What was the Banking Act of 1935? How did it change U.S. monetary control?
The onset of the Great Depression most prominently exemplified with the Black Friday stock market crash and the catastrophic failure of the U.S. banking system spurred intense congressional interest in reforming the country’s financial system to both avert future such events and to help insulate the public from the consequences of catastrophic failure should another financial system failure recur. The administration of President Herbert Hoover consented to the passage of the Banking Act of 1933, which sought to establish mechanisms to secure the savings of American citizens in the effect of future bank failures while creating a regulatory “wall” between the types of activities in which banks that joined the new federal system could partake. Specifically, the creation of the Federal Deposit Insurance Corporation put in place a federally-backed system wherein the deposits of private citizens were temporarily insured against loss up to a specified limit. Additionally, the Glass-Steagall prohibition on banks engaging in both commercial and investment banking was codified in the 1933 legislation.
Upon taking office in March 1933, newly-elected President Franklin Roosevelt was initially skeptical of the Banking Act recently passed by Congress. As the realities of the politics of the situation and the gravity of the financial crisis became better appreciated, however, the Roosevelt Administration softened on the ideas represented in the 1933 Act and supported passage of follow-on legislation, the Banking Act of 1935, which made the deposit insurance guarantees of the earlier Act permanent, while also increasing the amount of an individual depositor’s savings that would be insured – a number subsequently normed for inflation over the ensuing decades.
The most important components of the 1935 Act extended well-beyond the role of the FDIC in insuring deposits against bank failures. Those components included restructuring the Federal Reserve System to make it more independent of the Executive and Legislative Branches of the federal government while consolidating the system’s power in Washington, D.C. Previously, the system’s power had been more diffused among the various regional branches. Henceforth, the newly-codified position of “chairman” of the Federal Reserve Board would be independently selected and confirmed by the Senate in contrast to the previous arrangement in which the secretary of the Treasury served in that capacity. In short, the Federal Reserve Board was made more powerful and more independent.