Monetary Control Act: What It Means, How It Works

What Was the Monetary Control Act?

The Monetary Control Act (MAC) was a federal law passed in 1980 that changed bank regulations significantly. The bill was proposed in response to record two-digit inflation experienced in the late 1970s, which led to the notion of monetary control by Congress. The legislation was signed in by Jimmy Carter on March 31, 1980. 

Understanding the Monetary Control Act

The Monetary Control Act was legislation that changed banking considerably in the early 1980s, and it represented the first significant reform in the banking industry since the Great Depression.

Title 1 of the act was itself the Monetary Control Act. It required that banks accepting deposits from the public periodically report to the Federal Reserve System (FRS) and maintain required reserve minimums. One of the aims of the act was to put tighter controls on Federal Reserve member banks, making services charged to them in line with banks and other financial institutions.

Prior to the act, certain services charged to the member banks were free, but the act ensured the price of financial services to be competitive, and in line with the banks. Starting in September 1981, the Fed charged banks for a range of services historically provided for free, like check-clearing, wire transfer of funds, and the use of automated clearinghouse facilities.

Title 2 of the Monetary Control Act

Title 2 of this act was the Depository Institutions Deregulation Act of 1980. This legislation deregulated banks, while simultaneously giving the Fed more control of non-member banks. 

It required non-member banks to abide by Federal Reserve decisions but, perhaps most notably, the bill allowed banks to merge. It also deregulated interest rates paid by depository institutions such as banks, making them a matter of private discretion (previously this was regulated under the Glass-Steagall Act). It allowed credit unions to offer transaction accounts, which included checking accounts and savings accounts. The bill also opened the Fed discount window and extended reserve requirements to all domestic banks.

The Depository Institutions Deregulation Committee (DIDC) is a six-member committee established by Title 2 of the MAC, which had the primary purpose of phasing out interest rate ceilings on deposit accounts by the year 1986. The six members of the Committee were the Secretary of the Treasury, the chair of the Board of Governors of the Federal Reserve System, the chair of the FDIC, the chair of the Federal Home Loan Bank Board (FHLBB), and the chair of the National Credit Union Administration Board (NCUAB) as voting members, and the Comptroller of the Currency as a non-voting member.

The Monetary Control Act also contained several provisions relating to bank reserves and deposit requirements. It created the popular Negotiable Order of Withdrawal (NOW) accounts, which are accounts that have no limits on the number of checks that can be written. Additionally, it raised the amount of FDIC insurance protection from $40,000 to $100,000 per account. Note that the FDIC limit has since been raised to $250,000.