The Suburban Emergency Management Project (SEMP) gives us the first part in the three-part series on the creative influence of Carter Glass on the twentieth century financial history of the United States.
(emphasis mine) [my comment]
Carter Glass and the Federal Reserve Act of 1913
Biot Report #605: March 25, 2009
Before enactment of the pioneering Federal Reserve Act of 1913, which created the Federal Reserve System, the United States endured the handicap of "the most barbarous currency system on earth," declared the ebullient, feisty, and indefatigable Virginia Senator Carter Glass (1858-1946). The Federal Reserve System sought to bring "financial freedom" from catastrophic "money panics" that had overtaken the nation amid prosperity five times within the previous thirty years, said the freckle-faced red-headed, one-hundred-pound Senator, who lived 88 years. (1-3) Carter Glass was one of the major fathers of the Federal Reserve System, which had a tumultuous birth during the first year of President Woodrow Wilson's administration. (4)
Carter Glass Goes to Washington
James Palmer writes, "By the time the convention of 1901 closed Glass had become an important figure in the eyes of many Virginians. He had proven himself not only a serious minded senator but, under pressure, a keen and intelligent debater. Under the circumstances, it is not surprising that constituents elected him" to the 57th Congress (1901-1902). (13) Glass was to be re-elected as Representative from his congressional district in Virginia nine consecutive times (57th through the 65th Congresses, from 1901 to 1918) before moving to the Senate where he was four times and died in office (66th-79th Congresses, 1919-1946). (16)
John Sharpe Williams of Mississippi, minority (Democratic) leader of the House of Representatives, assigned 43-year-old Carter Glass to the Committee on Banking and Currency, saying, "Just watch your knitting, Carter, and you'll have a great opportunity to distinguish yourself." (15) Carter Glass agreed to this assignment saying, "All right, I don't know anything about banking and currency, but I guess I can learn." (17)
For the next decade, Glass completely immersed himself in the subject of banking and currency by visiting banks of all types and sizes—"small town banks in Virginia and huge institutions in New York City. He interviewed small merchants and great industrialists as to their financial needs. He studied monetary systems and the history of money, even the system of the Aztecs. He mastered the history of finance. Then, from all he had learned, he drew his conclusions as to what were the needs of his own country. These conclusions, arrived at by this country editor, were the major influences that went toward building the nation's dominant financial structure, the Federal Reserve System," writes Palmer. (18)
Carter Glass "despised the vote-swapping methods prevalent in Congress, took little or no part in Washington social life, and found his amusement in occasional attendance at boxing bouts or baseball games. His favorite team then, as later, was the Philadelphia Athletics, and his favorite manager, Connie Mack. In the House of Representatives he was scarcely known, and the few who did know him called him 'the taciturn gentleman from Virginia.'" (19)
1907 Money Panic
In 1907, the New York Stock Exchange fell almost 50 percent from its peak the previous year, causing a ruinous financial crisis as depositors made runs on banks and trust companies throughout the United States, causing bankruptcies and closures. Except for the intervention of J.P. Morgan and others, who pledged large sums of their own money to shore up the banking system, the panic may have deepened. This is a complex period of financial history covered elsewhere. [See The American Crisis Of 1907] (20-22)
The 1907 financial crisis was so serious, however, the Republican-controlled Congress, under pressure from Republican President Theodore Roosevelt (1901-1909) to "do something," hurriedly passed the precarious Vreeland-Aldrich Currency Law June 30, 1908. Carter Glass vehemently opposed the act and wrote its dissenting report. He also made the only speech against the act, which was his first speech before the House of Representatives:
The only emergency is the necessity which party leaders imagine confronts them to "do something' even though it be the wrong thing. This report [referring to the majority report], Mr. Speaker, enjoys the unique distinction of having been signed by all the Republican conferees of Senate and House, but not approved by a single one. There is scarcely a feature in this composite bill which has not been soundly condemned by the Republican leaders of Congress...And so we have here a bill for which every member on that side will vote, but in the provisions of which not one of them believes. The bill is utterly wrong in principle, as any bill must be which merely provides an emergency currency. What the country needs is not a makeshift legislative deformity, designed to help out a desperate situation, but a wise and careful revision of the entire banking and currency system of the United States, whereby panics may be prevented or their violence diminished. (23)
Nelson Wilmarth Aldrich (1841-1915) was the powerful Republican Senator from Rhode Island who led the Senate Republican Party and the Senate Finance Committee from 1881 to 1911. Edward B. Vreeland (1856-1936) was a Republican representative from New York who chaired the House Committee on Banking and Currency in the 61st Congress (1909-1911). (25) "The adoption of the Aldrich-Vreeland Law was not followed by any immediate progress in the organization of the national currency associations for which it provided," writes Henry Parker Willis who describes its content elsewhere. (26)
One of the most important aspects of the Aldrich-Vreeland bill of 1908 was its provision for the creation of the National Monetary Commission to study the currency problem and report back to Congress. (27) Four years later in 1912, the National Monetary Commission presented the Aldrich bill (and a handsome and valuable library on financial history), which strongly influenced later events. Senator Aldrich had spent time in Europe with the rest of the Commission studying financial systems there, and "decided to be guided by the experience of great commercial nations," notes Willis. "The Committee believed the example of Germany the safest precedent to follow and the one most likely to answer present needs successfully." (28) [which is sort of funny, considering what happened in Germany ten years (currency collapse, hyperinflation, etc...)]
