in part, by excess competition among banks in the 1920s, particularly for time deposits. For example, Joseph A. Broderick, Superintendent of Banks in New York from 1929 to 1934, said that "we want no competition on the basis of interest rates in this state again. I put that down as one of the most disturbing and disastrous factors we have had in the banking situation in this state during the past fifteen years. So many institutions… in order to obtain income or apparent income sufficient to enable them to pay the rate of interest that was being paid by other institutions, permitted their funds to be invested in a class of securities that should never have been placed in the banks."2 The simultaneous enactment of deposit insurance added to concerns that, without regulation, banks might take too much risk (Preston 1933, p. 605). Other 1930s-era regulations also sought to limit competition among banks, including limits on the chartering of new banks in areas already well-served by existing banks.

 

The prohibition of interest on demand account balances had to do with the historic practice in which small banks around the country held excess funds as demand deposits with large banks in New York and other cities. The payment of interest on these so-called bankers' balances had been criticized since the mid 1800s, but federal banking reform had centered on creating the Federal Reserve in 1913 rather than enacting interest regulation (Linke 1966). Critics argued this practice drained money from local communities and away from more productive uses. For example, Senator Carter Glass judged that interest on demand deposits had "gotten to be a dangerous vice in the banking system of this country" which "resulted in withdrawing from the interior country banks of the United States millions upon millions of dollars to the money centers, to be cast into the maelstrom of stock gambling" (Congressional Record, May 25, 1933, p. 4166). There was also a financial stability concern that large withdrawals of bankers' balances from New York banks were a source of periodic financial tightness.

 

Looking back, historians have had misgivings about the focus of 1930s-era banking reforms on interest rate regulation. While many banks did make poor investments in the 1920s and bankers' balances were a conduit for the spread of contagion, historians have identified many other sources of weakness that might have been the target of reform. For example, restrictions on branching meant that most banks were undiversified and dependent on large banks in major cities for services. In addition, many banks had chosen not to join the Federal Reserve System and therefore did not have access to loans from the Fed in an emergency.

 

 

Interest rate controls had relatively little impact on bank deposit services until the late 1960s. The prevailing level of interest rates until then was generally below the maximum rates on deposits set by Regulation Q. For example, in 1936, the rate on Treasury bills was generally below ¼ percent while the highest rate that could be paid on savings deposits was 2½ percent. In 1955, the rate on Treasury bills had risen, but only to 1¾ percent, while the maximum rate on savings deposits remained unchanged at 2½ percent.3

 

The level of interest rates in the economy increased over the late 1950s and 1960s. By 1966, the U.S. Treasury was paying nearly 5 percent on Treasury bills. In response, the Federal Reserve frequently adjusted Regulation Q limits upward. A revision in late 1965 allowed large commercial banks to attract funds away from savings banks and savings and loan (S&L) associations, creating a "credit crunch" in mortgage markets during 1966. In June 1966, Congress held hearings on "unsound competition for savings and time deposits" that had developed, a concern that had not been as salient since the 1920s (Committee on Banking and Currency 1966). Federal Reserve officials were caught somewhat off-guard by the turmoil. They did not expect so many major banks to move immediately to the new maximum, and they did not expect other nonbank institutions to have as much difficulty as they did in competing for funds afterward (Brimmer 1966). The credit crunch during 1966 was bad enough that the Fed made contingency plans for emergency discount window loans to nonbanks, such as savings and loans, but did not end up using such authority (Board of Governors 1966 Annual Report pp. 91-92). Congress responded to the episode by extending interest rate controls to insured savings and loans, implemented by the Federal Home Loan Bank Board, and to insured savings banks, implemented by the FDIC. This new law, enacted in September 1966, attempted to provide an adequate flow of funds for housing finance by requiring that maximum interest rates at S&Ls and savings banks be slightly above the rates available to commercial banks.

