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We Need a Politician Like Carter Glass

This year marks the hundredth anniversary of the Federal Reserve Act, often described as the most important financial law in U.S. history. This year also is the 80th anniversary of the Glass-Steagall Act, which President Franklin Roosevelt called "the second most important banking legislation enacted in the history of our country."

One member of Congress, Carter Glass, was the principal author of both the Federal Reserve Act in 1913 and the Glass-Steagall Act 20 years later. This anniversary year provides the opportunity to review Glass's remarkable achievements and their relevance today.  

At the start of the twentieth century the United States lacked a public authority that could respond to economic emergencies.  During the Panic of 1907, rescues of commercial banks, trust companies, securities firms, the New York Stock Exchange, and New York City had to be organized by a private individual, J. P. Morgan. There was widespread recognition that the nation needed a formal body to deal with future financial panics. Republican Senator Nelson Aldrich proposed legislation that would create a powerful state bank based on the German model. The Aldrich plan was defeated by Democrats, Progressives, and many Republicans, who opposed a strong central bank controlled by Wall Street.

In 1910 the Democrats gained control of the House and appointed Carter Glass, a Congressman from Virginia, to head a subcommittee to prepare legislation. Glass drafted a bill that would create a decentralized system with twelve regional Federal Reserve Banks overseen by a Federal Reserve Board in Washington. The bill was opposed by conservative Republicans who wanted a strong central bank and by agrarians who saw Glass's bill as a disguised version of the Aldrich Plan.  Glass persevered in both the House and Senate, striving to obtain agreement on reasonable legislation, while compromising as necessary. His bill, the Federal Reserve Act, was signed into law by President Woodrow Wilson on Dec. 22, 1913. Glass subsequently was honored as the "father of the Federal Reserve System" in a ceremony at the Federal Reserve Building in Washington. 

President Woodrow Wilson signs the Federal Reserve Act in 1913. Carter Glass is at his left shoulder.

In the 1920s Glass, by then a Senator, became concerned that commercial banks were fueling stock speculation by making loans to brokers. Even worse, Federal Reserve Banks were extending loans to commercial banks in their districts; these banks then re-lent the funds to brokers. Glass believed that unless the Federal Reserve Board used its general authority to curb these activities, a crash was inevitable. 

Glass's warnings were largely ignored. Indeed, Glass was ridiculed. The stock market crashed in October of 1929.

In a highly unusual move, the Senate Banking Committee, controlled by Republicans, appointed a subcommittee chaired by Glass, a Democrat, to prepare legislation.  The experience of the 1920s demonstrated that legislation granting only general authority to regulators was unlikely to work. "There is no lonelier man," the historian Frederick Lewis Allen observed, "than a government official who finds himself confronting…plausible arguments for…lax administration." Justice Louis D. Brandeis warned, "Remember the inevitable ineffectiveness of regulation." 

So Glass drafted legislation that laid down precise statutory prohibitions (e.g., banks and companies affiliated with banks cannot underwrite securities; securities firms cannot accept deposits)  and that gave clear directions to regulators (e.g. Federal Reserve Banks must keep informed of  bank loans to determine whether they are being used for speculation). Glass met violent opposition from Wall Street and its allies in Congress. He received no assistance from President Herbert Hoover and little help from his successor Franklin Roosevelt.  

But Glass persevered. His bill and the companion House bill sponsored by Rep. Henry Steagall of Alabama providing for federal insurance of deposits were melded into the Glass-Steagall Act, which Roosevelt signed into law on June 16, 1933. Roosevelt congratulated Glass for obtaining enactment of a law that "had more lives than a cat." 

The Glass-Steagall Act and other New Deal measures worked. For decades, the nation avoided lax regulation, excessive speculation, and financial crises.

The 1980s inaugurated an era of deregulation.  In 1989, Congress repealed the Glass-Steagall Act. The Securities and Exchange Commission exempted mortgage-backed pools from regulation as investment companies, repealed the uptick rule for short sales of securities, and reduced capital requirements for brokers. The Fed declined to crack down on unscrupulous subprime lending practices.  Most importantly, the central bank refused to raise interest rates to dampen the housing bubble.  This wave of deregulation produced a period of excessive speculation leading to the 2008 financial crisis.

Following that crisis Congress enacted the Dodd-Frank Act, which did not impose clear statutory requirements, but instead assigned more than 200 rulemaking projects to regulatory agencies.

