What Carter Glass Thought
REGION: How do you feel about product expansion, particularly
securities powers? The Federal Reserve has been dismantling the
Glass-Steagall Act's walls between commercial and investment banks.
As one of the architects of those walls, do you regret the changes?
GLASS: If you put yourself in my place and time, you would
have done as I did. Our subcommittee did not act out of any prejudice
or in a whimsical or inadequate way. We consulted practical bankers
and experts extensively. We did everything but sleep with experts,
and we learned that national banks had created affiliates as a way
of doing precisely those things that the National Bank Act prohibited
them from doing.
... Our subcommittee heard testimony about many virtuous affiliates,
but we also heard of abuses, especially in securities dealings,
and the weight of informed opinion was that the affiliate system
was riddled with vicious practices.
... We hoped those measures would answer the public's loss of
confidence, protect depositors and investors, and help prevent Federal
Reserve facilities from being used in support of stock and commodity
gambling, which had brought on the Depression and about which I
had been warning for 14 years or more, though I was never simple
enough to think I could end gambling.
Excerpted from The Region's December 1997
"interview" with Carter
Glass, an issue that was devoted to the Virginia senator who was
so instrumental to banking legislation during the first third of
this century. Glass' responses were prepared by James McAfee, Richmond
Fed general counsel and sometime Glass aficionado. Readers curious
about the history of 20th century banking legislation in general,
and Carter Glass in particular, should visit The
Region, December 1997.
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.
Sen. Carter Glass, 1929
And so it was, under the now infamous Glass-Steagall Act of 1933,
which, among other things, prohibited affiliation between commercial
banks and the securities industry. Since Glass' time, though, regulators
and legislators have apparently acquired the wit and wisdom he assumed
was absent over 70 years ago, and have overturned his work. The
future will determine the astuteness of the Financial Services Modernization
Act, and articles in this magazine address some possible outcomes,
but what of the past? More to the point: Who was Carter Glass and
how did his name come to be attached to Depression-era banking legislation?
The following is excerpted from the December 1997 Region's
biography of Glass.
In 1902, at the age of 44, Glass was elected to the U.S. House
of Representatives. To those who did not know him, he appeared sickly
and frail. The 5-foot-4-inch Glass had dropped to 100 pounds and
walked around on tiptoes to avoid jarring his sensitive stomach.
This malady was not uncommon for Glass. Four years earlier, doctors
warned him that his irregular eating habits and intense working
habits had almost ruined his digestion, as well as caused a number
of other bothersome ills. "Rest," his doctor ordered; but it was
a futile request.
His colleagues in the House soon learned that this little man
was not to be taken lightly. Within two years, he was appointed
to the Committee on Banking and Currency and threw himself into
the study of finance.
Shaping a central bank
The Banking Panic of 1907 put the Banking and Currency committee
in the spotlight, and Glass found himself chairman when his friend
Woodrow Wilson was elected president. Initial efforts at resolving
the problems raised by the 1907 panic, though, were met with frustration.
Essentially, legislators were concerned about two issues: a banking
system that was prone to panics (1907's event was not rare), and
a currency that was not responsive to changes in demand. On the
makeup of a reserve system to address those problems, there was
disagreement over the control of such an institution: Should private
banks have control over the eventual Federal Reserve System, or
should their input be confined to decentralized banks within the
Carter Glasswho favored decentralized powerwas particularly
adamant on this question, and his role in developing the legislation
is an example of how his Jeffersonian ideas of democracy, along
with his tenacious spirit, helped shape one of the country's most
important pieces of financial legislation. After working tirelessly
on the subject for five years, the election of 1912 brought an opening:
not only did it usher Wilson into the White House, but it also gave
Glass' party control of both the House and Senate.
Glass wasted no time. He began drafting legislation with Wilson
before the newly elected president even took office, and by December
of the following year, the Federal Reserve Act was passed and signed
into law. Glass was thrilled: "The thing which had been vainly discussed
and intermittently attempted for 20 years had finally been accomplished!"
Essentially, in constructing the Federal Reserve Act with Wilson, Glass
had repackaged the previous Republican administration's proposal, the
economist Milton Friedman would later write, making it even more conservative.
Instead of a centralized bank under private banker control, Glass, of
course, wanted decentralized banks under private control. (The claim that
the Federal Reserve Act was a modified form of the Aldrich plan was also
made in Glass' day, and it was a notion he detested. In a 1922 speech
before the Senate, Glass called the idea "a total misunderstanding," and
said "no greater misconception was ever projected in this Senate Chamber
...") It was Wilson who suggested an altruistic board of governors appointed
by the executive branch. Even though he may not have entirely liked that
idea, Glass and his sharp tongue helped guarantee the bill's passage.
His greatest domestic concern
During the coming European war, Glass supported Wilson and the struggle
for a lasting peace. At the end of 1919, he was named Wilson's Secretary
of the Treasury, the first cabinet officer from Virginia since the
elder Glass' commander, John Floyd, was Secretary of War in Buchanan's
administration. As such, Glass favored rebuilding Europe, including
the defeated Germany, and pushed for American financial assistance.
Although as head of the Treasury, Glass was in charge of enforcing
Prohibition laws, his greatest domestic concern had to do with the
vast amount of borrowing for stock market speculation. Glass wanted
the banks voluntarily to restrict their lending for stock purchases
and warned about the consequences if nothing was done. On the merits
of this speculation, he was more than a little doubtful: "To say
this is wholesome is to betray a case of intellectual astigmatism
that requires the curative skill of a physician."
Exactly one year after he took over at the Treasury, the popular
Glass was appointed to the Senate in 1920 to succeed Thomas S. Martin
of Virginia, who died in late 1919. Glass would remain a Virginia
senator until his death.
When Glass' predictions about the economy came true in 1929, he
first went to work defending his original Federal Reserve legislation,
then proceeded in 1931 to write a banking reform bill to provide
the Federal Reserve Board with greater control over speculative
credit. Thus began an important period wherein Glass and the rest
of the nation, reeling from a series of financial panics and rampant
bank closures, reconsidered what type of financial system was best
for the country.
As the timeline shows,
that debate continued throughout the century and culminatedafter
a series of regulatory and legislative changesin the Financial Services
Modernization Act of 1999.