1929: Inside the Greatest Crash in Wall Street History--and How It Shattered a Nation - 43

In the final days of May, while the country followed Charles Mitchell’s trial with rapt attention, Carter Glass received a startling directive from the White House. Roosevelt, he was told, was so enamored with Winthrop Aldrich’s plan to force the separation of banks and investment banks without any exceptions that the president asked the banker to write part of Glass’s bill. Glass was asked to insert Aldrich’s language directly into the bill that carried his name.

Glass was beside himself. The major reform that he had worked on for years, he believed, was now being co-opted by the leader of the nation’s biggest bank in an effort to stick it to J.P. Morgan.

“ I was rather surprised when Aldrich, who recently left the law to look after the banking interests of his brother-in-law, John D. Rockefeller Jr., after doing all he could to kill the Glass Bill, suddenly reversed himself, and concluded he must give up his affiliate,” Glass later wrote to his friend Leffingwell, who of course was also a partner at J.P. Morgan.

Glass told Leffingwell that section 32 of the bill was “ entirely drafted by Mr. Aldrich” and “incorporated upon urgent Administration request.”

Glass, beyond frustrated, explained how he had tried to block its inclusion but failed to persuade Roosevelt.

“I talked to the White House with a view” to explain the dangers of such an approach. “Much to my astonishment,” he said, the president “indicated his pronounced opinion that the provisions in question should be incorporated in the bill. I think the validity of these provisions is subject to grave question.”

The private machinations between Roosevelt and Aldrich about a more expansive separation of investment and commercial banking in the Glass bill soon became an open secret.

“ This is not the first indication that Mr. Rockefeller and Mr. Roosevelt enjoy sticking pins in Mr. Morgan,” wrote the syndicated columnist Paul Mallon. The concept that “Senator Glass must have thought up the brilliant idea one rainy afternoon when he had nothing else to do” is “not the case,” he wrote. “It came from no less a worthy opponent of Morgan than John D. Rockefeller Jr. himself.” The columnist scoffed at the idea that an industry-wide forced divorce of all investment banks from commercial banks was original to Aldrich. “If there is anyone who thinks Mr. Aldrich would act in a matter…without consulting Mr. Rockefeller, he does not know Mr. Aldrich or Mr. Rockefeller. They are two persons with a single thought—Mr. Rockefellers.”

Glass’s annoyance with Aldrich notwithstanding, he nonetheless felt that he was making progress. As the bill continued to gain support, Wall Street was in a full-on meltdown about the prospect of it becoming law.

Francis Sisson, president of the American Bankers Association, began a public campaign against the bill as it made its way through the Senate.

“So far as our commercial banking system is concerned, there is no phase of the investment banking business, in my opinion, that cannot be satisfactorily corrected by regulation and publicity, without recourse to a program of destruction and confusion,” he said. “That reforms are needed is clear, but I fail to see how we shall strengthen our commercial banks by putting beyond their reach and influence a field of activity that has been an integral part of banking from its very beginning and that dovetails intimately with commercial banking activities in many ways.”

But the country had tuned out bank executives and their lobbyists. Instead, America was ready to support banking reform.

Even the wife of the Fed chairman, Agnes Meyer, now believed the bankers with whom her husband interacted were practically criminals: “Certainly the New York bankers have proved they are no heroes. The wealthy classes as I have learned to know them through the depression are not much to be admired. They are overcome by fear and selfishness,” she wrote in her diary. And that wasn’t all: “If the general public realized the ignorance, smallness, futility and greed of the average New York banker, I think they would certainly hang a few of them, beginning I hope with Charlie Mitchell.”

Ever since declining the Treasury post, Glass had been feeling increasingly defensive in his dealings with Roosevelt. On the campaign trail, the president had made it abundantly clear that he stood with “sound money” stalwarts like Glass, men who believed in the gold standard as a safeguard against the evils of inflation. But his presidency was barely a few days old before Roosevelt began chipping away at it. First came a temporary gold embargo. Then, in April, he stunned a gathering of his economic advisors by almost giddily declaring his intention to support an amendment to an agricultural bill that gave him power to expand the money supply and reinflate crop prices. The United States was off the gold standard.

As three of his advisors continued to discuss the move late that night, one declared, “Well, this is the end of Western civilization.”

That was how Glass was starting to feel, too. A month later, when the administration publicly clarified the details of that amendment, which removed the government’s obligation to repay bondholders in gold, Glass went ballistic. “The proposal to repudiate all outstanding gold contracts is unconstitutional and the courts will so hold if there is any integrity left in the courts with regard to the sanctity of contracts,” he said. “It is utterly worthless to enact this legislation with 40 percent of the world’s gold in the United States.”

As usual, Glass was making the argument for embracing the traditional values that he believed made the country honorable and great. The fact that Roosevelt was reneging on campaign promises enraged him. But the president had come to understand the gold standard as a constraint on his power, and he wasn’t going to be held to it, even if it meant leaving an important ally like Glass howling in the wind.

