What FDR Hated About Glass-Steagall
President Franklin D. Roosevelt set the standard for the first 100 days in office with an unprecedented whirlwind of legislative activity that sought to make good on his pledge for “action and action now” to combat the Great Depression.
June 16 marks the 80th anniversary of that era, which came to a close when Roosevelt signed the Banking Act of 1933. That groundbreaking financial reform is more commonly known for its Democratic co-sponsors, Senator Carter Glass of Virginia and Representative Henry Steagall of Alabama. These days, it is mostly remembered for just one of its provisions, the separation of commercial and investment banking, designed to wall off customer deposits from the risk-taking inherent in securities underwriting.
The debate over the 1999 repeal of that reform still rages. Yet in 1933, the most controversial feature of Glass-Steagall was the creation of federal deposit insurance, which has been wildly successful and has virtually eliminated the repeated bank runs that swept the country in the decades before the bill’s passage. Even the ardent free-marketeer Milton Friedman called it “the most important structural change in the banking system” of the New Deal.
Deposit insurance remains one of the Roosevelt administration’s signature accomplishments. Yet FDR adamantly opposed the provision almost until the day he signed it into law because he thought it was unworkable and might impose crippling liabilities on the federal government.
Superficially, this seems to have been an instance of classic Rooseveltian deal-making: The president agreed to a more limited insurance provision than originally proposed as the price for passage of the rest of Glass-Steagall. A closer look, however, suggests that Roosevelt was forced to bend to the very political forces that he had helped to unleash.
When Roosevelt was sworn in on March 4, 1933, the financial system was on the verge of collapse. Banks had been battered for weeks by waves of runs sparked by Michigan Governor William Comstock’s decision to declare a statewide banking holiday and fueled by a Senate investigation of shady financial practices led by former prosecutor Ferdinand Pecora.
By Inauguration Day, 38 of 48 states had shut all their banks, and withdrawals were sharply curtailed everywhere else. The president’s inaugural address captured the country’s anger. The assembled crowd largely ignored Roosevelt’s admonition that “the only thing we have to fear is fear itself.” Instead, he received his first sustained applause when he proclaimed: “The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.”
The first step was to bolster confidence in the financial system. The president declared a nationwide bank holiday. The legislation he pushed through Congress in just a matter of days permitted only “sound” banks to reopen. The Federal Reserve became the lender of last resort for those banks, with the Treasury agreeing to indemnify the central bank for any losses. That amounted to de facto deposit insurance. As Vice President John Nance Garner told Roosevelt: “You’ll have to have it, Cap’n. The people who have taken their money out of the banks are not going to put it back without some guarantee.”
In his first fireside chat, on March 12, 1933, Roosevelt assured Americans “that it is safer to keep your money in a reopened bank than under the mattress.” Mostly, the president’s calm, patrician voice projected confidence as he exhorted Americans to “have faith.” They did. Money flowed back into the banks, the crisis passed, and Roosevelt was lauded for his swift and sure-handed response.
The emergency legislation was just the start. Glass and Steagall quickly re-introduced their banking reform legislation, which had been stalled in Congress for years. At Steagall’s insistence, the House bill included a deposit-insurance provision. It was hardly novel: Over the previous five decades, 150 bills containing such proposals were introduced in Congress, and all had failed. The debate in 1933 reprised the objections that killed earlier plans -- large banks argued that they would be forced to prop up small, weak ones, thereby creating disincentives for prudent management.
Despite the implicit guarantees in the emergency banking legislation and his support for most of Glass-Steagall, Roosevelt had no interest in backing a full-blown insurance program for bank deposits, and he told reporters that he would veto any legislation that contained one.
Glass was equally opposed to Steagall’s plan. Roosevelt probably thought that he and Glass could strip the offending provision out of the final bill, and reiterated his continued opposition throughout the spring.
It was a risky game: Even as Roosevelt threatened to veto deposit insurance, he was also stoking public outrage, maintaining political pressure so he could push through the other reforms. The president secretly urged Pecora to subpoena private bankers, especially the partners of the powerful J.P. Morgan and Co.
In May and June, the final debates over Glass-Steagall coincided with the media onslaught surrounding the Pecora hearings, where more disclosures of unseemly banking practices emerged, intensifying public outrage at banks and increasing support for deposit insurance. Thousands of letters and telegrams, many from depositors at failed banks, implored lawmakers to pass a guarantee.
That was when Glass switched sides. He urged the president not to veto the bill, fearing that opposition from bankers would only harden, possibly killing the other reforms and leading to another disastrous round of bank failures. Roosevelt caved. He wrangled some changes (graduating coverage for larger deposits and delaying implementation), and on June 16, 1933, he signed Glass-Steagall into law.
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