Depositors of a failed bank hold a protest during the Great Depression. Crowd of depositors gather in the rain outside Bank of United States after its failure. New York World Telegram and the Sun Staff. Courtesy Library of Congress Prints and Photographs Collection.
In the twenty-first century, Americans have generally left questions of financial policy to such experts as government regulators, academics, and bankers. However, into the 1940s, ordinary citizens showed keen interest in banking policy.[1] Their vigilance followed a period of “wildcat” banking in the United States during the nineteenth century, which was notable for the disorder that resulted from lack of oversight.[2] Grassroots advocacy for financial reforms resulted in stabilizing policies that remain central to banking regulation today.
This legacy has been all but forgotten as civic watchfulness over financial institutions dropped precipitously in the post–World War II period. Yet understanding the role that the public has—and can—play in financial regulation is crucial. In the late twentieth century, banking reforms instead tended toward deregulation. This alarming slide in the government’s authority over banks ran parallel with the public’s shift away from engaging with questions of financial importance.
The history of grassroots banking politics has been overlooked and even denied. According to U.S. history textbooks, public interest in the money question was intense yet brief. During the 1896 presidential campaign, the standard story relates, the spellbinding oratory of William Jennings Bryan epitomized a singular moment when the public took note of financial policy, specifically the gold standard, and then forgot about it. But Bryan’s defeat in this election did not mark the end of mass involvement in banking and monetary issues. Rather, it was the beginning of a struggle between workers and farmers on one side and bankers on the other—a struggle that produced the framework of a new financial order.
Leading bankers pushed for the Federal Reserve Act of 1913, which created the nation’s preeminent banking regulator.[3] Yet this law would have looked far different absent public influence. Importantly, while bankers wanted the central bank placed under their control, the negative public reaction to this proposed arrangement ensured government authority over the institution. Furthermore, farmers’ lobbying during the Federal Reserve debate won a commitment from President Woodrow Wilson to establish low-cost agricultural credit. The resulting Federal Farm Loan Act of 1916 presented a decisive break with laissez-faire economics and established the precursor of today’s Farm Credit System.[4]
In the wake of the financial crisis of 2007–08, the Banking Act of 1933, popularly known as “Glass-Steagall,” resurfaced from historical obscurity. The Clinton administration had nullified the law’s wall between commercial and investment banking, which many postmortems deem responsible for the “Great Recession.” The 1933 law enacted two critical reforms: the division of commercial and investment banking, which sought to safeguard savings and checking deposits from risky investments, and the establishment of a federal guarantee that depositors would be reimbursed in the event of a bank closure. Use of the title “Glass-Steagall” omits the influence of public opinion on the legislation while highlighting its southern Democrat congressional co-sponsors Representative Henry B. Steagall and his senior colleague Senator Carter Glass.[5] But the background of the two key features of the law reveals the significance of public influence over the era’s financial reforms.
While a broad swath of the public took an interest in questions of banking policy, farmers and workers throughout the nation were especially engaged with the issue, often channeling their advocacy through membership organizations. Convention resolutions and other policy statements regularly declared the positions of labor unions and farmer groups to politicians and the press. Elected officials also received a steady stream of mail from constituents—particularly working people—writing to urge changes to the banking system.
The depositors of a Philadelphia bank attempt to withdraw their money in 1931. Philadelphia Record Photograph Morgue Reference Library. Courtesy The Historical Society of Pennsylvania.
The Banking Act of 1933’s requirement that commercial banks divorce their investment affiliates emerged in response to the freewheeling financial practices of the Roaring Twenties. In the middle of the 1920s, midwestern inheritors of the populist tradition serving in Congress raised the alarm over the use of banking resources for stock market speculation. They spoke for a large segment of the public who did not trust Wall Street and wanted to see its influence curbed. Senator Glass became interested in the matter due to his desire to protect the Federal Reserve System he had helped establish and regarded as his legacy. He feared that use of the system’s credit to inflate the stock market would ultimately threaten the central bank itself. Glass initially endorsed administrative remedies that he hoped would block the more sweeping reform proposals of his populist colleagues.[6]
Amid the depths of the Great Depression in 1932, the popularity of an outright separation of commercial and investment banking grew. Cracking down on speculation by separating commercial banks from the securities industry offered a promising means to promote future economic stability. Franklin D. Roosevelt campaigned on separation during his successful bid for the presidency.[7] When Glass proposed this idea in his bank reform bill, he envisioned extending it only to investment affiliates of banks that were members of the Federal Reserve System. Glass intended to leave private investment banking partnerships—like J. P. Morgan & Company—free to maintain their existing operations even as many Americans held such Wall Street bankers responsible for the Depression itself.
