Aunt Bee still cried over it. It told me something about what it means to be afraid that you can’t provide for those you love. It told me about how worry gnaws at a person’s soul. It told me that economic crashes bite hard and the memories don’t fade.
PROTECTING THE BANKS FROM SPECULATORS
The Great Depression began in 1929. Gripping the country like a vise, it wore on and on, one year following the next. In 1933, just when it felt like the Hard Times would last forever, the newly sworn-in president, Franklin Delano Roosevelt, made an audacious claim: We can do better.
Roosevelt was an unlikely leader for the millions of men and women who were out of work, out of food, and nearly out of hope. He was a pampered only child, born into great wealth and all that came with his secure social position: private schools, servants, balls, and annual trips to Europe. He had been an active young man who learned to shoot, ride, hunt, and sail, and he’d filled his time with tennis, polo, and golf.
But Roosevelt was not interested in building up the family fortune. Early on, he felt the call to public service, running for the New York State legislature before he was thirty. When he was crippled by polio eleven years later, his political career seemed to be over. At the time, no one imagined that a man who was unable to stand on his own could become a leader. But Roosevelt did not give up. He pressed forward, first as governor of New York, then as the calm and unflappable president leading the nation during some of our darkest and most frightening days.
Roosevelt was deeply beloved. My grandmother never followed politics much, but later, when I was a little girl and Roosevelt had been dead for years, his name always prompted the same response. Her voice would drop a notch and she would say, “He made us safe.”
In a time of great danger, Roosevelt embraced experimentation, trying whatever he could to get this country out of the ditch of the Great Depression. He believed in action, believed in the idea that government does not stand passively by, believed that government has an active and critical role to play in making the lives of our citizens better.
The first order of business was to get the financial system back on track. Wild speculation, a stock market crash, and the failure of thousands of banks had nearly destroyed the U.S. economy. FDR didn’t suggest permanently shutting down Wall Street or nationalizing the banks. He proposed something far more audacious: capitalism that works for all Americans.
Roosevelt rejected the idea that economic booms and busts were inevitable—that they were part of the natural order, much like floods and forest fires. Instead, he proposed that we pass laws to make the economy safer. Keep capitalism, but make it work better for all Americans. Although there were some twists and turns, ultimately the plan for the economy, passed in 1933 and 1934, had three main parts:
Make it safe to put money in banks by establishing the Federal Deposit Insurance Corporation, or FDIC.
Separate ordinary checking and savings banking from Wall Street speculation with the measure known as Glass-Steagall.
Put a cop on the beat on Wall Street by creating the SEC.
Three ideas, born of desperation and experimentation in the early 1930s, helped put our financial system right. All three strengthened the hand of government to help make the economy safer for everyone.
With 20/20 hindsight, these ideas look, well, pretty obvious. But their simplicity was part of their power. My aunt Bee was in no position to evaluate the strength—or weaknesses—of a bank, and neither were most of the other customers. They just wanted to know that if they put their hard-earned money in the bank, they could be confident that the bank would still have cash when they wanted to take it out.
By guaranteeing that depositors’ money would be there no matter what, FDIC insurance eliminated the kind of panic that had triggered devastating bank runs. No customer needed to worry that if trouble hit and they didn’t get to the bank right away and grab all their cash, they would be left with nothing. In exchange for this extraordinary benefit of a federal government guarantee, the banks agreed to submit to careful regulation. They agreed to be constantly scrutinized to ensure that they were safe and sound and that they would not need to call on federal insurance to bail them out.
Before giving a bank its blessing, the FDIC checked out the bank’s assets and management talent. Banking quickly shifted from a speculative undertaking to a far more stable business that produced regular profits year in and year out. Banking became boring—and boring worked. The thousands of small banks across the country became institutions where customers could reliably deposit their earnings and carefully tuck away some savings, as well as places where people could borrow the money they needed to buy homes or start their own businesses. Bank regulation steadied the financial system. It was a good deal for the banks, a good deal for the depositors, and a good deal for the U.S. economy.
Glass-Steagall, named after the two members of Congress who sponsored the legislation, Senator Carter Glass and Representative Henry Steagall, was a corollary to FDIC insurance: any financial institution that took taxpayer-guaranteed deposits was barred from engaging in other, higher-risk activities. This meant that Aunt Bee’s little bits of savings couldn’t be scooped up by the bank to be used for gambling on Wall Street or in some crazy deal that some bank manager wanted to run on the side. Her money was safe, in part because taxpayers would never have to bail out the bank because its management had ended up on the losing end of a highly speculative deal. One happy side effect of this new rule was that the money deposited in a local bank was more likely to stay in the community in the form of small business loans and home mortgages. It was a pretty straightforward deal: bankers had to make a choice between low-risk, boring banking and high-risk, Wall Street–style investing. One or the other—but not both.
The third tool for making the financial system safer involved policing the giant corporations so that they couldn’t cheat investors. Once again, the idea was pretty simple: put a cop on Wall Street. A cop would force the companies to keep honest books and would also be on the lookout for scams and frauds. Thus, the Securities and Exchange Commission was born. The SEC helped level the playing field so that investors—not just Wall Street insiders—could figure out the difference between good deals and bad ones.
The new laws addressed a number of other issues, but Roosevelt started where the need was most urgent: get the financial institutions under control. He understood that if depositors couldn’t count on money being available in their banks, the whole economy would be crippled because people and businesses wouldn’t be able to move around the cash needed for buying, selling, and investing. He also knew that if people thought that Wall Street was the financial equivalent of a lawless jungle, then crazy speculators and scam artists would be attracted to the market, while good, steady investors would stay home. That mattered a lot, because if the prudent investors stayed home, growing businesses wouldn’t be able to get the money they needed to expand.
Roosevelt looked pretty cheerful about breaking up the big banks. As he signed Glass-Steagall into law, Senator Glass (hands in pockets on the left) and Congressman Steagall (hands in front of him on the right) looked on.
All three of these moves—providing FDIC insurance, breaking up the big banks, and putting a cop on Wall Street—triggered huge battles with the CEOs and millionaires who liked things just the way they were. Sure, the crashes had been hard
