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GLASS VERSUS STEAGALL: the FIGHT OVER FEDERALISM and AMERICAN BANKING Jacob H. Gutwillig* N October 3, 2008, President George W

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GLASS VERSUS STEAGALL: the FIGHT OVER FEDERALISM and AMERICAN BANKING Jacob H. Gutwillig* N October 3, 2008, President George W GUTWILLIG_BOOK (DO NOT DELETE) 5/15/2014 12:39 PM NOTE GLASS VERSUS STEAGALL: THE FIGHT OVER FEDERALISM AND AMERICAN BANKING Jacob H. Gutwillig* INTRODUCTION N October 3, 2008, President George W. Bush signed into law the O Emergency Economic Stabilization Act of 2008 as a response to the subprime mortgage crisis.1 One important provision of this legisla- tion was a temporary increase on the basic limit of federal deposit insur- ance coverage from $100,000 to $250,000 per depositor. “This tempo- rary increase in deposit insurance coverage should go far to help consumers maintain confidence in the banking system and the market- place,” said Federal Deposit Insurance Corporation (“FDIC”) Chair- woman Sheila C. Bair.2 It was an incredible commitment—the federal government insuring individual depositors up to a quarter of a million dollars—designed to meet exceptional circumstances. The increase was scheduled to expire on December 31, 2009, by which time it would pre- sumably no longer be necessary; however, that turned out not to be the case. On May 20, 2009, the temporary increase was extended to Decem- ber 31, 2013,3 and only fourteen months later the measure was made * J.D., M.A., 2013, University of Virginia School of Law. Thank you to Professor Charles McCurdy, who steadfastly supported this Note through many drafts and revisions; to Profes- sor Risa Goluboff for her continued leadership of the legal history program; to Professor Julia Mahoney for her insights and ideas; and to Professor G.E. White, for his advice and encouragement throughout my time at UVa. Thanks also to Katherine Rumbaugh, Kathryn Barber, and Declan Tansey for their thoughtful suggestions and careful editing. Finally, thank you to my loving family, the Humphreys and Gutwilligs, and to Victoria Morphy and Alex Wyman. 1 Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat. 3765 (codified as amended in scattered sections of 5, 12, 15, 26, and 31 U.S.C.). 2 Press Release, Fed. Deposit Ins. Corp., Emergency Economic Stabilization Act of 2008 Temporarily Increases Basic FDIC Insurance Coverage from $100,000 to $250,000 Per De- positor (Oct. 7, 2008), http://www.fdic.gov/news/news/press/2008/pr08093.html. 3 Fed. Deposit Ins. Corp., Financial Institution Letter 22-2009, FDIC Insurance Coverage: Extension of Temporary Increase in Standard Maximum Deposit Insurance Amount (May 22, 2009), available at http://www.fdic.gov/news/news/financial/2009/fil09022.pdf. 771 GUTWILLIG_BOOK (DO NOT DELETE) 5/15/2014 12:39 PM 772 Virginia Law Review [Vol. 100:771 permanent when President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) into law on July 21, 2010.4 Though extraordinary, it would be inaccurate to describe this chain of events as unprecedented. If anything, the 2008 “bailout” of the U.S. fi- nancial system and subsequent passage of Dodd-Frank represent the log- ical conclusion to an earlier episode. In 1933, newly elected President Franklin Roosevelt confronted arguably the grimmest economic situa- tion in our nation’s history: the Great Depression.5 As in 2008 and 2010, debate on the extent to which the federal government should be respon- sible for the economic security of individuals centered on a specific pol- icy tool: federal deposit insurance. In 1933, however, the question was not how much deposit insurance the federal government should provide individual depositors, but if it should do so at all. The Glass-Steagall Act6 answered that question affirmatively. It was a momentous choice that fundamentally altered the existing American banking structure, re- jecting the extant competitive dual federalism model in favor of a coop- erative federalism one. Knowing why and how that change was made is essential to understanding the modern American banking system and is particularly relevant in light of banking reforms adopted following the subprime mortgage crisis. Since the ratification of the U.S. Constitution, American banking had been based on a model of competitive dual federalism. While the Consti- tution clearly allocated some powers regarding regulation of the money supply among governmental entities, “Both the text and the debates ig- nored the authority either of Congress or the states over banks.”7 This “unhelpful silence”8 ignited a competition between federal and state au- thorities seeking to regulate banking. Along with the text of the Consti- tution itself, a number of episodes over the ensuing century and a half capture this clash of federalism: the debate over whether and to what ex- 4 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 335, 124 Stat. 1376, 1540 (2010) (codified as amended at 12 U.S.C. § 1821 (2012)); Press Release, Fed. Deposit Ins. Corp., Basic FDIC Insurance Coverage Permanently Increased to $250,000 Per Depositor (July 21, 2010), http://www.fdic.gov/news/news/press/2010/ pr10161.html. 5 See sources cited infra notes 25–26. 