My mother said, “Mr. McFadden hung himself yesterday.” She was talking to one of my Aunts. I have forgotten which one now, I use to have a bunch of those, but anyway, I overheard the remark. The McFadden family lived in a big farmhouse near our shack. With the naiveté of a child, I pictured Mr. McFadden hanging by his collar from a hook in a closet, and wondered why in the world anyone would choose to do that. I did not like Mr. McFadden very much. If he saw me take the shortcut across his barnyard on my way home from school, he would yell at me and complain to my mother about it later at church. He also had a mean dog that worried me when I walked on the dirt road that passed near the McFadden farm. News travels fast in a rural community, what with Churches, The Grange, Barn Dances, Harvest Homes, and Fairs. Even as a child I knew every soul who lived within a 10 mile radius of our shack, knew how many kids they had, knew if a Grandma or Grandpa, an Old Maid Aunt or a Bachelor Uncle lived with the family. I knew about how poor or well off they were, knew a lot of details about their private lives. Everyone else did as well. I finally came to the realization from clues overheard from the adults, that Mr. McFadden had killed himself. The local knowledge was Mr. McFadden had hung himself on the big white oak tree out near his spring house, because his bank had failed and he had lost something in the neighborhood of $30,000.00. This was an astronomical amount to people in the area back in the early 30’s. People who had an income of $75 a month were considered upper middle class.
Over 4,000 banks failed that year (1933) and so the depositors lost everything they had in the banks. That had happened before in U.S. banking history but, lucky for the banks, the public has a short memory.
The stock market crash of 1929, and thus the Great Depression occurred because of a stock market bubble. Like all financial bubbles, a few people made vast amounts of money from it, but the majority suffered extensive losses. During the “Roaring Twenty’s”, according to my Uncle Clyde, everyone was saying, “You’re a fool if you’re not in the market.” People mortgaged their farms to buy stock, and then borrowed more money using the stock they owned as security. Most banks were happy to make such loans and used their own assets as well as their depositor’s money to buy stock. Everyone in the market was making money on paper because the price of stocks was rising each and every day. A myth of wealth was being created, not because of any increase in production, or innovation, or anything else tangible, the wealth was all on paper. When this insane house of cards collapsed, it pretty much destroyed the U.S. financial system. My father, who was a skilled tool and die maker, lost his job because the factory where he worked went out of business. Mr. McFadden, by the way, did not own a dimes worth of stock, he just had his money on deposit in a bank that failed.
In April of 1932, the latter years of the Hoover administration, there was an investigation into the reason why the financial system collapsed. The investigation was launched by the U.S. Senate Banking Committee who appointed a Commission to do the work. At that time both the House and Senate were controlled by the Republican Party. The Commission incurred a lot of criticism for being weak and ineffective. The Banking Committee refused to grant the Commission subpoena powers, so it lacked the investigative tools needed to do any sort of proper investigation. It was looked on as simply an attempted to appease a very angry public by going through the motions of an investigation.
In the election of 1932 Democrats won control of the House and Senate, as well as the White House. They kept control for years afterwards because people remembered the Hoover Administration with a bitterness that lasted for a very long time. FDR was elected President and John Nance Garner, his V.P. During the campaign Garner accused the Republican Administration of “leading the country down the path to Socialism”. It seems that old dog never dies, does it?
The Democratic Senate Banking Committee appointed Ferdinand Pecora, an assistant district attorney from New York, as Chief Counsel of the Investigative Commission and the Commission acquired teeth. Pecora did such a good job; the Commission now bears his name. Under his watch the Commission was given wide subpoena power and exposed extensive corruption and abuses of the system by bankers, stock brokers and speculators, as well as violations of the usury laws. The system had become rotten. As a result of the work of the Pecora Commission, the U.S. Congress passed the Glass – Steagall Banking Act of 1933 to separate commercial and investment banking. I have always had problems with the word ‘investment’ because it seems to me to be a euphemism for gambling. So in my lexicon let’s say they separated the utility banks from the gambling banks. They also passed the Securities Exchange Act to set stiff penalties for filing false information about stock offerings, and formed the Securities Exchange Commission to regulate Wall Street. Wall Street and the Banks strongly objected to the restrictions placed on it by these new laws and immediately began to lobby against them. The ability to rip people off, be deceptive with impunity, and charge usury was a slice of their profits no longer available to them. Bankers hate it when that happens. Part of the Glass – Steagall Act was to set up the FDIC. (Federal Deposit Insurance Corporation) They did this to instill confidence in banking-system again because people were now really shy about putting their money to the bank. Everyone knew somebody like Mr. McFadden.