President-elect Wilson sent a note to Glass asking him to come to Princeton the day after Christmas (December 26, 1912) to discuss the question of federal reserve legislation. Glass writes, "It is not difficult to recall the trepidation one felt in contemplating an interview of this nature with a man ripe in scholarship, practiced in economics, a seasoned student of government. ...Before and during the presidential campaign, Mr. Wilson had manifested an eager interest in the nation's credit situation. From both the economic and political points of view, he discussed the subject with a clarity and precision that attracted wide attention and elicited from the weightier papers and periodicals discriminating comment. In calmer moments, after the riot of politics was over, he discussed the question with deliberate earnestness." (33)
Wilson on The New Freedom
Carter Glass reproduced in his book An Adventure in Constructive Finance the following fine extract from Woodrow Wilson's The New Freedom (1913) in which Wilson articulates his beliefs on antitrust modification, tariff revision and reform in banking and currency policy. (34) Wilson wrote,
You will notice from a recent investigation that things like this take place: A certain bank invests in certain securities. It appears from evidence that the handling of these securities was very intimately connected with the maintenance of the price of a particular commodity. Nobody ought, and in normal circumstances nobody would, for a moment think of suspecting the managers of a great bank of making such an investment in order to help those who were conducting a particular business in the United States to maintain the price of their commodity; but the circumstances are not normal. It is beginning to be believed that in the big business of this country nothing is disconnected from anything else. I do not mean in this particular instance to which I referred, and I do not have in mend to draw any inference at all, for that would be unjust; but take any investment of an industrial character by a great bank. It is known that the directorate of that bank interlaces in personnel with ten, twenty, thirty, forty, fifty, sixty boards of directors of all sorts, of railroads which handle commodities, of great groups of manufacturers which manufacture commodities, and of great merchants who distribute commodities; and the result is that every great bank is under suspicion with regard to the motive of its investment. It is at least considered possible that it is playing the game of somebody who has nothing to do with banking, but with whom some of its directors are connected and joined in interest. The ground of unrest and uneasiness, in short, on the part of the public at large, is the growing knowledge that many large undertakings are interlaced with one another, indistinguishable from one another in personnel.
Therefore, when a small group of men approach Congress in order to induce the committee concerned to concur in certain legislation, nobody knows the ramifications of the interest which those men represent; there seems no frank and open action of public opinion in public counsel, but every man is suspected of representing some other man, and it is not known where his connections begin or end.
I am one of those who have been so fortunately circumstanced that I have had the opportunity to study the way in which these things come about in complete disconnection with them, and I do not suspect that any man has deliberately planned the system. I am not so uninstructed and misinformed as to suppose that there is a deliberate and malevolent combination somewhere to dominate the Government of the United States. I merely say that, by certain processes, now well known, and perhaps natural in themselves, there has come about an extraordinary and very sinister concentration in the control of business in the country. [Wilson was a conspiracy theorist, I love this!]
However it has come about, it is more important still that the control of credit also has become dangerously centralized. It is the mere truth to say that the financial resources of the country are not at the command of those who do not submit to the direction and domination of small groups of capitalists who wish to keep the economic development of the country under their own eye and guidance. The great monopoly in this country is the monopoly of big credits. So long as that exists, our old variety and freedom and individual energy of development are out of the question. A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities, are in the hands of a few men who, even if their action be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who necessarily, by very reason of their own limitations, chill and check and destroy genuine economic freedom. This is the greatest question of all, and to this statesmen must address themselves with an earnest determination to serve the long future and true liberties of men.
