Financial History Issue 129 (Spring 2019) | Page 33
CARTER GLASS’S LEGACY
The Federal Reserve Act: Glass drafted the Federal Reserve Act of 1913 to create a
unique geographically decentralized reserve banking system. Beginning with the Bank-
ing Act of 1935, some authority has been shifted from regional reserve banks to the
Federal Reserve Board in Washington, DC. However, the system still functions within
the decentralized structure designed by Glass. Today there are proposals to further
increase the authority of the Board (for example, to give it responsibility to name the
heads of the regional banks), but no one is proposing to do away with Glass’s core
concept of geographic decentralization.
The Securities Exchange Act: In 1934, as Glass proposed, the SEC was created as a
stand-alone independent agency, rather than as part of a larger governmental body,
the approach favored by New Dealers. Shortly after the SEC was created, there was a
call for “unifying … governmental agencies which regulate the operations of security
capitalism…into a Federal Finance system which would exercise all the powers now
performed by these separate agencies.” Similar proposals have been put forth over the
ensuing years. None have been enacted. Thus, the SEC remains a stand-alone federal
agency devoted solely to the regulation of securities activities, just as Glass intended.
The Glass-Steagall Act: In 1999, the Glass-Steagall Act was amended to permit com-
mercial banks to affiliate with securities firms, thus undoing one of Glass’s major reforms.
However, the act’s other provisions, including those limiting bank lending for securities
speculation (Glass’s primary objective), providing for federal insurance of bank deposits
and prohibiting direct bank involvement in securities activities, remain in place.
concentrated financial power. Most nota-
bly, in 1999, Congress enacted the Gramm-
Leach-Bliley Act, which repealed the
Glass-Steagall Act’s provisions that pro-
hibited banking organizations from own-
ing securities firms. As a result, today large
universal banking organizations engage
in all aspects of the securities business.
Congress also has enacted a long series
of financial laws imposing new regula-
tory requirements on the financial sector.
As part of this legislation, Congress has
created a large number of new regulatory
agencies. In 1912, the only federal financial
regulator was the Comptroller of the Cur-
rency, who oversaw national banks. Today
there are more than a dozen federal agen-
cies and quasi-agencies that regulate the
financial sector.
This New Nationalism approach reached
a new peak when Congress responded to
the 2008 Financial Crisis by enacting the
Dodd-Frank Wall Street Reform and Con-
sumer Protection Act of 2010. The act runs
848 pages and directs regulators to adopt
243 new rules, to undertake 67 major stud-
ies and to prepare 22 reports. Many rules
that have been adopted run for dozens of
pages. The so-called Volcker Rule dealing
with proprietary trading by banks is 71
pages long and has an 850 page preface.
The act also created the Financial Stability
Oversight Council, a group of 10 financial
regulatory agencies that has the authority
to determine that a particular non-bank
financial institution poses a threat to the
stability of the financial system and there-
fore should be made subject to heightened
prudential requirements.
Despite increased use of the New Nation-
alism regulatory approach exemplified by
the Dodd-Frank Act, Glass’s approach of
fragmenting financial power still remains
the cornerstone of the American financial
system. The financial laws that form the
basis of our financial system—the Federal
Reserve Act, the Securities Exchange Act
and the Glass-Steagall Act—continue to
function largely as Glass intended.
It is not surprising that over the decades
these most important financial laws have
been amended to meet new conditions
and to reflect new theories. What is sur-
prising is how much of the basic regula-
tory superstructure created by Glass is still
in place.
Today there is widespread belief that
the Dodd-Frank Act has not lessened the
chances of a major financial crisis. Neil
Barofsky, the former Special Inspector
General of the Treasury, has warned, “We
had a system that was broken…and the
fundamentals within that system haven’t
changed.” He stated, “‘The question is not
if the United States faces another finan-
cial disaster, it’s when.” David Primo,
professor of Political Science and Busi-
ness Administration at the University of
Rochester, predicted, “Dodd-Frank will
do nothing to prevent another financial
crisis.”
There is also concern that there are
now a handful of giant banks and that if
a crisis threatens one just one of them,
there will be a catastrophe. Thomas Hoe-
nig, former vice chairman of the Federal
Deposit Insurance Corporation, has noted
that the United States now has a financial
industry “that is far more concentrated,
complex, and government dependent that
at any time in recent history. In 1990,
for example, the five largest US financial
holding companies controlled only 20% of
total industry assets. Today that number
is 55% and will likely increase. Ironically,
these events also have left the US econ-
omy increasingly vulnerable to industry
mistakes.”
These concerns have led to proposals
to impose new controls along the lines
of Glass’s approach to financial regula-
tion. A bipartisan group of senators has
introduced legislation to restore the Glass-
Steagall Act’s provisions separating banks
and securities firms. Another proposal
would go a step further and require the
separation of banks from both securities
firms and asset managers. Two Demo-
cratic senators have proposed legislative
limits on the size of banks. Others have
suggested imposing similar size limits on
securities firms. Another idea is to create
a new institution, “The Sentinel,” whose
sole responsibility would be to assess and
report annually on the efficacy of finan-
cial laws and regulations. Thus, Glass’s
legacy can be found not only in the laws
that underlie the American financial sys-
tem, but also in current-day proposals to
improve the functioning of that system.
Matthew P. Fink was employed by the
Investment Company Institute, the
mutual fund association, from 1971–2004,
and he served as the Institute’s president
from 1991–2004. He is the author of The
Rise of Mutual Funds: An Insider’s View
(Oxford University Press, 2008) and The
Unlikely Reformer: Carter Glass and
Financial Regulation (George Mason
University, 2019), from which this article
has been adapted.
www.MoAF.org | Spring 2019 | FINANCIAL HISTORY 31