In a restricted financial system, the government attempts to control the allocation of credit and obtain revenue by fixing interest rates, implementing selective credit policies, blocking the development of direct financial markets, and heavily taxing the banking system. This dissertation asks three major questions: What are the political and economic foundations of restricted financial systems? Which political and economic factors lead to financial deregulation in restricted systems and determine its timing? Which actors drive the process of deregulation? To examine these issues, the dissertation looks at the foundations of Spain's restricted financial system in the period 1940-1974 and its intense process of deregulation from 1974 onwards. The case study is based on in-depth interviews with financial policy makers and financiers as well as a thorough examination of primary and secondary sources.
I argue that political factors best explain the existence of restricted financial systems. Politicians, with the consent of banks and well-connected firms, attempt to establish financial restriction to pursue political goals. A restricted system helps politicians to retain power, by creating a means of delivering patronage, and to raise revenue, by enabling them to tax the banking sector indirectly. I contend that public officials initiate the movement for deregulation in restricted financial systems. Changes in the political environment or institutions may provide politicians with an incentive to pursue the greater financial efficiency deregulation produces. In Spain, a transition from an authoritarian to a democratic regime was the key factor driving change in financial policy. A transition to democracy gave politicians an incentive to place less emphasis on providing particularistic benefits through the financial system and more on promoting financial efficiency, and led them to adopt more effective means of raising revenue. The Spanish experience with deregulation differs from that of states with non-restricted financial systems. In these systems, regulated financial entities promote deregulation in an effort to cope with unregulated competitors. In Spain, the financial status quo did not challenge the regulatory regime because these market pressures were absent.