History demonstrates that reliance on regulators will not work. Unless legislation itself imposes specific rules, including clear limits on the activities and size of financial institutions, we are bound to have lax regulation, excessive speculation, and another crisis.

We need a politician like Carter Glass, with the common sense, independence, and tenacity to devise meaningful financial legislation and get it enacted into law.

Matthew P. Fink, a former president of the Investment Company Institute, a mutual fund association, is writing a biography of Carter Glass. 


(5) Comments



Comments (5)
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Posted by poonam21 | Saturday, May 11 2013 at 9:32AM ET
If Matt Fink wants to do an objective look at Sen.Glass, and I hope he does, I encourage him to look at the work Carter Golembe did during the 80s and 90s. I'm sure FRB Chair Bernanke's research into the depression and efforts to address it will provide added insights.
Glass for many years held the view that the banking and securities business should be separate from one another, and the Crash of 29 and ensuing years of bank failures presented him with just the "problem" his "solution" was searching for.
The fact is, however, that of the nearly 9000 banks that failed 1930-33(well over a third of all banks)few were involved in securities activities or had securities affiliates.
No one can argue that clear laws and strong vigilant regulators are needed over ALL financial activities, but separation of banks and securities firms did nothing for the thousands of small community based banks which failed, much less their customers.
Posted by mclaughlin | Sunday, January 27 2013 at 4:22PM ET
Apparently Mr. Fink's book is not intended as a biography of Glass, but a polemic for Mr. Fink's views. The Glass-Steagall Act was not repealed in 1999. Two sections (20 and 32) of the 1933 Banking Act restricting, not prohibiting, affiliations between banks and securities firms were repealed. As interpreted by the FRB those restrictions did not prevent Citibank from affiliating with Salomon. The direct restrictions on banks (Sec 16) and securities firms (Sec 21) remain. It probably won't be covered in Mr. Fink's book, but in 1935 Glass introduced (and the Senate passed) a bill to change Section 16 to not prohibit, but instead regulate, direct bank underwriting. Glass stated banks should return to corporate underwriting. Glass thought "regulation" not the statutory prohibition favored by Mr. Fink was appropriate. Mr. Fink's organization was the plaintiff in the famous Camp case. Citibank tried to sell the equivalent of mutual funds to retail customers. The SEC and OCC liked that, because the members of Mr. Fink's trade group were charging 8.5% loads for their funds. Mr Fink's group didn't like the competition and stopped Citi from offering a lower priced product through the Supreme Court's Camp decision. While gsutton is technically correct that 23A was separate from what we call "Glass-Steagall," it was part of the same law (the 1933 Banking Act) so it didn't exist before "Glass-Steagall." 23B came more than 50 years later.
Posted by Robert L | Friday, January 25 2013 at 5:10PM ET
Banks without investment banking, merchant banking, insurance, and brokerage arms can only grow so large, and the danger they pose can only become so great. Add those other businesses, and there is no limit to size. Then they become too big to fail, and too big to jail, and too big to let anyone prosecute criminals in their midst.

Citbank and Bank of America would have never have become the money-sucking monsters they are if Glass-Steagall weren't first weakened under the Reagan administration and killed off during the Clinton administration. No, this took decades of constant work first to line up economists and academics, then legislators and regulators to do the dirty deed.

Banks can barely survive if they stick to banking. Add those other businesses, and management fails. Look at the litany of unpunished activity: LIBOR manipulation, RMBS fraud, money laundering, foreclosure fraud, violations of FCPA. There are no statutes that banks don't violate with impunity, thanks to the trillions they control courtesy of the murder of Glass-Steagall.
Posted by Ed Walker | Thursday, January 24 2013 at 7:43PM ET
The logic of this argument doesn't hold up. Glass Steagall prohibited affiliations between banks and securities brokers. It didn't prevent banks from making loans secured by stock. Glass Steagall was repealed in part because separate federal laws (23A and 23B) prohibit loans by a bank to an affiliate or a third party to do business with an affiliate. In 1987 the FDIC published a study in which it found that lending by banks to affiliated securities brokers did not contribute in any material way to the 1929 stock market crash. It concluded that Glass Steagall was political window dressing designed primarily to give the appearance that Congress was taking bold action to deal with the Depression, and called for repeal of the law. Overkill and redundancy is why Glass Steagall was repealed.
Posted by gsutton | Thursday, January 24 2013 at 4:01PM ET
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