The Great Depression and Financial Institutions:The Collapse and Rebuilding of America’s Financial Sector

On “Black Monday”, October 28, 1929, the Dow Jones Industrial Average saw a drop of nearly 13 percent. What followed was the rapid and devastating collapse of the stock market on Wall Street. This would start perhaps one of the most challenging economic eras in modern history, referred to as the “Great Depression”. This decades-long period of American history still reaches into the back of the nation's consciousness. As much of the “Greatest Generation” has unfortunately begun to pass away, their experiences during the depression have left a lasting mark on subsequent generations. Historians and economists alike have looked closely at the Great Depression and tried to target and pinpoint its cause or causes, to be able to prevent such a crisis from emerging again.

There are numerous different theories and views on what precipitated the crash that began in 1929. Some authors have argued that it was a lack of consumer demand; others that overconsumption paired with high debt and low interest payments caused the collapse. Others have pushed that international trade and financial networks caused the global crisis. One of the key factors that contributed to this economic crisis was the lack of strong institutions and oversight in the decades before the depression. The weakness of the American banking system, lack of cohesive financial regulation, and ineffective government institutions all contributed to the stock market crash and led to reforms during the New Deal to rebuild public confidence and lay down the foundation for long-term economic and financial success. 

Research Methodology 

     Economists have tried to articulate different theories and analsysis of what events led to the eventual decade long economic depression. Milton Friedman and Anna Schwartz in their work A Monetary History of the United States,1867–1960, argue for the belief that lapses in the Federal Reserve and other banking safeguards ultimate led to the sectors downfall. Without this so called safety net being activitated, the chain reaction of bank failures precipatated the economic downturn. interest rates would sore, deflation of currency and public cofnidence would ensue. Other scholars such as Ben Bernanke and David Kennedy have discussed in their respective works the impact of these new government regulations. That without the implementation of the FDIC and the SEC primarily, the coutnry's financial sector would lack regulation and oversight to prevent dangerous and high risk activites.

With Franklin Delano Roosevelt's election in 1932, he brought with him the implementation of his New Deal programs. With his progressive and active administration, the Roosevelt agenda created scores of new federal programs and legislation looking to curb deficiencies across the country while also creating better government regulation and oversight. Prior to 1933, the U.S. banking system was in disarray. Approximately 9,000 banks failed across the nation between 1930 and 1933, millions of Americans lost money in savings and checking accounts, and an overall lack of public confidence in the U.S. banking system occurred. As small and large banks were greatly affected, there was also little to no federal oversight over securities markets, investment banks, and stock brokers. There were widespread occurrences of speculation and purchasing of stocks on margin. This led to overinvesting with borrowed money, increasing the amount of high-risk investments and purchases made before the depression. 

The lack of regulation in the country’s financial sector became a primary target of the new administration’s agenda. This began with the passing of the Banking Act of 1933, also referred to as the Glass-Steagall Act. The act looked to regulate banking policies and reduce speculative banking activity and trades, as well as separate commercial and investment banking operations. This was followed by actions such as the Banking Holiday, which temporarily closed banks for review of their finances.

Two of the more impactful financial regulations occurred with the establishment of the Federal Deposit Insurance Corporation (FDIC) in 1933 and the Securities and Exchange Commission in 1934. The FDIC would insure customers' deposits if the bank failed (initial amount was $2,500). Banks that met requirements outlined in new banking regulations would be protected by the FDIC. Institutions that made risky trades and purchases could lose this insurance from the government. This act helped provide public faith and stability that their investments would be protected. Average Americans had looked to pull their money out when the depression hit, causing the brutal run on banks, which saw many of them collapse. The SEC helped provide additional regulation of stock trading and investment markets. One of the SEC's most important responsibilities was enforcing the Securities Act of 1933 and the Securities Exchange Act of 1934, which required publicly traded companies to disclose accurate financial information. This prevented fraud and stock manipulation in the markets. Insider trading, price manipulation, Ponzi schemes, etc would now be subject to investigation by the SEC. The FDIC and the SEC’s creation were seen as one of the most successful and impactful financial reforms in U.S. history. The provision of oversight and stability to the banking system and the regulation of the stock and bond market helped foster public faith and confidence in these institutions again. 

On March 12, 1933, President Roosevelt gave one of his several fireside chats. The focus of this chat was on the country’s banking system. After discussing the reasons for the bank closures and failures, he pivoted and discussed the new banking regulation. He stated in the closing passages of his chat,

“One more point before I close. There will be, of course, some banks unable to reopen without being reorganized. The new law allows the Government to assist in making these reorganizations quickly and effectively and even allows the Government to subscribe to at least a part of new capital which may be required.

I hope you can see from this elemental recital of what your Government is doing that there is nothing complex, or radical, in the process.

We had a bad banking situation. Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people's funds. They had used the money entrusted to them in speculations and unwise loans. This was, of course, not true in the vast majority of our banks, but it was true in enough of them to shock the people for a time into a sense of insecurity and to put them into a frame of mind where they did not differentiate, but seemed to assume that the acts of a comparative few had tainted them all. It was the Government's job to straighten out this situation and do it as quickly as possible. And the job is being performed.

I do not promise you that every bank will be reopened or that individual losses will not be suffered, but there will be no losses that possibly could be avoided; and there would have been more and greater losses had we continued to drift. I can even promise you salvation for some at least of the sorely pressed banks. We shall be engaged not merely in reopening sound banks but in the creation of sound banks through reorganization.

It has been wonderful to me to catch the note of confidence from all over the country. I can never be sufficiently grateful to the people for the loyal support they have given me in their acceptance of the judgment that has dictated our course, even though all our processes may not have seemed clear to them.

After all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people. Confidence and courage are the essentials of success in carrying out our plan. You people must have faith; you must not be stampeded by rumors or guesses. Let us unite in banishing fear. We have provided the machinery to restore our financial system; it is up to you to support and make it work.

It is your problem no less than it is mine. Together we cannot fail.”

Conclusion

FDR signing into affect the Glass-Steagall Act of 1933 (Banking Act)

Much of the writings and historiography of the depression era will focus on the difficulties and hardships that defined the period. The New Deal programs looked to attack the issues of the error with regulation or government action while also trying to bolster and develop public morale and support. Among the many different areas of the country that were suffering from the economic downturn of the era, reforming the banking and financial markets of the country was paramount to provide stability. Having to rebuild public faith in these institutions would have significant changes for the long-term growth of the country. The establishment of these pillars of American finance would allow for the country’s exponential growth in the second half of the 20th century. 

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