Shortly before Roosevelt’s inauguration in March 1933, revelations began to emerge from the Senate’s investigation of the 1929 stock market crash that shocked an already suspicious public. One of the nation’s most prominent bankers, Charles E. Mitchell, chairman of National City Bank, had evaded personal income tax payments while leading a multiyear campaign to sell the bank’s stock to retail investors at inflated prices. Among other shady practices, the investigation further revealed that Mitchell had awarded himself millions in bonuses and unpaid loans. After resigning his position, the thoroughly discredited and disgraced Mitchell symbolized the disrepute of bankers. An observer noted that Mitchell looked like “a person going into exile.”[8]
Negative popular opinions about bankers were further inflamed due to the nationwide bank holiday that Roosevelt announced immediately after entering office. The thousands of bank failures that followed the Great Crash of 1929 finally had collapsed the entire system.[9] After years of denials about the severity of the situation from finance, government, and the media, the public found Roosevelt’s decisive move to address the spiraling crisis reassuring.[10] Pausing banking transactions allowed the incoming administration to execute a successful rescue plan for the banks.
Large Wall Street banks submitted to the tide of public opinion and preemptively announced their intentions to divorce their investment affiliates. After surveying the political climate, leading public relations specialist Ivy Lee advised Winthrop W. Aldrich, chairman of Chase National Bank, to follow this course of action. Elected officials in Washington also recognized that voters wanted reforms to prevent any recurrence of the recent banking disaster. The popular outcry foiled Glass’s attempt to exempt private banks from regulatory reform, and the separation of investment banking from commercial banking became a cornerstone of the Banking Act of 1933.[11]
Likely even more pivotal to the decades of financial stability that followed was the government’s guarantee of bank deposits. Glass had opposed this idea bitterly for decades, successfully removing such a program from the Federal Reserve Act twenty years earlier. His opinion conformed with the prevailing belief among bankers and academics that the concept of guaranteed deposits was fatally flawed. If bankers were insured from loss, this argument contended, then what incentive would they have to eschew reckless business practices? If depositors had no fear of losing their savings, then what advantage would honest bankers have over dishonest ones? Importantly, the federal government’s assumption of this financial risk would require it to exercise greater oversight of banking operations. This prospect was one that bankers, who prized autonomy, wanted to avoid.
On July 3, 1934, Mrs. Lydia Lobsiger received the first check that the FDIC issued to the depositor of a failed bank. Photo through FDIC.
Though bankers opposed the idea of guaranteeing deposits, it had long been an ambition of the Populist movement, which first championed the idea at the close of the nineteenth century. Following the financial crisis of 1907, William Jennings Bryan promoted this policy during his third—and final—campaign for the presidency in 1908. Broad public support for the concept produced a number of state-level bank deposit insurance programs that commenced operation prior to World War I. Conventional wisdom, however, still stridently opposed any government guarantee of bank deposits. It took the suspension of nine thousand banks in the early 1930s for guaranteed deposits to make real progress nationally. By the time Congress considered the idea seriously, much of the public was advocating for government banks and the nationalization of existing banks as the best course for banking reform. In this climate, a federal guarantee of bank deposits became a central article of the Banking Act of 1933. This new regime was a victory for the millions of workers and farmers who supported the idea despite opposition from the experts. Fast-spreading outbreaks of banking panics ceased: only nine insured banks suspended operations in 1934.[12]
The foundations of American banking regulation were laid during the early twentieth century, when the public significantly influenced the course of financial reform. With popular involvement in financial policy comparatively lacking in recent years—removing a historically vital counterbalance to the political influence of finance—the absence of white-collar crime prosecutions in the wake of 2007 becomes more understandable, as does the relative modesty of the resulting regulatory changes, such as the Dodd-Frank Wall Street Reform Act of 2010. When popular engagement with banking policy waxed so did financial regulation. When it waned, such regulation waned as well.
Christopher W. Shaw is the author of Money, Power, and the People: The American Struggle to Make Banking Democratic (University of Chicago Press, 2019) and First Class: The U.S. Postal Service, Democracy, and the Corporate Threat (City Lights Books, 2021).
[1] Christopher W. Shaw, Money, Power, and the People: The American Struggle to Make Banking Democratic (2019).
[2] Jeffrey Sklansky, Sovereign of the Market: The Money Question in Early America (2017), 134–36.
[3] James Livingston, Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890–1913 (1986).
[4] Christopher W. Shaw, “‘Tired of Being Exploited’: The Grassroots Origin of the Federal Farm Loan Act of 1916,” Agricultural History, 92 (Fall 2018), 512–40.
[5] In the early 1930s, Glass was the primary congressional sponsor of comprehensive banking legislation.
[6] Christopher W. Shaw, “The Politics of Elite Anxiety: Carter Glass and American Financial Policy,” The Historian, 82 (Fall 2020), 308–27.
[7] Eric Rauchway, “The New Deal Was on the Ballot in 1932,” Modern American History, 2 (July 2019), 201–13.
[8] Susan Estabrook Kennedy, The Banking Crisis of 1933 (1973), 127–28.
[9] Elmus R. Wicker, The Banking Panics of the Great Depression (1996).
[10] Christopher W. Shaw, “‘The Story Was Not Printed’: The Press Covers the 1930s Banking Crisis,” Journalism History, 45 (March 2019), 25–44.
[11] Ron Chernow, The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (1991), 375.
[12] Federal Deposit Insurance Corporation, The First Fifty Years: A History of the FDIC, 1933–1983 (1984), 49.