 

Over the next decade and a half, savings deposit interest rate controls would have far-reaching impacts across the financial system. Interest rates generally increased until reaching a peak in the early 1980s. Interest rates also became more volatile. Large commercial banks had trouble maintaining funds they had been raising through large-value certificates of deposits. Smaller banks and savings institutions struggled to maintain stable funding from retail investors. Businesses and households that depended on these institutions for loans encountered occasional credit squeezes in the late 1960s and 1970s. More than once, Federal Reserve officials developed plans to make loans to nonbanks in emergencies.

 

Banks and thrifts implemented some innovative ways to get around interest rate controls. For demand deposits, banks would provide services such as check writing below cost as implicit interest. It was common for depositors to receive "free" gifts such as toasters and umbrellas. Banks also allowed depositors to move funds between savings deposits and demand deposits and used technological advances to ease and automate the movement of funds. Savings banks began to offer NOW (negotiable orders of withdrawal) accounts, which were retail savings accounts that allowed for check-like payments, to get around the prohibition on paying interest on demand deposits (Staff of the Board of Governors 1977).

 

Meanwhile, some activity moved out of depository institutions to avoid interest rate regulations. Money market mutual funds grew quickly in the 1970s, attracting investors by paying a market rate of interest while offering some characteristics of bank deposits, such as the ability to write checks and providing investors with a fixed $1.00 value (rather than having the value float with the prices of the underlying investments). In housing finance, securitization was revived in the 1970s by the U.S. government and financial market participants as a supplementary source of funding to thrifts.

 

 

Interest rate controls were a matter of frequent debate throughout the 1970s. Support for repeal grew over the decade. The Hunt Commission, for example, which was tasked by President Nixon with analyzing the U.S. financial system, recommended in 1972 that controls on time and savings deposits be gradually lifted and that the Fed's Board of Governors retain only a standby authority in the event of "serious disintermediation" in which savings banks or S&Ls found it very difficult to raise funds (Hunt Commission 1971 p. 23). The gradual nature of the proposed removal was designed to avoid an abrupt rise in costs for thrifts.

 

Support for repeal was far from a consensus across all stakeholders, however. While large banks supported repeal because they sought to maintain funding from sophisticated money market participants, smaller banks and thrifts were more likely to oppose repeal, especially if done in isolation and without other reforms. Other housing market stakeholders, such as groups representing realtors, construction, and labor, also generally opposed repeal out of support for thrifts. Federal regulators were also split. Thrifts regulators opposed repeal while banking regulators supported it. At the Federal Reserve, Governor J. Charles Partee, for example, called for the phasing out of Regulation Q in 1976 (Partee 1976). By 1979, Governor Frederick Schultz said that Federal Reserve officials had "consistently urged" repeal of regulation Q (Schultz 1979).

 

The issue that ultimately cut through these varying interest groups was the treatment of small retail savers. Federal regulators in the 1970s had generally maintained looser interest rate limits on large-sized deposits, the idea being that large depositors were more able to access other money market investments. Increasingly, though, this asymmetry came to be seen as "discrimination against small savers," as described by Senator William Proxmire in 1979. Likewise, President Carter called the controls "unfair to the small saver" and called for their repeal in May 1979. Advocates for consumers and retired people joined the call for repeal.4

 

As a result, repeal of controls on savings and time deposits was enacted as part of the Depository Institution Deregulation and Monetary Control Act (DIDMCA) of 1980. The act laid out a gradual process in which maximum rates would converge to market rates by 1986 to avoid an abrupt rise in costs for depository institutions. The high level of interest rates in 1981 and 1982 complicated repeal, however. For depository institutions, especially thrifts, this was an inopportune time to allow interest rate controls to rise up to market rates. For retail savers, the high level of market rates only heightened the demand for deregulation. Congress acted again by passing the Garn-St. Germain Depository Institutions Act of 1982. This act significantly sped up the process of deregulation by creating a category of deposits known as money market deposits accounts (MMDAs) that immediately allowed depository institutions to pay market rates. It also enacted wider-ranging reforms designed to help thrifts remake their business models as they had long desired, such as permitting greater diversification of assets away from mortgage lending.

