Back to the Future
Carter Glass (left) developed an impressive resume during his nearly 50 years in public life – Congressman, Secretary of the Treasury under Woodrow Wilson, architect of the Federal Reserve System and U.S. Senator. If he’s remembered at all more than 60 years after his death it for the financial services regulation he authored – the Glass-Steagall Act – and pushed through the Senate in 1933.
A key provision of Glass-Steagall regulated for the first time the speculative activities of banks and mandated the eventual separation of commercial banking from investment banking. Bankers would have to chose under Glass’ legislation to accept deposits and make loans – commercial banking – or invest and trade in securities and other instruments – investment banking. There is general agreement that the legislation stablized banking in the 1930’s and provided a solid platform on which to build a strong and sustainable system for the rest of the 20th Century.
Wall Street was never satisfied, however, and after years of lobbying to end the separation and “reform” and modernize banking for the 21st Century, Congress repealed provisions of Glass-Steagall in 1999. President Bill Clinton signed the legislation.
The final Senate vote was a lopsided 90-8. Still, there were some voices back in 1999 expressing concern about doing away with the Depression-era legislation. When you go back and read the comments of North Dakota Senator Byron Dorgan, one of the no votes, you almost feel he had a crystal ball allowing a look into the future.
”I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that which is true in the 1930’s is true in 2010.
”I wasn’t around during the 1930’s or the debate over Glass-Steagall,” Dorgan went on, “but I was here in the early 1980’s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”
The late Sen. Paul Wellstone of Minnesota called Glass-Steagall a “stabilizer” during the Great Depression “designed to keep a similar tragedy from recurring.”
The fears were discounted by the proponents who, after all, had the votes. Then-Sen. Bob Kerrey of Nebraska said: ”The concerns that we will have a meltdown like 1929 are dramatically overblown.”
Now, in the wake of the greatest financial crisis since 1929, a host of people think the repeal was a bad idea and even some who originally supported it, like Arizona’s John McCain, are supporting a return of Glass-Steagall. Even an ex-Merrill Lynch executive said he regretted supporting repeal.
The great financial meltdown of 2008 had roots deep in the fertile soil of a wild and unsustainable real estate market, unregulated and unintelligible exotic investment tools and regulators at the federal level who were too often asleep at the switch. Someday we may know the full story that is still unfolding thanks primarily to good reporting and post-disaster analysis.
One could make the argument, and more and more are making it, that the great collapse really began when Washington wiped from the books a Depression-era law written by the long forgotten senator from Virginia – Carter Glass.