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The Men Who Made the American Financial System

In New York City, things were so desperate that Parks Commissioner Robert Moses ordered the sheep removed from the Central Park Zoo and relocated to Prospect Park in Brooklyn, where they could be securely protected from hungry residents of a nearby “Hooverville.”

The following is an excerpt from Wall Street Wars by Richard E. Farley

In March 1933, the United States economy was in a shambles. The nationwide unemployment rate stood at 25 percent. In certain areas of the country, the rate was twice that—this in an era when single income households were the norm. Gross domestic product had fallen by more than 45 percent since October 1929, when the stock market crash tripped the wire that sent the economy into free fall. The Dow Jones Industrial Average had fallen 85 percent from its 1929 high and stood at 59 as 1933 began. The nation’s financial system, the lifeblood of the economy, had ceased functioning, and banks were failing at an astounding rate.

In New York City, things were so desperate that Parks Commissioner Robert Moses ordered the sheep removed from the Central Park Zoo and relocated to Prospect Park in Brooklyn, where they could be securely protected from hungry residents of a nearby “Hooverville” who had taken to stealing the sheep and cooking them on open trash can fires. Winter 1933 would prove to be the cruelest season of an economic depression that Lionel Robbins from the London School of Economics named “Great,” and curiously the label took.

Four months earlier, the incumbent president, Herbert Hoover, had been voted out of office by a lopsided margin. Contrary to later conventional belief, the election of Franklin Roosevelt in November 1932 did not give birth to a widespread feeling of optimism about the country’s economic future. In fact, it made things worse. His election was more a personal repudiation of Hoover than it was an endorsement of Roosevelt’s economic plan, which was, to put it kindly, not fully formed. The change Roosevelt promised was to use the full power of federal government to combat the Great Depression and reform the financial system. Few—not even the president-elect himself—could fully foresee and comprehend what course the application of that awesome power would take. Fewer still believed it would effect a quick end to the suffering. Roosevelt’s campaign song, “Happy Days Are Here Again,” from the MGM film Chasing Rainbows, famously captured the candidate’s unbridled optimism and self-confidence. Few of his fellow citizens found his optimism contagious.

That winter, Bing Crosby had a number-one hit song with “Brother, Can You Spare a Dime?” capturing the mood of disillusionment and despair that enveloped the nation between Roosevelt’s election and inauguration:

They used to tell me I was building a dream
And so I followed the mob
When there was earth to plow or guns to bear,
I was always there, right on the job
They used to tell me I was building a dream
With peace and glory ahead—
Why should I be standing in line, just waiting for bread?
Once I built a railroad, I made it run
Made it race against time
Once I built a railroad, now it’s done
Brother, can you spare a dime?

Out of the anger and despair came the popular support for Roosevelt’s efforts to reform the rules governing financial markets. Beneath his cheery exterior, Roosevelt possessed a steel will and cunning determination not to waste the nation’s anger but to channel it for his political advantage. And Roosevelt possessed that most important and elusive quality in a leader: luck. Time and again, a serendipity of events would nudge outcomes in Roosevelt’s favor—and he seemed so often to have the right men in the right positions at the right times. Roosevelt was elected on a promise to use the power of the federal government to end the Great Depression. He made good on that promise, though there would be many ideological course changes and a frustrating trial-and-error approach to policy. And there would also be embarrassing missteps. What follows is the story of the battles of the first two and a half years of his administration that remade the country’s decimated and corrupt financial system—and how, from this crisis, the modern financial system was born.

During that brief period, the Roosevelt administration enacted the Emergency Banking Act of 1933, instituting a nationwide shutdown and massive bailout of the nation’s banks; the Banking Act of 1933, commonly referred to as Glass-Steagall, establishing national deposit insurance and separating commercial banking from investment banking; the Securities Act of 1933, mandating full and fair disclosure in the issuance of securities; and the Securities Exchange Act of 1934, regulating the trading of securities and the exchanges they are traded on and creating a national securities regulator, the Securities and Exchange Commission, which would become the most effective and long lasting of any of the New Deal agencies.

This is the story of that remarkable period and the remarkable men who made the modern American financial system.

It is a story of conflicts—Republicans battling Democrats; rural America competing against urban America; hard-money men versus inflationists; ideological reformers fighting free market bankers, brokers, and traders; old-line investment banks competing against upstart commercial banks; youthful New Deal reformers versus old Wilsonian progressives; and brokers competing against traders. And just underneath the surface of these conflicts were the class, ethnic, and religious rivalries that fueled them. Wall Street and Washington were forever changed by these battles.

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