Having conceded that Aldrich’s section would be part of the bill, Glass had one more major hurdle to clear. Representative Steagall, who co-authored the first bank bill Glass put together in the aftermath of the crash, continued to insist that the government provide an ironclad guarantee of bank deposits. If you want to stop bank runs, Steagall said, this was the only way to do it, with the government as the ultimate backstop.

“ Telegrams are coming in from coast to coast in support of a guarantee bank deposit law,” Steagall told the press, hoping to gain the attention of Roosevelt.

Glass had always been adamantly opposed to the concept, as had Roosevelt. Roosevelt’s objection was that “ the use of the word ‘guarantee’ with respect to bank deposits is that you guarantee bad banks as well as good banks. The minute the government starts to do that, the government runs into a probable loss.”

After the Panic of 1907, eight states had enacted some form of deposit guarantees. It hadn’t worked. Most of the banks with deposit insurance failed in the agriculture crash of 1921, and none were still functional in 1929. Major banks seized on this poor track record as evidence of the inadequacy of the policy. To their way of thinking, it subsidized small, weak institutions at the expense of stronger, well-managed ones, and created a moral hazard—the idea that people or institutions will take greater risks if they’re insulated from the consequences. If customers’ funds were guaranteed regardless of where they put them, what was the incentive for choosing a reputable bank?

The public, however, was deeply frightened by the prospect of bank runs and wanted them to end. If guaranteeing deposits was what it took, so be it. This had become the overwhelming popular view, and neither Glass nor Roosevelt could afford to ignore it.

In April, Glass added a deposit guarantee to his bill that would be voluntary and was mostly palatable to the big banks. In the House, however, Steagall was championing a bill that contained a much more expansive guarantee, which was overwhelmingly preferred by his rural constituency. Rural Americans had seen enough of their life savings vanish. Steagall’s version sailed through the House by an overwhelming margin of 262 to 19.

Glass and Steagall, who had been seen as allies, had actually been engaged in a hard-fought battle that the press was only beginning to identify. So far, the two men had managed to keep their disagreement under wraps. But The Wiregrass Farmer , one of Steagall’s home-state newspapers, broke the news about the long-running “feud” that was “just now becoming apparent.” Though there had been “no public hair-pullings” and the men had scrupulously avoided “mention[ing] each other’s names in their speeches,” the paper reported, their mutual enmity “has been nonetheless deep and bitter.”

The paper added that the fact their names ended up side by side on the same bill meant nothing. They had very different views on banking. Glass’s “bill would have ‘rearranged the furniture somewhat,’ ” the newspaper said, “while the [Steagall’s] bill would more or less have reconstructed the whole banking edifice.”

Hell-bent on minimizing deposit guarantees, Glass found himself with an unlikely ally—Aldrich. As the chief executive of Chase, one of the strongest banks in the nation, Aldrich had no incentive to favor a plan that would protect his smaller rivals. If anything, he hoped they’d fail so Chase could get even bigger.

The Steagall plan, which Glass reluctantly signed on to, called for the creation of a federal deposit insurance corporation. It would be funded by the nation’s banks themselves, which would pay into it; the insurance premiums would be used to protect the first $2,500 of deposits for customers with accounts at failing banks.

An unhappy Aldrich went back to Roosevelt in an effort to get that part of the bill removed.

“ At my interview with you last Wednesday, I expressed the concern which I felt as to the unfortunate consequences which would ensue if the bank deposit insurance provisions contained in the latest draft of the Glass Bill were enacted into law,” Aldrich wrote to the president. “Even if you should take the view that provision for permanent bank deposit insurance is necessary, I still feel very strongly that the whole scheme may be jeopardized unless certain changes are made in the provisions of the present Glass Bill. I have, therefore, taken the liberty of writing you to suggest certain specific amendments to the provisions of the Glass Bill relating to this subject, the general purpose of which is to lessen the burden of the insurance provisions on the banking structure of the country by passing some of the load on to the depositors.”

Roosevelt was still very much against the idea of deposit guarantees. But he was also a political animal who understood the political popularity of such a guarantee. His own vice president, John Nance Garner, the Senate’s presiding officer, had worked with Republican senator Arthur Vandenberg of Michigan to add an even stronger version of a deposit insurance provision in Glass’s Senate bill. If Roosevelt were to veto it, Vandenberg looked like he had enough votes to override it.

So Glass now had to play a waiting game—waiting for Roosevelt to make up his mind about the future of his bill.

He got some help from the popular actor Will Rogers, in a letter published by The New York Times on May 20:

Carter Glass, who knows more about money than any man in America, talked in the Senate today on his new bank bill. It protects deposits and makes bankers responsible to each other. In other words, he wants to set a banker to watch a banker, instead of leaving it to the depositor to try. He also stops banks from racketeering in trusts and holding companies. It really sounds too good to pass.