 

 

While regulation of savings and time deposit interest rates was phased out in the 1980s, the prohibition of interest on demand deposits continued. This continued prohibition affected only businesses because retail depositors had gained access to NOW accounts that paid interest and offered check payments since the 1980 DIDMCA. Ultimately, section 267 of the Dodd-Frank Act repealed the prohibition of interest on demand deposits in 2011. Large banks tended to welcome the repeal, but small banks generally expressed concern. One small bank described the prohibition of interest on checking accounts as a "primary franchiser builder," for example, a key way of building a stable business model.5

 

At the Federal Reserve, support for repeal of this prohibition had grown starting in the 1970s. At that time, the historic pre-1933 concerns about the bankers' balances struck Federal Reserve officials as outdated, given the methods banks had developed for compensating depositors and the growing competition banks faced from other financial institutions. Because of these developments, a 1977 analysis by staff at the Board of Governors suggested that repeal could rationalize financial regulation (Staff of the Board of Governors 1977). That study also suggested that repeal could be paired with the payment on interest on reserves to help offset higher interest costs on banks. The two subjects would be paired in many proposals over the next few decades and Fed officials would consistently advocate for both measures (Meyer 1998).
 
Endnotes
  • 1 The FDIC established a blanket maximum rate of interest on any type of deposit at non-member insured banks through Regulation B in January 1934. The Banking Act of 1935 directed the FDIC to implement a new, similar regulation that prohibited interest on demand deposits and provided for maximum rates of interest on time and savings deposits, initially known as Regulation IV.
  • 2 An excerpt of the 1934 speech in which Broderick made this comment can be found on the FRASER website at this link.
  • 3 See Banking and Monetary Statistics, 1914-1941, pp. 447 and 460, and Banking and Monetary Statistics, 1941-1970, pp. 673 and 693.
  • 4 For the range of views on repealing interest rate control, see Subcommittee on Financial Institutions of the Committee on Banking, Housing, and Urban Affairs (1979). The Proxmire quote is on page 2.
  • 5 For a summary of the comments made by banks, see the Federal Register notice repealing Regulation Q published July 18, 2011, p. 42015, vol. 76, no. 137. 
 
References

Brimmer, Andrew F. (1966) "Tradition and Innovation in Monetary Management." Remarks at the Annual Convention of the Arizona Bankers Association, November 19. Available on FRASER.

Committee on Banking and Currency, House of Representatives. (1966) Hearings: To Eliminate Unsound Competition for Savings and Time Deposits. Available on FRASER.

Linke, Charles M. (1966) "The Evolution of Interest Rate Regulation on Commercial Bank Deposits in the United States." The National Banking Review. Available on FRASER.

Meyer, Laurence H. (1998) Testimony, The Payment of Interest on Demand Deposits and on Required Reserve Balances, Before the Committee on Banking, Housing, and Urban Affairs, United States Senate. March 3. Available on FRASER.

Partee, J. Charles. (1976) "Regulation Q—Ten Years Later." Address before the 30th Midyear meeting of the National Association of Mutual Savings Banks. December 7. Available on FRASER.

Preston, Howard H. (1933) "The Banking Act of 1933." American Economic Review, vol. 23 no. 4 pp. 585-607. Available online.

The Report of the President's Commission on Financial Structure & Regulation (known as the Hunt Commission Report.) 1971. Available on FRASER.

Schultz, Frederick H. (1979) Remarks before the Association of Bank Holding Companies. November 8. Available on FRASER.

Staff of the Board of Governors of the Federal Reserve System. (1977) The Impact of the Payment of Interest on Demand Deposits. January 31. Available on FRASER.

Subcommittee on Financial Institutions of the Committee on Banking, Housing, and Urban Affairs, United States Senate. (1979) Hearings: Equity for the Small Saver. April 11 and 12. Available on FRASER.

Published November 19, 2025. Jonathan Rose contributed to this article. Please cite this essay as: Federal Reserve History. "Interest Rate Controls (Regulation Q)." November 19, 2025. See disclaimer and update policy.

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