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This Week in History

June 2010

This article was originally published in the EIR Magazine’s Electronic Intelligence Weekly as part of an ongoing series on American history. We are reprinting these articles now to assist our readers in understanding of the American System of Economy.

June 3-9, 1933 and 1934

Nearing the end of his First One Hundred Days, President Franklin Delano Roosevelt turned his attention again to the question of the financial markets, particularly the securities markets. Roosevelt had called for the implementation of a program of regulation for securities back at the end of March, but the Securities Act of 1933 was passed only at the end of May, and signed on May 27. Its companion piece, which established the Securities and Exchange Commission (SEC), was signed into law about a year later, on June 6, 1934.

Roosevelt had promised during his campaign to reform the marketing of securities, whose frequent flim-flam character was more than reminiscent of the stock and accounting frauds we are seeing exposed today. But there was tremendous hostility coming from the banking community, at the same time that the leaders of that community—specifically, Junius P. Morgan and his family—were being forced to testify about their financial dealings before the Congress.

The Truth-in-Securities Act required full disclosure in the issue of new securities to the public. Heavy penalties would be levied for failure to give full and accurate information to the government about securities. The concept of this bill, as defined by its authors, was that a corporation seeking funds from the public, must be considered "in every true sense" a public body, and its managers and bankers public functionaries. There was considerable argument, however, as to who should have this regulatory function. It was eventually decided to give it to the Federal Trade Commission (FTC).

Because of its compromise character, the Securities Act (also known as the Thompson bill) dealt only with the issuances of new securities, and left unregulated the market in which the vast bulk of securities already issued were bought and sold. The result was predictable: After the President had appointed new Commissioners for the FTC, who were seen by the banking community as "out to get them," the market in new securities virtually dried up (according to FDR adviser Raymond Moley).

The President realized that it would be necessary to expand the regulation to the broader market. His objectives were contained in the Securities Exchange Act of the following year, which set up the Securities and Exchange Commission to regulate and oversee the securities markets. Certain manipulative practices (such as washed sales and matched orders) were prohibited. Insider trading was eliminated.

Franklin D. Roosevelt signs Glass-Steagall Act

In the meantime, however, another major regulatory bill was passed in the beginning of June, which had been in the offing for three years. This was the Glass-Steagall Act of 1933—the act which divorced commercial banking from securities-selling for decades, until the modern-day devotees of John Law, like Senator Phil "Enron" Gramm, repealed it in 1999.

The major elements of the Glass-Steagall bill, according to FDR adviser Moley, were:

1. The Federal Reserve Board got authority to prevent speculation in securities, real estate, and commodities.

2. Payment of interest on demand deposits by member banks was prohibited.

3. Beginning on Jan. 1, 1934, there could be no overlap between officers and directors of member banks, and officers and directors of a security-selling firm or private bank.

4. National banks were put on a parity with state banks in branch banking.

5. Within a year, member banks were required to divorce their security affiliates, and private banks required to stop selling securities.

6. Most importantly, the bill created the Federal Deposit Insurance Corporation, which provided insurance for member banks on deposits up to $2,500. This provision was temporary, until July of 1934, when it was extended until July 1935. Finally, the FDIC system became part of the Banking Act of 1935.

It should be of prime concern to citizens today that the regulations proposed in these bills have been more honored in the breach than in the observance, over recent years. The bankers have taken the view that they need more freedom to speculate, not less—and foolish or corrupt Congressmen have gone along with them. Wise citizens would do well to recall the effective legislation of 1933, and 1934, and to demand that their Congressmen and President do likewise today.

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