With the imminent demise of the Glass-Steagall Act of 1933
(there was also a Glass-Steagall Act of 1932, by the way) I
thought it would be interesting to take a closer look at Virginia
Senator Carter Glass and his role in the financial history of
America.
Glass” story really goes back to 1911, a time when the Senate
sought to create a great central bank with Reserve Association
branches, all under the direction of private bankers. The Federal
Reserve Act, finally adopted in 1913 by Woodrow Wilson, was
based on a report made by a subcommittee of the House Banking
and Currency Committee headed by then Congressman Carter
Glass.
The Federal Reserve Board would control the money supply,
determine interest rates, and perform all the functions of a central
bank. The legislation also provided for new currency, Federal
Reserve Notes, which were to be issued by the Federal Reserve
banks upon a basis of gold and commercial assets so that the
money supply would expand or contract according to the needs
of producers and businessmen. Glass and his committee had
completed their draft by May, 1913. There were to be 9 members
of a Federal Reserve Board, all appointed by the President.
Conservatives and many large-city bankers had mounted an
assault on the Federal Reserve bill. They charged that it was
socialistic because it deprived bankers of control over their own
property, and they also said that the measure would politicize the
banking and currency systems (sound familiar?). Thanks to
Glass” leadership, the House passed the bill overwhelmingly and
the Senate eventually followed with Wilson signing it into law
on December 23, 1913.
Historian Henry Graff says, “The Federal Reserve Act was the
most important legislation of the Wilson era and one of the most
important pieces of legislation in the history of the U.S. The
cornerstone of the new progressive political economy, it
attempted to combine private initiative with public control.” The
act was amended significantly only once, in 1935, in order to
strengthen the Federal Reserve Board”s power over interest rates
and the money supply.”
But back to Carter Glass. Glass served as Treasury Secretary
under President Wilson from 1918-20. He then went back into
Congress, this time as Senator.
In 1928, as the U.S. stock market was soaring, Carter Glass was
a voice of reason crying in the night. Now labeled the “father of
the Federal Reserve System” (perhaps a bit over the top), Glass
called for strong curbs on the New York banking community and
specifically, the removal of Charles Mitchell (a loose cannon)
from the Federal Reserve Board. But nothing came of this.
Glass was worried about the huge increase in speculative
activities by the member banks.
Also worried, at the time, was Arthur Lehman of Lehman
Brothers, who at year end 1928 said there would be troubles
ahead. “Production has been at a high rate during the past year
and it is difficult to see where in many lines an expansion could
(continue) to take place.” [I just threw this in because of the
productivity debate going on in today”s economic discussions].
By 1929, there were 25,000 banks in America, operating under
52 different regulatory regimes. Many were pitifully
undercapitalized. In David Kennedy”s book, “Freedom from
Fear,” he notes that Senator Glass denounced the banks as no
more than “pawn shops,” often run by “little corner grocery-men
calling themselves bankers – and all they know is how to shave a
note.”
Only 751 American banks operated branches by 1930. The
overwhelming majority of American banks were, for all practical
purposes, solitary institutions that could look only to their own
resources in the event of a panic (see also; George Bailey).
After the stock market crash of 1929, thousands of banks closed
their doors. The Great Depression was sweeping across the land.
By 1933 Carter Glass, and his legislative partner, Congressman
Henry Steagall, decided to do something about it and they helped
craft the Glass-Steagall Act of 1933.
Carter, incidentally, turned down incoming president Franklin
Roosevelt”s offer of Treasury Secretary in his new cabinet.
When FDR took office in March, 1933, he launched his
“Hundred Days,” March 9th through June 16th. 15 major
proposals were passed including landmark legislation like the
Tennessee Valley Authority, the National Industrial Recovery
Act, and, on the last day, the Glass-Steagall Banking Act. FDR
remarked on June 16th that “more history is being made today
than in [any] one day of our national life.” The whole “New
Deal” program had decisively halted the banking panic.
Actually, as market historian Robert Sobel wrote, Glass-Steagall
was “rammed down Roosevelt”s throat, and he took credit for it
ever after.” A key component of the Act was the establishment
of the Federal Deposit Insurance Corporation (FDIC). Steagall
deserves a little credit for this but the main kudos go to
Republican Senator Arthur Vandenburg who wanted to come up
with a way to safeguard depositors, and the legislation also
ordered commercial banks to divest themselves of their
investment affiliates.
The creation of the FDIC “forever liberated banks and depositors
from the fearful psychology of bank ”runs,” or panics.” [David
Kennedy]. Bank deposits were to be insured up to $5,000.
And from the creation of the Federal Reserve to Glass-Steagall,
the gentleman from Virginia, Carter Glass, was in the middle of
titanic changes to our banking system.
Sources: “Freedom from Fear,” by David Kennedy
“The Presidents,” by Henry E. Graff
“The Great Bull Market,” by Robert Sobel
“America: A Narrative History,” by George Brown
Tindall and David Shi.
Brian Trumbore
