Friday, January 22, 2010

LIFE Examines Banking in 1946

The most amazing thing about a casual look through the back pages of LIFE magazine is how relevant the articles can sometimes be. For example, take the January 7 1946 issue about Wall street "the Citadel to US Capitalism." One of the side articles details the more conservative approach to banking following the world war and its origins. The story provides quite an education in the varied aspects of banking.

On Wall Street there are two principal kinds of bankers: Commercial bankers and investment bankers. The commercial banks, such as Chase and National City, make loans, accept deposits, finance foreign credits, buy government and state bonds. They also usually have a trust department which executes wills and acts as trustee. The investment bankers, such as Morgan Stanley and Kuhn, Loeb underwrite and distribute new security issues for corporations. They also have a brokerage department which buys and sells securities.

The Banking Act of 1933 made it illegal for one firm to act both as a commercial act and investment banking house. Until then, the two were often combined. In his triumphant days, J.P. Morgan, a banker, merged railroads and steel companies into nationwide corporations. In the 1920s, Wall Street made idols of men like Charlie Mitchell, chairman of National City Bank, who was also the greatest securities salesman in history and an adroit market manipulator. The 1929 crash exposed the dangers of these dual functions, With one hand, banks were taking deposits. With the other, they were financing new securities. When the business they were promoting failed, the depositors, security holder and the bank itself were in trouble.

Today the very nature of Wall street bankers has changed. In place of the speculators and market manipulator there are sound, deliberate investors who by choice as well as by law are more interested in government bonds than in a flier in market.

The Banking Act of 1933, also known as the Glass-Steagall Act, introduced banking reform and safeguards on deposits following the crash of 1929. Many of the provisions were also designed to reduce the amount of wild market speculation which was thought to be contributing factor to the collapse.

The Glass-Steagall Act passed after an ambitious former New York prosecutor, collected enough popular support for stronger regulation by bringing bank officials before the Senate Banking and Currency Committee to answer for the role in the crash.

In addition to the Banking Act of 1933, the Bank Holding Company Act was passed in 1956 and extended the restrictions on banks. According to this, bank holding companies owning two or more banks could no longer engage in non-banking activity and could not buy banks in another state.

Altogether, an impressive bit of banking regulation. The Banking Act of 1933 reduced the amount of free-wheeling risk-taking- with depositor's assets, I mean. And the Bank Holding Company Act clearly defined the role of banks and kept bank holding companies from becoming "too big to fail."

And you know something? It actually worked. Nations, which adopted such regulations and stuck to them when the rest of the world began to de-regulate, such as China and Turkey, have emerged from the latest crash, jolted but not devastated.

Another Fine Mess

So what happened? How did we come back in a full circle? Through a careful whittling away of the legislation through intensive and sustained lobbying by special interest groups, starting as far back as 1980 with the Depository Institutions Deregulation and Monetary Control Act.

This allowed banks to merge. Subsequent decisions by the Federal Reserve Board in 1986 and 1987, after the Board heard proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions, further undermined the regulatory effects of the the Banking Act of 1933. For a full account of the various steps, see HERE.

The record shows a Federal Reserve Board, at the very least, flawed by its willingness to accept the demands of institutions to circumvent the laws were designed to regulate and control precisely those sectors.

Finally- perhaps inevitably- the Banking Act of 1933 was repealed in 1999 by the Gramm-Leach-Bliley Act. The legislation was signed into law by President Bill Clinton on November 12, 1999. From there, it was a slow predictable march to the sorry mess of 2009.

Greed is Good?

What on earth could have persuaded, sensible people with all the wisdom a chastising experience as the Great Depression, to lift restrictions and to deregulate and repeal? The only answer seems to be the temptation of tremendous profits that de-regulation allowed financial institutions. In short, greed.

Last year, much to their credit, Republican Senator McCain of Arizona and Democratic Senator Cantwell of Washington made a proposal for a return to the Glass-Steagall Act, specifically the distinction between commercial and investment banking. Ironically this regulation rollback to the 1930s is being called " Obama's banking reform", making it sound untested and potentially risky when a stronger case of risk by deregulation of the banking industry in the 1980s could- and should- have been made at that time.

Banks which, despite the latest crisis continue to rake in vast profits, have, not surprisingly, been strongly opposed to a return to the restrains of the Banking Act of 1933.

According to the latest news, President Obama is set to propose wide-ranging moves on bank regulation first proposed by his economic advisor Paul Volcker who, has been an outspoken advocate for the reimplementation of many aspects of Glass-Steagall.

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1 comment:

  1. I read this blog post, still cross-eyed and my brain is popping a few circuits but I think I got it.
    Take my money out and go bury it in the yard!


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