This money trust, or as it should be more properly called, this credit trust, of which Congress has begun an investigation, is no myth; it is no imaginary thing [Conspiracy theorist!]. It is not an ordinary trust like others. It doesn't do business every day. It does business only when there is occasion to do business. You can sometimes do something large when it isn't watching, but when it is watching, you can't do much. And I have seen men squeezed by it; I have seen men who, as they themselves expressed it, were put out of business by Wall Street because Wall Street found them inconvenient and didn't want their competition. (35)
[Do you understand the implications of this? The Federal Reserve Act was the passed by a president who deeply feared Wall Street conspiracies]
Carter Glass then wrote, "And this was the man, just elected President of the United States, with whom the country-editor chairman of a congressional subcommittee was going to discuss a currency measure!" (36)
Bedridden Wilson Meets Carter Glass, December 26, 1912
Carter Glass described his experience during first meeting Woodrow Wilson:
December 26, 1912, was a desperately cold day. The snow at Princeton was two feet deep. Dr. Willis, the committee expert, had accompanied the chairman [Glass], prepared to answer or discuss any purely technical question that might be projected. I had made a written divisional memorandum of the bill I desired to outline to Governor Wilson. The latter had a severe cold and was propped up on pillows in bed. He had cancelled every other engagement for the day, and at once it was suggested that he let us come another time when he might be in better trim; but he insisted on proceeding with the business, so intent was he on a speedy and sweeping currency reform. For two hours the situation was reviewed and the chairman's memorandum dissected. Toward the end, Mr. Wilson announced it as his judgment that we were "far on the right track"; but offered quite a few suggestions, the most notable being one that resulted in the establishment of an altruistic Federal Reserve Board at Washington to supervise the proposed system. We had committed this function to the Comptroller of the Currency, already tsaristic head of the national banking system of the country. Mr. Wilson laughingly said he was for "a plenty of centralization, but not for too much." Therefore, he asked that a separate central board provision be drafted, to be used or not, as might subsequently be determined, "as a capstone" to the system which had been outlined to him. (37)
Content of Glass Currency Proposal
Chairman Glass explained the features of the currency program presented to President-elect Wilson as follows:
1. "Organization of a certain number of regional reserve banks of specified capital, with a view to decentralizing credits;
2. Compulsory withdrawal of reserve balances as then impounded and their transfer to these regional reserve banks;
3. Compulsory stock-holding membership of national banks under penalty of charter forfeiture in case of refusal;
4. Associate membership of state banks with limited privileges;
5. The rediscounting processes common to such plans;
6. The issuance by the regional banks of federal reserve notes, based on a gold and liquid paper cover;
7. The gradual retirement of national bank bond-secured notes;
8. The joint liability of all the regional banks'
9. Constituting the regional banks fiscal agents of the government, with a view to displacing subtreasuries;
10. Conversion of United States 2 per cent bonds into 3 per cent bonds, with cancellation of circulation privilege;
11. Committing to the Comptroller of the Currency at Washington full supervisory power over the reserve system." (38)
President-elect Wilson did not care for the idea of a single person, the Comptroller of the Currency, possessing so much power over the system and suggested instead the creation of a federal reserve board.
President Wilson at one point called his Secretary of the Treasury, William Gibbs McAdoo; Senator Robert L. Owen (D-Oklahoma), chairman of the Senate Banking Committee; and Carter Glass, chairman the House Banking Committee to the White House to discuss the feature of the bill that gave the banks minority representation on the Federal Reserve Board. Glass said he was "very definitely committee do giving the banks some voice," but Owen, McAdoo, and the President opposed this provision. Glass did not give up and approached the President again, with a gaggle of bankers in tow. This is what happened, according to Glass:
The President was courteous and contained. These great bankers, arbiters for years of the country's credits, were grouped about the President's desk in the Executive office adjoining the Cabinet room. I [Glass] sat outside the circle, having already voiced my own dissent from the President's attitude. President Wilson faced the group across the disk; and as these men drove home what seemed to me good reason after good reason for banker representation on the central board, I actually experienced a sense of regret that I had a part in subjecting Mr. Wilson to such an ordeal. When they had ended their arguments Mr. Wilson...said quietly: "Will one of you gentlemen tell me in what civilized country of the earth there are important government boards of control on which private interests are represents?" There was a painful silence for the longest moment I ever spent; and before it was broken Mr. Wilson further inquired: "Which of you gentlemen thinks the railroads should select member of the Interstate Commerce Commission?" There could be no convincing reply to either question. (44)
As compensation to the bankers for denial of representation on the central board, President Wilson set up "a Federal Advisory Council, to be composed exclusively of bankers, authorized to sit at stated times with the Federal Reserve Board in a purely advisory capacity. This was done and the amendment made in committee." (44)
Wilson Signs the Federal Reserve Act
The administration currency bill, passed by the House and in many particulars altered by the Democratic Senate caucus, was passed by the Senate on December 19, 1913, by 54 to 34, and was immediately sent to conference. ...
The Suburban Emergency Management Project (SEMP) gives us the second in the three-part series on the creative influence of Carter Glass on the twentieth century financial history of the United States.
Carter Glass and the Banking Act of 1933 (Glass-Steagall Act)
Biot Report #606: March 29, 2009
Carter Glass (1858-1946), Democratic U.S. Senator from Virginia and co-sponsor of the Federal Reserve Act of 1913, grew increasingly concerned in early 1929 with the growth of bucket-shop practices to "a national scale of alarming magnitude." (1-3) "For years [Carter Glass] had predicted ultimate collapse of the [U.S.] economic system if prodigal stock and commodity gambling were not checked. Now he saw the dark clouds of disaster ahead," intoned his biographers Smith and Beasley in 1939. (2)
Lead up to the 1929 Stock Market Crash
The Federal Reserve Act of 1913 charged the Federal Reserve Board with supervision of the nation's banks, but not the nation's stock-exchange activities, "except as speculative activities might relate themselves to the facilities of the Federal Reserve Banks." By the 1920s, stock-exchange activities had gotten out of hand, Glass warned the Senate in February 1929. "The great corporations of the country have acquired the habit of throwing their surplus funds into the vortex of stock speculation, instead of distributing them among their stockholders in the nature of dividends, and individuals are doing the same thing." Glass noted,
Member banks of the system have manipulated their deposit accounts [sounds familiar? (See *****Deposit Reclassification Used To Eliminate All Reserve Requirements*****] so as to transfer from the demand deposit account, requiring a reserve of 7 percent, to the time deposit account, requiring a reserve of only 3 per cent, thereby releasing enormous funds to be thrown into the maelstrom of stock speculation [sounds familiar].  When I presented a bill here last week to restore the reserve behind time deposits to the figure which obtained in the original set-up, banks all over the country began to write me letters of protest. That alone would withhold form those speculative activities at least $300,000,000; but banks are not willing to desist.
