Social Education 73(6), pp 260–265 ©2009 National Council for the Social Studies Teaching with Documents Letters to the Senate Banking Committee about Reform Legislation during the New Deal

Christine Blackerby

arly in 1933, shortly after the election of President Franklin Roosevelt, the The U.S. Senate Banking U.S. Senate Banking and Currency Committee began receiving hundreds of Committee Investigation Eletters from concerned Americans. They were closely watching the commit- In January 1933, at the nadir of the tee’s efforts to find and fix the causes of the that had consumed the Depression, the Senate Banking and nation for more than three years. Two letters received by the committee, featured in Currency Committee renewed an earlier this article, show two perspectives of the public reaction to the committee’s efforts effort to find and fix the causes of the to institute extensive reforms in the financial sector. nation’s financial woes. The committee hired as its new chief counsel Ferdinand Pecora, an assistant district attorney from The Great Depression wrote Frank A. Vanderlip, former presi- New York. Pecora immediately set to After the 1929 stock market crash, dent of the National City Bank of New work utilizing his extensive subpoena President Herbert Hoover made several York, in 1932. “The [newspaper] page of power to dig deeply into the records of attempts to encourage financial firms to stock-and-bond quotations might well be the top banks and financial firms in New voluntarily reform Wall Street practices. headed Quotations of Risks and Hazards. York, determined to uncover the activi- He strongly believed that the federal To call them securities ... is ironical.”1 ties of the “banksters” on Wall Street. government had no power under the As the Depression deepened, doubts He subpoenaed several Wall Street Constitution to regulate the industry, grew about the legitimacy of the entire titans to testify in front of the commit- and that the government’s proper role capitalist system. Some Americans were tee. Charles E. Mitchell, chairman of the was to encourage business to police itself. calling for drastic action, including the National City Bank; Albert H. Wiggin, In a message to the 71st Congress at the nationalization of banks or their com- former president of Chase National end of 1930, Hoover said, “Economic plete eradication. One letter writer told Bank; and J.P. Morgan, Jr., president of depressions cannot be cured by legisla- the Senate Banking Committee, “In view J.P. Morgan and Company, were among tive action or by executive pronounce- of the monstrous record connected with the witnesses who were well known to ment ... economic wounds must be healed the stock market, it would be perfectly many Americans with bank savings by the action of the cells of the economic justifiable to close the [New York Stock] accounts or stock certificates. They were body—the producers and consumers exchange forever.” well respected as the heads of large banks themselves.” Roosevelt, however, had no plans to or financial firms, and they had testified Several years after the crash, however, dismantle the financial system. Rather, previously before the committee. This the economic body had not healed itself he thought that legislation establishing time, however, they were unprepared and the stock market remained unsound. government oversight could help fix the for Pecora’s withering line of questioning. Buying and selling securities (i.e., stocks, financial system by ensuring fairness and Pecora’s intensive research had revealed bonds, etc.) was extremely risky, espe- honesty for investors. He disagreed with much about the banks’ activities, and cially for small investors who did not Hoover on the limited constitutional if the witnesses lied during question- have access to inside information about powers of the federal government and ing, Pecora produced documentation a company’s financial health. “The word he pledged that his administration would from their own bank’s records to refute ‘securities’ has almost become obsolete,” take action to end the crisis. them.

