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 Most nota- bly, in 1999, Congress enacted the Gramm- Leach-Bliley Act, which repealed the Glass-Steagall Act’s provisions that pro- hibited banking organizations from own- ing securities firms.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