Unless some man be wise enough, and have wit enough to give a statutory definition of investments as contra-distinguished from stock gambling, I do not see how we are to curb these gambling activities. That ought to be done. (2)
Glass said the normal private citizen regarded the purchase of stock as an investment and expected to earn dividends paid out annually by a prosperous company. "But if he bought...stock with a view of selling it even before delivery physically could be made, the next hour, or with a view of anticipating the future of tomorrow or the next day, that was nothing in the world by pure gambling—'just as much gambling as if Senators were to sit at a roulette table and bet on the outcome of the game," he growled. (2) Another Senator said stock transactions were like poker, except that "the gambling is done with other people's money." People who deal in the stock market "sell things they do not possess," stormed Glass, "and they buy things they never expect to get, and thereby disturb the whole commercial fabric of this country, and it ought to be stopped." (2)
The Federal Reserve Board had tried in vain for six months (1928-1929) to "establish a policy that the law itself makes mandatory upon the banks and the board, and that should have been established long ago, and if established long ago, would have averted this difficulty." (6) Glass stated that "ever since mid-February  the directors of the New York Federal Reserve Board [bankers] had been persistently pounding the Federal Reserve Board [political appointees] every week to permit them to penalize legitimated commercial transactions by upping its rediscount rate." The rediscount rate is the rate of interest charged to member banks when they borrow from the Federal Reserve System. (7) Carter fumed,
By every influence legitimate and illegitimate, by threats and otherwise, that New York crowd [bankers] has been trying to compel the board [political appointees] to raise its commercial rediscount rate; and it has refused by a very narrow margin with the board. As I pointed out publicly six or eight weeks ago, when an outstanding director of the New York Federal Reserve Bank—the President [Charles E. Mitchell] of the largest bank in the Western Hemisphere—defied the board and publicly avowed that his obligation to the stock gamblers was superior to his obligation as a sworn officer of the Federal Reserve system, what the board should have done was to have incontinently kicked that fellow out of his position before noon of the day upon which he made that announcement.
...I own stocks and proprietary interests in newspapers, banks, hotels, farms, foundries and other productive enterprises, but I have never acquired the habit of betting at one hour that the value of these interests will be greater or less the next hour or the next day or the next month....I invested my money; and I do not have to listen at the ticker or watch the tapes for profits. (6)
Stock Market Crash 1929
As Carter Glass observed the stock market crash that began in late October 1929, he considered the need for a banking reform bill to correct certain deficiencies in the Federal Reserve Act of 1913. The Federal Reserve Act had made provisions to prevent inflation of the currency. Glass was generally content with the performance of the Federal Reserve System in halting post World War I inflation. The Federal Reserve System accomplished this through application of various tools at its disposal: a) adjusting the rediscount rate to member banks; (b) adjusting open market rates; (c) adjusting reserve requirements; (d) adjusting the issue of Federal Reserve bank note currency against United States bonds; (e) adjusting buying of bills, notes, acceptances, etc.; and (f) adjusting interest on excess deposits. (8)
However, Carter was extremely concerned that between 1920 and 1929 other de-stabilizing factors had entered the banking picture, in particular, unprecedented stock speculation. "In the summer of 1929, business began to slacken and the speculative fever increased," write Smith and Beasley. "With the spell of gambling on the country, the unemployment rate went almost unnoticed, but Glass was one of those who did notice. On the Senate floor in 1927, he warned against 'growing speculation'; and off the Senate floor discussed with the head of a New York investment banking organization [emphasis added] the advisability of legislation which would compel stock-market gamblers to pay a tax of five per cent on sales of stocks held less than sixty days." (8) The following exchange between Glass and the investment banker ensued:
That would ruin the market," declared the investment banker.
"Supposing it does—it is better to 'ruin the market,' as you say, than to ruin the country, as will surely happened if this gambling fever continues to spread.
The investment banker smiled tolerantly. "My own opinion, Senator, is that the people of this country are just beginning to realize on the prosperity to which they are entitled."
"I hope you are right, but common sense tells me you are wrong. The day of reckoning for gambling cannot be escaped. It must come. I think something should be done to deprive people of the privilege of mortgaging their homes and their futures to buy stocks on margin and to keep blowing up bubbles that are certa in to break in their faces." (8)
Under Section 13 of the Federal Reserve Act, Federal Reserve Banks could rediscount paper of member banks under the stipulation that "such definition shall not include notes, drafts or bills covering merely investments or issued or drawn for the purpose of carrying or trading in stocks, bonds or other investment securities, except bonds and notes of the Government of the United States." [Emphasis added.] [added my emphasis too] Considering the enormous amount of Government securities outstanding, it was easy for banks to borrow from the Federal Reserve, thereby providing the funds needed to divert into speculative borrowings. (9)
Banks accomplished this feat through creation of "security affiliates," which, according to Adolph C. Miller, Federal Reserve Board economist, were "little more than market operators." (9) Security affiliates had been around since the early 1900s, when commercial banks established them to float bond issues and underwrite corporate stock issues.