S o c i a l Ed u c a t i o n 260 The hearings produced testimony that shocked the nation with tales of risky , insider trading, preferen- tial deals to public officials, tax eva- sion, fraud, and misconduct. Some wit- nesses admitted to short selling their own company’s stock, that is, profiting personally when the value of the stock (and thus the profit to the stockholder) went down. The incredibly wealthy J.P. Morgan, Jr., admitted that he had paid no U.S. income taxes in 1931 and 1932. Even when the banks defended their activities as strictly legal, Pecora dem- onstrated that they acted unethically or in conflict with the interests of their own stockholders. The investigation personalized the Depression for many Americans by putting a face—a banker’s face—on their problems. The widely reported testi- Photo of Counsel Ferdinand Pecora, Chairman Duncan Fletcher, and witness J. P. Morgan, mony of the bank presidents allowed Jr., during a break in the Senate Banking Committee hearings, May 1933. the average American to move beyond fear of a powerful but nameless, faceless market and instead focus their outrage The Legislation deposits for risky speculation on on the actions of individuals and compa- The investigation was associated with the stock market. nies. This made the continuing financial three major pieces of legislation that crisis seem more understandable. instituted federal regulation of the Securities Act of 1933 (Pub.L. 73-22, The misdeeds exposed by the Senate financial industry for the first time. 48 Stat. 74) Banking Committee investigation ren- Several parts of these laws had been dered a blow to public confidence in previously proposed but never enacted • Required a company offering its the banking system by revealing its dark in the face of strident opposition from stocks or bonds for sale to disclose underbelly. But the investigation also Wall Street. This time, however, the certain information to allow buyers provided detailed information about news reports of the investigation had to make informed decisions about what was wrong, so that legislation could garnered widespread public support for the purchase. This act regulated be produced to address the core prob- reform legislation, and lawmakers lined sales of securities from company lems. Efforts to radically alter or abol- up to support it, too. to investor. ish the capitalist system (ideas that were The following pieces of legislation supported by the growing Communist were passed and signed into law during Securities Exchange Act of 1934 (Pub.L. Party) were cast aside in favor of remov- the investigation: 73-291, 48 Stat. 881) ing specific miscreants and revising rules to prevent further abuses. The investiga- The Glass-Steagall Banking Act of 1933 • Created the Securities and Exchange tion, therefore, resulted not in a revo- (Pub.L. 73-66, 48 Stat. 162) Commission (SEC) to oversee the lutionary overthrow of the capitalist stock market to prevent fraud. This financial system, nationalization, or • Created the Federal Deposit act regulated sales of securities from centralization, but rather a “legislative Insurance Corporation (FDIC), investor to investor. legacy” of government regulation to curb which insured bank deposits. the worst abuses. The careful documen- The Senate Banking Committee heard tation of exploitative financial practices • Required separation of commercial from hundreds of Americans with strong in the public hearings had provided the and businesses. opinions about the proposed bills. The factual basis and the public support for This meant that commercial banks letters received by the committee indi- remedial legislation. could not use customers’ savings cated a great deal of public support for continued on page 265

O c t o b e r 2009 261 S o c i a l Ed u c a t i o n 262 O c t o b e r 2009 263 Teaching Suggestions Christine Blackerby and Lee Ann Potter

1. Distribute copies of the featured documents to students. Banking Committee investigation. Ask the groups to con- Ask students to read them and lead a class discussion sider: How did the law affect banking and the financial by posing the following questions: What types of docu- sector? Some parts of these laws have since been repealed. ments are they? Who created them? For what purpose? What parts were repealed, when, and why? How have the Who were the intended recipients? What questions do changes to these laws affected the financial sector today? they prompt? Direct the groups to share their findings with the class.

2. Ask students to research what a stockbroker is, what 5. Divide students into three groups. Ask members of the first one does, and how one makes money. Explain to the group to explore the website of the Senate Committee on students that the Securities Exchange Act, also called Banking, Housing, and Urban Affairs (banking.senate.gov/ the Fletcher-Rayburn bill, for the first time (among other public); members of the second to explore the website provisions) required that brokers meet basic compe- of the Securities and Exchange Commission (www.sec. tency requirements, adhere to certain rules of conduct, gov); and members of the third to explore the website of maintain approved trading practices, and submit to the New York (www.nyse.com). Assign regular audits. It also set up the Securities Exchange each student to identify five facts about their organization Commission (SEC) to police violations of securities laws. that they find interesting. Next, using the jigsaw method, Reviewing the Sandler letter, ask student pairs to consider rearrange the students into groups of three that contain these questions: What did Sandler’s broker think about a representative from each of the larger groups. Ask the these regulations? Why would Sandler’s broker ask her students to share their facts with one another and to con- to write to the Senate? What did Sandler think of them? sider why members of each group should know about Why did Sandler hold this opinion? Encourage student the other organizations, their missions, and how they volunteers to act out a 2- to 3-minute scene featuring operate. a conversation between Sandler and her broker. 6. Discuss the spectrum of political opinions from left to right, 3. Share information with students from the essay about and ask students to place the petitioners and Sandler on Roosevelt’s executive order on the gold standard, and the spectrum. Divide students into groups of three or discuss what it meant. Ask a student volunteer to four and ask them to conduct research into the financial read aloud the petition from the citizens of Baltimore, crisis that began in the fall of 2008. Assign them to find . Lead a group discussion on the opinions of the three editorials in print or online newspapers that reflect petitioners by posing the following questions: What did opinions about Wall Street. Direct them to share their they think of the proposed Fletcher-Rayburn bill? What findings with the class, and collectively place their writers did they think of the Roosevelt administration policy? on the spectrum. Encourage students to consider where How did they feel about government involvement in they would place themselves on the spectrum. economic activities? How did the petitioners think the legislation would affect them personally? Next, invite 7. Invite a stockbroker or financial planner to come into students to assume the role of one of the petitioners class and talk with students about his or her work. Assign and write a short editorial expressing their reaction to students to prepare questions ahead of time. Topics may the Securities Exchange Act or suggesting alternate leg- include: what a “typical” work day is like, how they keep islation. Ask student volunteers to share their editorials track of market trends, the impact that online stock trad- with the class. ing companies have on their industry, and what laws have the greatest influence on their work. 4. Divide students into three groups and assign each group to research one of the laws that resulted from the Senate

