The Financial and Banking Crisis

THE FINANCIAL AND BANKING CRISIS

The Banking Crisis

In the banking and fiscal crisis of the Great Depression, the heady days of the 1920s were well-nigh forgotten. More than five thousand banks closed in the three years before President Roosevelt took office in March 1933. By then about nine million people had lost their savings and it was clear that some action was necessary. In the "interregnum," Hoover's final days as a "lame-duck" president between Roosevelt's election in November 1932 and his inauguration the following March, state after state declared banking "holidays," briefly closing local banks in efforts to prevent nervous depositors from creating bank failures by rushing to withdraw their savings from banks believed to be financially unstable. The day after his inauguration, President Roosevelt called Congress into special session and announced a four-day nationwide banking holiday. While the banks were closed, the president introduced the Emergency Banking Act, which Congress passed the same day. During this bank closure many people ran short of cash. In an era before credit cards, people without hard currency were unable to purchase groceries or attend public events. Shows at Radio City Music Hall in New York were all but empty. At Madison Square Garden people "paid" admission to boxing matches with spark plugs, jigsaw puzzles, and other items deposited with the attendants at the door. Yet these short-term and relatively minor hardships were offset by the fact that the federal banking holiday worked. In his first radio "fireside chat," broadcast three days after the banks were closed, President Roosevelt reassured the public that the banks had been made safe. The president's personal charm and his penchant for decisive action were apparent in this first New Deal success. Within the month banking deposits had grown by more than a billion dollars.

The Pecora Investigation

In January 1933 the Senate Banking and Currency Committee appointed Ferdinand Pecora as legal counsel for an investigation of banking and securities trading. In 1933 and 1934 Pecora—an Italian immigrant educated at City College of New York and New York Law School—captured headline after headline in his unflagging efforts to reveal corruption in American financial institutions. His investigations uncovered unethical and criminal activities by some of the most revered financial giants. In addition to securities and tax fraud he found a web of complicated holding companies controlled by single interests and stock-market trusts manipulated by major financial players. Pecora's investigation proceeded in two steps. First, he sent more than a hundred investigators and accountants into various banks and other financial institutions. Second, armed with information from these reconnaissance forays, Pecora questioned witness after wealthy witness before the Senate committee, usually before a crowd of about three hundred witnesses. His handling of the first investigation set the tone for more than a year of probing by the Senate committee. Charles E. Mitchell, president of National City Bank of New York, was the first financial magnate called before the committee. During three days of testimony, Mitchell admitted to feigning the sale of $2.8 million in stocks to his wife so that he could declare an income loss for tax purposes. (He received a salary of $1.2 million). He told how he and other high-ranking bank officials lent themselves more than $2 million interest-free to cover losses that they had incurred during the stock-market crash of 1929. At the time of the hearing virtually none of that loan had been repaid. He also testified that hundreds of lower-level bank employees had suffered severely in the crash but that they had received no help from National City Bank. When Mitchell had finished, Sen. Burton Wheeler of Montana said, "If it's right to send Al Capone to the Federal penitentiary for income tax evasion, some of these crooked bank presidents ought to go too." Much of the public agreed with Wheeler, but Mitchell served no prison time.

Banking Regulation: The FDIC

The first reform to derive from the Pecora investigation was the Glass Steagall Banking Act, sponsored by Sen. Carter Glass of Virginia and Rep. Henry Steagall of Alabama in 1933, amid a rash of bank failures. The law regulated many of the unsound practices that contributed to the Depression, including making it illegal for banks to deal in stocks and bonds. It also created the Federal Deposit Insurance Corporation (FDIC). The FDIC initially guaranteed deposits to a maximum of $5,000. (In the 1990s it guarantees deposits up to $100,000.)

Taming Wall Street: The SEC

The greatest legacy of the Pecora investigation was the creation of the Securities and Exchange Commission (SEC) in 1934. Working with the Federal Reserve Board, the SEC has successfully regulated financial markets and prevented subsequent depressions. When Roosevelt named Joseph P. Kennedy (father of John F. Kennedy, future president of the United States) the first chairman of the SEC, critics said that appointing a man reputed to have made his fortune through some of the practices the SEC was supposed to prevent, was like hiring a fox to guard the henhouse. Yet under Kennedy's leadership the SEC became a model government regulatory agency. In administering the Securities Act of 1933, the SEC protects investors against fraud and malpractice, supervising the New York Stock Exchange and other securities markets where stocks, bonds, and commodities are brokered and requiring that anyone offering securities register with the SEC.

Sources:

Paul K. Conkin, F.D.R. and the Origin of the Welfare State (New York: Crowell, 1967); republished as The New Deal (New York: Crpwell, 1969);

Steve Fraser and Gary Gerstle, eds., The Rise and Fall of the New Deal Order, 1930-1980 (Princeton: Princeton University Press, 1989);

William E, Leuchtenburg, Franklin D. Roosevelt and the New Deal, 1932-1940 (New York: Harper & Row, 1963);

Cabell Phillips, From Crash to the Blitz, 1929-1939 (New York: Macmillan, 1969);

Arthur M. Schlesinger Jr., The Coming of the New Deal, volume 2 of his The Age of Roosevelt (Boston: Houghton Mifflin, 1958);

Schlesinger, The Politics of Upheaval volume 3 of his The Age of Roosevelt (Boston: Houghton Mifflin, 1960).