Senator Glass was determined to separate these security affiliate appendages from the banking structure to halt the harvest of Federal Reserve funds to fund speculation in the stock market. He knew bankers would oppose him and so collected data showing the increase in security investments by national banks, state banks and trust companies. "He learned that in 1930 security investments and loans, together, represented 40 per cent of the total banking resources; and that security loans had increased by more than 50 per cent, while security investments by banks and trust companies had increased by 63 per cent." (9)
Banking Act of 1933
In spring 1931, Glass began to write the banking reform bill he first thought necessary in 1929. "He talked it over with his subcommittee [Senate Banking and Currency Committee] and the members were quite in agreement that much more severe restrictions should be written to curb the use of Federal Reserve funds for speculative purposes." (10) The principle features of the bill are in the list below. They bear close reading.
1. "To provide the Federal Reserve Board with greater control over speculative credit by giving it power to impose penalties, one penalty being to suspend credit facilities of the System to any member bank which ignored official warnings against increasing outstanding collateral loans while obtaining 15-day advances from a Federal Reserve Bank on its promissory note.
2. Security affiliates of banks were to be brought under strict supervision by the Federal Reserve Board; and it was required that they be completely divorced within three years.
3. To keep open market operations under control, and under the close supervision of the Federal Reserve Board, it was to be required that a Federal Open Market Committee consisting of one member from each of the twelve Federal Reserve districts be appointed.
4. The bill eliminated the Secretary of the Treasury as ex-officio member of the board thus removing the board from Treasury influences in its policies.
5. To safeguard the System from foreign banking interests, it required that all such relationships be brought under the board's supervision.
6. To give further protection to depositors, branch banking was encouraged...
7. Because inadequate capital was found to be the cause for many failures minimum requirements for capital of banks particularly in smaller communities were raised on a graduating scale based on population. Increased reserves were also required by these smaller institutions.
8. A Federal liquidating corporation was to be formed [later became FDIC], the capital of which would be supplied by an appropriation from the Treasury and from assessment against member banks as well as Federal Reserve Banks surpluses. This capital was to be used in purchasing the assets of closed member banks, thus speeding up payments to depositors." (10) Senator Glass introduced his banking reform bill into the Senate on January 22, 1932. Protests from bankers, politicians, investors, and other stakeholders in stock speculation, flooded Glass, the Congress and the Republican Hoover Administration. Glass' bill was such so hot and contentious that the Senate finally removed it from the calendar on June 16, 1932, as the national conventions of the two major political parties revved up. Henry B. Steagall of Alabama was chairman of the House Committee on Banking and Currency. He agreed to support the Glass banking reform bill if it permitted bank deposit insurance. When Glass and his subcommittee agreed, Steagall earned a place in the short name of the Act (Glass-Steagall Act) when it was eventually passed the following year (more below).
Glass and FDR
Democrat candidate for President, Franklin Delano Roosevelt, was not Carter Glass' first choice during the primaries, although eventually, on the very last ballot, the Virginia delegation did vote for Roosevelt. Glass said that he liked Roosevelt personally, but had had two experiences to which he reacted with distaste. "One was the practice of Roosevelt, when Governor of New York, in stopping over in Washington on his way to and from Warm Springs, Georgia, and indulging in political pow-wows with Democratic Congressmen and Senators. All his life Glass had been opposed to men seeking public office—and, to him, the Presidency, or a Presidential nomination, was one honor that should always seek the man. He was often invited to these meetings. He never went." (11)
A third item about candidate Roosevelt that Glass opposed was his close advisors' advocacy of currency manipulation, which Glass adamantly opposed (more below).
When Roosevelt trounced Hoover in the November 1932 Presidential election, chaos was reigning as hundreds of banks continued to fail. Glass attributed the financial chaos to three things:
1. "The failure of the Coolidge Administration [1923-1929] to take steps to put a stop to stock-market gambling; and, after Coolidge, the failure of the Hoover Administration [1929-1933] to realize, fully and quickly enough, what was actually happening in the 1929 collapse.
2. The action of the House of Representatives in compelling the Reconstruction Finance Corporation to make public the borrowings of banks, and of private corporations. [This led to severe bank runs. Hoover set up the Reconstruction Finance Corporation in 1932 as an independent agency of the United State Government chartered to provide aid to state and local governments, banks, railroads, farm mortgage associations and other businesses. Roosevelt continued the Reconstruction Finance Corporation in his "New Deal."]
3. The growing public belief that the Roosevelt Administration, when in office, would devalue the dollar, and go off the gold standard; and the failure of the President-elect publicly to disclaim these rumors." (12)
In the waning days of his presidency, an anguished Herbert Hoover called Senator Glass to the White House to discuss the Glass banking bill, which the Senate had shelved because of controversy, as noted above. "A Republican President whom he had assailed only a few months before was asking him [Glass] for hel p. Also, a Republican President was seeing eye to eye with him in the importance of the Glass banking bill. Hoover wanted to know if there was not some way in which he-a President of the United States!-could help in getting the proposed legislation enacted into law," write Smith and Beasley. (12) As Hoover and Glass discussed the banking bill, Hoover wondered whether it was a plan by which the Reconstruction Finance Corporation could come to the aid of the banks by temporarily buying the assets of such institutions as were closed. [Emphasis added.]