Initially the U.S. Treasury loaned the FDIC a big chunk of seed money to start the insurance process. The fund was to charge member banks an insurance premium and pay back the Treasury seed money, as well as reimburse depositors for any losses they incurred due to bank failure. It took 16 years but the debt to the Treasury was paid off from collected bank insurance premiums in 1949. By the way, FDIC won’t pay you a dime for anything except a bank failure.
Banks continued to fail after the passage of Glass – Steagall from 1934 through 1942 but the rate slowed down to double digits not thousands. From 1943 through 1974, the failure rate for banks dropped to single digits, the highest being in 1969 when 9 banks failed. Most of the failure during those years was 1 or 2. The consensus was, “We were really stupid to allow the Great Depression to happen and we sure won’t do that again”. My Uncle Clyde said, “They told us they could spin straw into gold and we believed them. Uncle Clyde lost $150 and change in a bank and the few stocks he owned became worthless, but he did not hang himself.
Then in the 70’s and 80’s the Savings & Loan Crisis happened. It happened due to the lack of regulation and Government oversight, the same reason for the bank failures of the 30’s. The Savings & Loan idea was really a very good one but without a vigilant watch dog, they became a corrupt mess. A lot of them turned into Ponzi Schemes, paying huge salaries to the officers of the institution and offering ever increasing interests rates to attract depositors. The same idea Bernie Madoff used, a concept that needs new depositors, else it fails.
Now the Savings & Loans had their own version of FDIC. It was called Federal Savings and Loan Insurance Corporation. (FSLIC) When the S & L’s began to fail, over 700 of them, the FSLIC went bankrupt and the responsibility was picked up by FDIC. The tax payer picked up the losses which are estimated to be around 150 billion. Merging the S & L losses with FDIC caused it to go broke as well and at the latest count, the Banks and the few remaining S & L’s FDIC members owe the fund over 100 billion dollars. So folks, just so you know, if your bank fails, the tax payer will cover your losses up to 250 thousand dollars. True they funnel the money through the FDIC but its tax payer money. We have the Social Security Fund with a positive 2.7 trillion + dollars at the moment and the FDIC which insures your bank deposits, bankrupt for years. So why aren’t the deficit-hawks screaming about reforming FDIC?
Due to years of lobbing pressure by the banks, the Glass Steagall Act was finally repealed in 1999 after 11 attempts that failed. Remember, it was part of FDR’s New Deal. I wish I could write that Democrats fought the Repeal, tooth and nail but alas, that would not be true. The vote in the Senate was 90 for repeal, 8 against. It the House it was 343 for repeal, and 86 against, and President Clinton signed it into law. You can use your search engine to check how the vote went. In the House it was HR – 10, 106th Congress. In the Senate it was S-900. There were a few people in Congress warning the repeal was the wrong thing to do.
Now when the Congress repealed Glass – Steagall, they left part of it on the books. The FDIC part is still in effect so banks can gamble with your savings and the tax payer will pay you back should your bank make a really bad bet and go belly up. At this writing, 495 banks have failed since Glass – Steagall was repealed.
We had the beginning of another financial collapse in 2008, but Ben Bernanke, Chairmen of the FED and a student of the Great Depression, in conjunction with the Treasury Department, pumped enough funds into the system to sort of stabilize the economy for a while, but did not fix the basic problem. Congress passed the Dodd Frank Bill but it’s a puny reform compared to Glass – Steagall. One good thing that came about due to Dodd Frank was the Consumer Protection Act and Elizabeth Warren, so there is some hope.
I recently heard ex-Sen. Phil Gramm, the guy who lead the crusade to kill Glass – Steagall, the guy who would probably been McCain’s Treasury Sectary, say, “Repealing Glass – Steagall did not cause the financial meltdown of 2008. Yeah it did!
We should re-learn the old Great Depression lesson that actual wealth cannot be created by manipulating numbers on paper. We buy into that illusion at the risk of another financial collapse. You can’t spin straw into gold.
This is my perception of history, thus my reality. Take exception to it if you will.