Roosevelt historian and Braintruster David Woolner shines a light on today’s issues with lessons from the past.
The medicine that FDR prescribed to restore the faith of Americans in their government and protect the population from the excesses of capitalism was financial regulation, regulation that was designed to prevent a recurrence of the disease so that in the future our economy could grow and prosper. An excellent example of this type of reform can be found in the Glass-Steagall Act of 1933, which established the Federal Deposit Insurance Corporation and stipulated, among other things, that commercial and investment banks must remain separate.
What is fascinating about Glass-Steagall is that it is as much about human nature as it is about banking, for it addresses the two key emotions that stood at the heart if the 1930s financial crisis: fear and greed. By providing individual account holders with deposit insurance, the fear that led to the bank runs that devastated our nation’s banking system came to halt virtually overnight. And by separating commercial and investment banking, Glass-Steagall insulated home owners and small business owners from the vagaries of the investment markets, allowing those who wished to speculate to do so, but not, as FDR put it, “with other people’s money.”
The Glass-Steagall prohibition between investment and commercial banking served the nation very well and remained in force until 1999. Some economists have argued that had this provision remained in place, the current financial crisis would never have occurred as the major investment banks would not have been able to get their mitts on all of those sub-prime mortgages. But even if one does not adhere to this position it seems reasonable to argue that we need to return to the values and vision that stood behind this provision and so many other pieces of legislation that were passed during the New Deal: A government that is responsive to the needs of the average American; financial reform that does not merely address the immediate economic crisis but seeks to prevent a recurrence of a similar crisis in the future; a shared desire to live in a society where the benefits of the free market accrue not just to the few, but to all.
David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.