"Glass thought that over, then asked: "Do you seriously contend that the Government has any responsibility whatsoever for the indebtedness of these closed banks?" "From one point of view, no," answered Hoover. "From another point of view, yes." Hoover explained, "I believe the Government has a real responsibility because publicizing loans from the Reconstruction Finance Corporation has caused runs on these banks-runs that have resulted, directly, in the closing of the institutions." Glass agreed to Hoover's amendment to the banking bill. (13)
On February 20, 1933, Hoover valiantly "tried to force dislodgment of the Glass banking bill by appealing to Congress," as follows:
...There are certain measures looking to the promotion of economic recovery which have been under consideration by the Congress and are so advanced toward completion or understanding as to seem possible of enactment during the present session. The enactment by the House of the general principles embodied in the Glass Banking Bill, which has already passed the Senate, will greatly contribute to re-establishing confidence. It is the first constructive step to remedy the prime weakness of our whole economic life-that is, organization of our credit system." (14)
He was unsuccessful in persuading Congress to move forward on the bill.
Meanwhile, FDR asked Glass to be his Treasury Secretary, but Glass declined because of FDR's refusal to divulge his intentions regarding a plan "to experiment with the currency." (15)
Two days before the inauguration of FDR on March 4, 1933, the Federal Reserve Board recommended for the second time in three days that President Hoover issue a proclamation, closing all banks before they could open. Hoover said that he thought this was unnecessary, because he believed most of the banks were solvent. (16) Senator Glass asked President-elect Roosevelt what he planned to do about closing the banks. Roosevelt said that he was planning to close them, of course.
Glass then admonished Roosevelt, "You will have no authority to do that, no authority to issue any such proclamation. It is highly questionable in my mind if you will even have the authority to close national banks-and there is no question, at all, that you, even as President, will lack the authority to close banks chartered by states."
Roosevelt retorted, "I will have the authority. Under the Enemy Trading At, passed during the World War and never rescinded by Congress, I, as President, will have the authority to issue such an emergency proclamation 'for the purpose,' as the Act says, 'of limited the use of coin and currency to necessary purposes.'" (16) Glass left the Roosevelt suite that night, deeply concerned.
The Roosevelt Administration came into power on March 4, 1933. The following day, FDR called a special session of the 73rd Congress that wrote and passed the Emergency Banking Bill (a quite separate bill from the Glass banking bill) that legalized Roosevelt's mandatory four-day "Bank Holiday." (17) The main points of the proclamation FDR made to Congress in getting the Emergency Banking Bill through the Congress were:
4. "A national bank holiday from March 6 to March 9 , inclusive.
5. An embargo on the withdrawal of gold and silver for export or domestic use during this period except with permission of the Secretary of the Treasury.
6. The issuance of Clearing House certificates or other evidence of claims against the assets of banking institutions to permit business to carry on.
7. Authorization to banking institutions under regulations of the Secretary of the Treasury to receive new deposits and make them subject to withdrawal on demand without restriction or limitations." (18)
Glass believed that the President was without constitutional authority for this act, but the deed had been done and now the important thing, he believed, was to get the banks open again.
In the midst of this whirl of activity, FDR signed the bill Glass helped to forge-the Banking Act of 1933 (48 Stat. 162) on June 16, 1933. Glass believed that the delay in passing this legislation "accelerated the forces speeding toward disaster." (14)
Analysis of the Banking Act of 1933
Henry Parker Willis, Ph.D., Carter Glass' longtime technical advisor, assessed the Banking Act of 1933 in a withering article from 1934 titled "The Banking Act of 1922—an appraisal." (19) At the time he wrote this article, Willis was a professor of economics at Columbia University. Willis was born in Massachusetts and graduated from the University of Chicago with a Ph.D. in economics in 1897. He taught economics for eleven years at Washington and Lee University in Virginia, but at the time Carter Glass hired him to work on the bill that would become the Federal Reserve Act of 1913, he was Washington representative of the New York-based Journal of Commerce, with Treasury assignments. Among his many lucid contributions to the financial history of the United States is his 1,000-page magnus opus The Federal Reserve: A Study of the Banking System of the United States (1923). (20)
Willis believed, contrary to most other observers, that the Federal Reserve Act of 1913 was not a panacea for America's financial system woes. It was only "the best that could be had at the time of its adoption." (21) World War I, he argued, was the cause of "subsequent inattention and even of erroneous thinking" at the Federal Reserve, which necessitated the "immediate process of 'clearing up' afterward." The original Federal Reserve Act was amended, noted Willis, on the "average more than once for every year of its existence," and nearly all of these amendments were "futile or worse." Furthermore, the amendments