S o c i a l Ed u c a t i o n 264 the new regulations, but not every- be the most important matter facing A new book from one was pleased. These new laws that the nation: “The issue involved merits instituted massive federal oversight consideration equal to that which was James Loewen of a large and important sector of the accorded slavery during the adminis- Author of Lies My Teacher Told Me economy were, according to petition- tration of Abraham Lincoln.” ers from Maryland (see page 262), an Enacted with strong public support, instance of government violation of but also against tenacious opposition individual rights. The petitioners from Wall Street, the legislation that wrote to their senator to condemn the grew out of the investigation eventu- Securities Exchange Bill as “vicious ally gained wide support from pivotal legislation.” They expressed their sections of the business sector. The disapproval of this bill in particular, stability and transparency wrought but they also voiced a philosophical by the laws encouraged renewed busi- disagreement with New Deal gov- ness activity. Although these laws did ernance as a whole. Believing that not immediately lift the nation out government should not meddle in of the Depression, they did stabilize people’s individual pursuits, they the stock market and halt the flood called the legislation “destructive to of bank closures. This encouraged elemental human liberties—even the many Americans to renew their trust liberty to lose one’s money in one’s in the financial system and, with their own way.” The petitioners believed meager savings, begin reinvesting in that the Roosevelt administration’s the nation’s economy. Teaching What support of the bill intended “to curb Really Happened speculation and market manipulation” Note How to Avoid the Tyranny of was hypocritical. Probably referring 1. Frank A. Vanderslip, quoted in Michael E. Parrish, Securities Regulation and the New Deal (New Textbooks and Get Students to Roosevelt’s April 1933 executive Haven, Conn., and London: Yale University Press, Excited About Doing History order to take the off 1970), 43. the gold standard, the petitioners

accused the administration of having James Loewen’s new book should

a policy of “gigantic speculation” and be in the hands of every history teacher in the country. It is...a of “deliberately rigging the market for Note about the Documents and Sources: ‘‘wonderful guide to‘‘ how the teaching commodities and gold.” You can reproduce the images that accompany of history can open up minds, excite In the second featured document, this article in any quantity. The featured docu- the imagination, and educate a new ments come from the records of the Banking and investor Margaret Sandler indicated generation dedicated to making this that she was a stockholder who “got Currency Committee, Records of the U.S. Senate, Record Group 46. The photograph, Number a better world. badly ‘stung’ in 1929, worse in 306-NT-178368 C, is held by the Still Pictures —Howard Zinn, author of 1930.” Sandler endorsed the securi- Branch at the National Archives in College Park, A People’s History of the United States ties exchange legislation, despite the Maryland. request of her stockbroker to oppose FREE it. To protect her investments, Sandler poster wished the Senate Banking Committee “every success in having this passed, with the least possible bother.” Many other letter writers championed the Christine Blackerby is an archives special- committee’s regulatory legislation. ist in the Center for Legislative Archives at the One said, “I am coming to the con- National Archives and Records Administration clusion that these great corporations in Washington, D.C, and Lee Ann Potter is Free poster with book when you order from are in many cases run primarily by the director of Education and Volunteer Pro- www.tcpress.com, while supplies last. grams at the National Archives and Records the inside few to feather their own Administration in Washington, D.C. Potter nest by trading in and manipulat- serves as the editor for “Teaching with Docu- Teachers College Press ing their own securities.” Another ments,” a regular department of Social Educa- Teachers College, Columbia University believed stock market regulation to tion. www.tcpress.com 800.575.6566

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