After his inauguration, FDR immediately took action to try and halt the Great Depression. In 1933 he urged Congress to pass the Emergency Banking Act, which would force American banks to close down and initiated his well-known “bank holiday” plan. Historical perspectives on this administrative move are, along with most of FDR’s actions, are divided. Some historians argue that the Bank Holiday allowed FDR to save America’s entire credit system, while others claim the Emergency Banking Act (and the rest of FDR’s One Hundred Days measures) worsened the Great Depression. Here, I will explore the anti-FDR perspective through the work of Jim Powell in his book FDR’s Folly.
FDR’s Banking Act of 1933, also known as the Glass-Steagall Act, continued his efforts in dividing the power of big banks. It also set up the Federal Deposit Insurance Corporation, which guaranteed approximately $2,500 reserves for all Federal Reserve institutions. Still, the act didn’t cause banks to stop failing; instead, it merely shifted the economic burden from depositors, who were not as concerned with losing their money, to taxpayers (everyday citizens). In addition and more importantly, the Banking Act prohibited commercial banks (deposit-takers) from engaging in investment banking (known as securities underwriting). Because only the biggest of banks could afford to engage in both activities, only the biggest of banks were affected by this legislation specifically designed to upend them. JP Morgan & Company, for example, split, developing the company Morgan Stanley and another company with the name of its predecessor. Neither of the two retained the economic power of their forefather.
This separation of commercial and investment banking harkened back to progressive ideals laid out in that very movement during the early 20th century. Coincidentally, FDR’s father, Teddy Roosevelt, was president during this time and occasionally provided support for the progressive and populist movements (though he often played both sides of the coin, as any politician would). Anything big, after all, was feared and suspected of monopolization and exploitation of common Americans. There is a link here back to the Gilded Age cultural clashes I explored: those individuals who had developed powerful enterprises, thus embodying American ideals of individual greatness, were shunned by the masses who were unable to fully grasp those luxuries for themselves.
But this disgust for big banks and subsequent passion for small banks did not succeed in stopping almost 90% of small banks from failing. Why, then, did FDR seek to break up the big banks when it was the smaller institutions that required immediate attention? One might argue, as Powell does, that it would have been in FDR’s better interests to channel his administrative energies to this very end and not towards deconstructing financial behemoths. Instead of allowing stronger banks to establish branches throughout the woeful nation, he sought to destroy them. Though his motives are perhaps understandable, as big banks were easily scapegoated during times of economic trouble, this does not change the realities of history.
Another significant belief at the time was that bank failures were inevitably caused by mixing between commercialization and securities underwriting: essentially, banks had to separate their functions, much like how a democratic government ought to refrain from involving itself in overly religious affairs. Although this argument was used during the Depression as justification for breaking up the banks, many modern quantitative and qualitative studies have failed to detect a connection between bank failures and overlap of operations. In fact, most of the big banks that did overlap survived the Depression (or their components survived after administrative separation) whereas smaller banks collapsed.
I would like to reaffirm that the points made in this post are not absolute. One of the most intriguing things I find about the Great Depression is the complexity of historical thought behind it. The intertwined economic, social, and political difficulties of the time period make it difficult for historians to interpret, leading to wildly different arguments for people such as myself to sift through. In any case, to hold FDR’s One Hundred Days as a model of government action may not be incredibly accurate when considering Powell’s argument regarding big banks, and how FDR’s attempts to crush them might actually have further cost America.
An American Inquiry 
