A close connection existed between the principal banking acts passed during 1932: the Reconstruction Finance Corporation Act, signed by Herbert Hoover on January 22, subtitled an act …
“to provide emergency financing facilities for financial institutions, to aid in financing agriculture, commerce, and industry … ;”
and the Banking Act of 1932, signed by Herbert Hoover on February 27, subtitled an act …
“to improve the facilities of the Federal reserve system for the service of commerce, industry, and agriculture, to provide means for meeting the needs of member banks in exceptional circumstances … .”
The acts responded to concerns about the structure and mission of the Federal Reserve that arose during the economic contraction of the early 1930s.
Congress gave the Federal Reserve multiple missions. One was to act as a lender of last resort, which would extend loans to banks during financial panics. Another included providing an elastic currency. Congress also intended for the Federal Reserve to carry out its mission in a manner consistent with the maintenance of the gold standard. The Federal Reserve’s leaders disagreed on how to prioritize those missions and the appropriate response to the economic contraction of the early 1930s. The twelve Federal Reserve banks could not agree on a course of action and lacked some legal powers that would have enabled them to act more effectively. The Federal Reserve Board in Washington, DC, lacked the authority to dictate nationwide policies, the power to act on its own, and a clear vision about how to counteract the depression, even if it had the power to act.
Endnotes
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1
Gary Richardson is the historian of the Federal Reserve System in the research department of the Federal Reserve Bank of Richmond. Michael Gou is a PhD student in economics at the University of California, Irvine. Alejandro Komai is a PhD candidate in economics at the University of California, Irvine. Daniel Park is an undergraduate at Duke University.
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2
The Banking Act of 1932 was originally known as the Glass-Steagall Act. In 1932, the Federal Reserve Bulletin, newspapers, and congressional documents referred to the act with that label. The Banking Act of 1933, however, was also sponsored by Sen. Carter Glass and Henry Steagall, and four provisions from that act that limited commercial banks’ activities in securities markets and relationships with investment banks have come to be commonly called the Glass-Steagall legislation. Now the Glass-Steagall label is seldom used for the earlier legislation.
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3
Our account of the genesis of the Banking Act of 1932 is based on Chandler (1971).
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Written as of November 22, 2013. See disclaimer.