have pandered to special banking interests, whittled away the safeguards against banking danger which had been set up in the Act itself, and have added new features of laxity to the concessions which had been forced upon its framers, [e.g., Woodrow Wilson and Carter Glass, among others]. Hence the necessity of witnessing: (1) a period of bank failure without parallel, in which the Reserve system and its managers sat silent, unwilling even to suggest a remedy; (2) a debauch of credit, likewise without parallel, in which the administration of the Reserve system spent its time in quarrels as to the proper application of remedial measures, while special interests made ducks and drakes of the resources which had been piled up in gold as the outcome of war and the consequent disturbances of trade; and finally (3) an unprecedented panic and depression in which all sorts of emergency or first-aid measures have been suggested and urged, and in notable inst ance tried,--usually with the result of further deterioration and impairing the situation. (22)
Willis provides these facts as an
essential background for the history and comprehension of the Banking Act of 1933. The new measure is an anomaly—an attempt to correct obvious evils growing out of the misuse of the Federal Reserve Act by applying remedies which ought long ago to have been attempted if at all. What needs to be understood first of all is the fact that it is an anomaly—an Act which ignores the changes of banking practice that have occurred during the twenty years of Federal Reserve experience. Not only this, but it also ignores or rejects the "new era" notions of banking theory which have been urged by some reasoners. It adheres to the older conceptions of self-liquidation in commercial paper, of "liquidity," of limitation of speculation, of separation between commercial and industrial financing, and many others which were entertained by those who formulated the original Federal Reserve Act—which are still, indeed, entertained by them. This may be accounted unto the new Act and its framers for righteousness; but the fact is that it will not succeed much better than the Reserve Act itself unless enforced in a more sympathetic and understanding way, and unless applied by a banking community willing to make radical changes in its own technique. (22)
Willis outlines the major elements of the Banking Act of 1933, including "the abolition of the security affiliates and the separation of directorates so as, if possible, to recreate the older type of bank board what at its best—a group of non-partisan, disinterested men who have an eye single to the welfare of the community." (23) He is not sanguine about the United States ever having such a system unless it gives up its "indulgence in stock gambling of an extreme type, corporation finance of a shoddy and unsafe sort, and extravagant, costly, and hazardous government finance." (23)
Willis concludes, "The Act of 1933 is a protest against a banking world gone wrong. Whether it will be heeded or not is to be seen; but if heeded, much more will be essential in the way of legislation before that heed proves effective in results." (24)
The Suburban Emergency Management Project (SEMP) gives us the third in the three-part series on the creative influence of Carter Glass on the twentieth century financial history of the United States.
Fifty-Year Demolition Derby of Glass-Steagall Act of 1933
Biot Report #607: March 30, 2009
Federal Reserve Board under Chairman Volcker Eases Glass-Steagall Regulations, 1986-1987
"In December 1986, the Federal Reserve Board reinterpret[ed] Section 20 of the Glass-Steagall Act, which bars commercial banks from being 'engaged principally' in securities business, deciding that banks can have up to 5 percent of gross revenues from investment banking business. The Fed Board then permit[ed] Bankers Trust, a commercial bank, to engage in certain commercial paper (unsecured, short-term credit) transactions. In the Bankers Trust decision, the Board conclude[d] that the phrase 'engaged principally' in Section 20 allow[ed] banks to do a small amount of underwriting, so long as it d[id] not become a large portion of revenue. This is the first time the Fed reinterpret[ed] Section 20 to allow some previously prohibited activities."
On February 4, 1987, eight prominent bankers and Wall Street financiers jousted with Federal Reserve Board members over breaching the Banking Act of 1933 by giving banks underwriting powers to enter vast new securities businesses. "Three big New York banking companies-- J. P. Morgan, Citicorp and Bankers Trust...asked the Fed to let them begin underwriting commercial paper, mortgage-backed securities, municipal revenue bonds that [were] now off limits and some securities backed by consumer debt, such as credit cards and auto loans, through non-bank subsidiaries."
"The banks argue that, though the Glass-Steagall Act of 1933 was passed to separate banking from underwriting, they already have the right to enter the Wall Street arena since the language of the law can be read to permit banks limited participation in these businesses. The securities industry, on the other hand, strongly contends that Congress intended to exclude banks totally from such underwriting markets." (13) Thomas C. Theobald, then vice chairman of Citicorp, argued that three "outside checks" on corporate misbehavior had emerged since 1933: "a very effective" Securities and Exchange Commission ["very effective" at what? Letting Madoff rip off investors for decades?]; knowledgeable investors [Who here bought stocks when DOW was at 14,000], and "very sophisticated" rating agencies. [AAA = toxic]
Federal Reserve Board Chairman Volcker remained unconvinced, and expressed his fear that lenders would "recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. For many critics, it boiled down to the issue of two different cultures--a culture of risk which was the securities business, and a culture of protection of deposits which was the culture of banking." (3)
In the spring of 1987, the Federal Reserve Board voted 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Paul Volcker.
