Glass-Steagall Banking Act

Ferdinand Pecora was appointed Chief Counsel to the U.S. Senate's Committee on Banking and Currency in January 1933, that carried out an investigation into the Wall Street Crash . This included interviewing Richard Whitney (J.P. Morgan), Albert H. Wiggin (Chase National Bank) and Charles Edward Mitchell (National City Bank).

During his inquiries Pecora discovered evidence of irregular practices in the financial markets that benefited the rich at the expense of ordinary investors. For example, from September 1929, Wiggin had begun selling short his personal shares in his bank and at the same time he was committing his bank's money to buying. He shorted over 42,000 shares, earning him over $4 million. His earning were tax-free since he used a Canadian shell company to buy the stocks. Pecora also revealed that J.P. Morgan had a "preferred list" of investors, that included people with political power such as Calvin Coolidge and Owen J. Roberts, who participated in stock offerings at steeply discounted rates.

Senator Burton Wheeler of Montana argued: "The best way to restore confidence in the banks would be to take these crooked presidents out of the banks and treat them the same way as we treated Al Capone when he failed to pay his income-tax." Senator Carter Glass of Virginia claimed: "One banker in my state attempted to marry a white woman and they lynched him."

As a result of Pecora's investigations, Congress passed the Federal Securities Act in 1934. Before securities could be offered for sale they had to be accompanied by full and true information. Misleading information or the absence of pertinent information could result in prosecution. The Securities and Exchange Commission (SEC) was set up to supervise the stock market. The commission had five members and enforced the publication of stock prospectuses and the regulation of exchange practices.

Pecora had urged the separation of investment from commercial banking. As a result the Senate also passed the Glass-Steagall Banking Act without a dissenting voice. As William E. Leuchtenburg, the author of Franklin D. Roosevelt and the New Deal (1963) pointed out: "The Pecora committee had urged the separation of investment from commercial banking, and this feature of the Glass-Steagall bill, highly popular with investors... When Congress adopted the Glass-Steagall Act, it approved not only the separation of investment from commercial banking and certain reforms of the Federal Reserve System but the creation of the Federal Deposit Insurance Corporation. A stepchild of the New Deal, the federal guarantee of bank deposits turned out to be a brilliant achievement. Fewer banks suspended during the rest of the decade than in even the best single year of the twenties."

Primary Sources

(1) William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal (1963)

Two days after Pecora's inquiry revealed that the twenty Morgan partners had not paid a penny in income taxes in two years, the Senate passed the Glass-Steagall banking bill without a dissenting voice. The Pecora committee had urged the separation of investment from commercial banking, and this feature of the Glass-Steagall bill, highly popular with investors... When Congress adopted the Glass-Steagall Act, it approved not only the separation of investment from commercial banking and certain reforms of the Federal Reserve System but the creation of the Federal Deposit Insurance Corporation. A stepchild of the New Deal, the federal guarantee of bank deposits turned out to be a brilliant achievement. Fewer banks suspended during the rest of the decade than in even the best single year of the twenties.