6 See infra note 11. 7 James Willard Hurst, A Legal History of Money in the United States, 1774–1970, at 134 (1973). 8 Id. GUTWILLIG_BOOK (DO NOT DELETE) 5/15/2014 12:39 PM 2014] Glass Versus Steagall 773 tent the First Bank of the United States would establish branches, partic- ularly Secretary of the Treasury Alexander Hamilton’s role in the con- troversy; the U.S. Supreme Court’s pronouncement that the federal gov- ernment may establish corporations in McCulloch v. Maryland 9 and the Court’s holding in Veazie Bank v. Fenno that the federal government’s imposition of a ten percent tax on state bank notes was constitutional;10 state experiments with deposit insurance from 1909 to 1923; and, of course, the debate over and eventual passage of the Glass-Steagall Act in 1933.11 Each chapter in this seesaw narrative represents another clash between state and federal authorities vying to fill the gap left by the Constitution. The Constitution’s silence on this matter should not be interpreted as ambivalence. A—perhaps the—principal challenge confronted by the new American republic was its massive public debt. Senator Arthur Vandenberg, whose amendment to the Glass-Steagall Act largely shaped the legislation,12 wrote in his tribute to Alexander Hamilton: “No na- tion ever was or ever will be stronger than its public credit.”13 The strength of the public credit is necessarily tied to the liquidity,14 elastic- ity,15 and uniformity of the money supply.16 As the primary circulating 9 17 U.S. (4 Wheat.) 316, 325–26 (1819). 10 75 U.S. (8 Wall.) 533, 539–40, 549 (1869). 11 Banking Act of 1933, Pub. L. No. 73-66, 48 Stat. 162 (codified as amended in scattered sections of 12 U.S.C.). The Banking Act of 1933 is commonly referred to as the Glass- Steagall Act, as it will be throughout this Note. 12 For the full text of the so-called Vandenberg Amendment, see 77 Cong. Rec. 3878 (1933). 13 Arthur Hendrick Vandenberg, The Greatest American, Alexander Hamilton: An Histori- cal Analysis of His Life and Works Together with a Symposium of Opinions by Distin- guished Americans 173 (1921). 14 Liquidity is defined as the degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets. It is therefore safer to invest in liquid assets because it is easier for an investor to reclaim his money at a given time. See David L. Scott, Wall Street Words: An A to Z Guide to Invest- ment Terms for Today’s Investor 213 (2003). 15 Elasticity is a measure of a variable’s sensitivity to a change in another variable. As it relates to the money supply, elasticity refers to the degree to which individuals change their demand or supply in response to price or income changes. Id. at 124. The basic concept is that a nation’s economy is healthiest when the money supply is liquid, or elastic, enough to respond to changes in the marketplace. 16 Alexander Hamilton, Final Version of the Report on the Establishment of a Mint, in 7 The Papers of Alexander Hamilton 570, 570–71 (Harold C. Syrett & Jacob E. Cooke eds., 1963) [hereinafter Hamilton, Report on Mint Establishment]. GUTWILLIG_BOOK (DO NOT DELETE) 5/15/2014 12:39 PM 774 Virginia Law Review [Vol. 100:771 medium17 evolved from gold bullion to bank deposits over the course of the first half of the nineteenth century,18 banking became a quasi-public enterprise tied to the public interest and, consequently, partially the province of the federal government and its state counterparts. The task of managing the public credit increasingly became that of governmental bank regulation, which inevitably raised the question: which govern- ment? This question has arisen with great fervor after every major economic crash in American history.19 These include the Panic of 1819, the eco- nomic contraction following the Civil War, the Panic of 1907, and, es- pecially important for the purposes of this Note, the Great Crash of 1929. In the aftermath of each ordeal there were cries for reform, result- ing in both federal and state action. Unfortunately, these twin responses were generally ineffective, and worse, often resulted in a sort of “race to the bottom” between federal and state banks in which sound banking principles—such as prudent capital requirements and competent over- sight—were subordinated to attracting deposits. Acting head of J.P. Morgan & Co. Thomas Lamont aptly described the situation: “In bank- ing, our country has forty-nine different sovereigns .
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