On March 19, 1987, the Fed allowed a unit of Chase Manhattan Corporation to underwrite—as well as deal in—commercial paper. Commercial paper is the term used to describe the multibillion-dollar market in short-term corporate i.o.u.'s, an alternative form of borrowing to ordinary bank loans. The Fed, in approving the Chase application, said the case was similar to that of the Bankers Trust New York Corporation, in which it found in December  that the bank holding company could place commercial paper because its finance subsidiary would not be ''engaged principally' in this business." (14) The vote in the Chase case was 4 to 0, with Chairman Volcker absent. "The Fed also indicate[d] that it would raise the limit from 5 percent to 10 percent of gross revenues at some point in the future. The Board believe[d] the new reading of Section 20 [Banking Act of 1933] [would] increase competition and lead to greater convenience and increased efficiency." (3)
President Reagan appointed Alan Greenspan chairman of the Federal Reserve Board on August 11, 1987. Greenspan was formerly a director of J.P. Morgan and a fierce proponent of banking deregulation to enable U.S. banks to compete better with big foreign banks that were not subject to the restrictions of Section 20 of the Banking Act of 1933.
Federal Reserve Board under Chairman Greenspan Further Eases Glass-Steagall Regulations and Finally Renders them Obsolete, 1986-1997
On January 19, 1989, the Federal Reserve Board breached "a wall that ha[d] separated banking and the securities business for more than 50 years" by allowing banks once again to create "security affiliates" to "raise money for corporations in the bond market. The action on bonds set strict limits on the amount of corporate bond business that banks could do. Those limits," said the Federal Reserve Board, would "prevent banks from quickly challenging the dominance of the largest securities firms. Recognizing concerns that the securities powers could lead to an excessive concentration of financial power among banks, the Federal Reserve's order require[d] the banks to create 'firewalls'' to prevent the banks' new securities affiliates from using sensitive information available to lending officers of the parent banks." (15) In 1990, J.P. Morgan became the first bank to receive permission from the Federal Reserve to underwrite securities, so long as its underwriting business did not exceed the 10 percent limit. (3)
Senator Carter Glass would have recoiled at any attempt to breach the Banking Act of 1933 (Glass-Steagall). Indeed, some members of Congress lambasted the move by Greenspan's Board, but only because it usurped Congressional powers, not because it might cause harm. Securities dealers, fearing the competition from banks, said, "The new powers were an unwise destruction of the separation of banking and securities dealing." (15)
In December 1996, Chairman Alan Greenspan and the Federal Reserve Board issued a "precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting (up from 10 percent). This expansion of the loophole created by the Fed's 1987 reinterpretation of Section 20 of Glass-Steagall effectively render[ed] Glass-Steagall obsolete. Virtually any bank holding company wanting to engage in securities business would be able to stay under the 25 percent limit on revenue. However, the law remain[ed] on the books, and along with the Bank Holding Company Act, d[id] impose other restrictions on banks, such as prohibiting them from owning insurance-underwriting companies." (3)
In August 1997, the Federal Reserve Board eliminated "many restrictions imposed on 'Section 20 subsidiaries' by the 1987 and 1989 orders. The Board state[d] that the risks of underwriting had proven to be 'manageable,' and sa[id] banks would have the right to acquire securities firms outright. In 1997, Bankers Trust (now owned by Deutsche Bank) [bought] the investment bank Alex. Brown & Co., becoming the first U.S. bank to acquire a securities firm." (3) In the next two years, mega-mergers, characterized by a combination of insurance underwriting, securities underwriting, and commercial banking became the rage. This combination banking/investment firm idea was exactly what Carter Glass had vehemently opposed, because of its potential for crashing the economy as it did with the Wall Street crash of 1929 (he believed). The Citicorp-Travelers merger on April 6, 1998, (approved by the Federal Reserve Board on September 23, 1998) sent Sandy Weill of Citicorp into rapture.
Congress Repeals Banking Act of 1933 (Glass-Steagall) November 1999
After his coup with the Citicorp-Travelers merger, Citicorp's Sandy Weill raced to Congress to initiate a "public relations and lobbying campaign for the repeal of Glass-Steagall and passage of new financial services legislation (what becomes the Financial Services Modernization Act of 1999...In May 1998, the House passe[d] legislation by a vote of 214 to 213 that allow[ed] for the merging of banks, securities firms, and insurance companies into huge financial conglomerates. And in September, the Senate Banking Committee vote[d] 16-2 to approve a compromise bank overhaul bill. Despite this new momentum, Congress [was] yet again unable to pass final legislation before the end of its session." (3) This was not the first time Congress had tried and failed to repeal the Banking Act of 1933, considered by some a "Depression-era relic." [some = idiots]
"On October 21 , with the House-Senate conference committee deadlocked after marathon negotiations, the main sticking point [were] partisan bickering over the bill's effect on the Community Reinvestment Act, which sets rules for lending to poor communities. Sandy Weill called] President Clinton in the evening to try to break the deadlock after Senator Phil Gramm, chairman of the Banking Committee, warned Citigroup lobbyist Roger Levy that Weill ha[d] to get White House moving on the bill or he would shut down the House-Senate conference. Serious negotiations resume[d], and a deal was] announced at 2:45 a.m. on October 22 ." (3) The House and Senate approved the final version of the bill on November 4 " and President Clinton signed it into law latter that month.
"Just days after the administration (including the Treasury Department) agree[d] to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, raise[d] eyebrows by accepting a top job at Citigroup as Weill's chief lieutenant. The previous year, Weill had called Secretary Rubin to give him advance notice of the upcoming merger announcement. When Weill told Rubin he had some important news, the secretary reportedly quipped, 'You're buying the government?'" (3)