Welcome to Civil Discourse. This podcast will use government documents to illuminate the workings of the American Government and offer contexts around the effects of government agencies in your everyday life. Now your hosts, Nia Rodgers, Public Affairs Librarian and Dr. John Aughenbaugh, Political Science Professor.
Nia Rodgers: Hey, Aughie.
John Aughenbaugh: Morning, Nia. How are you?
Nia Rodgers: I'm good. How are you?
John Aughenbaugh: I'm doing fine. Another lovely spring day in The Greater Richmond area.
Nia Rodgers: I was going to say in the RVA.
John Aughenbaugh: Yes.
Nia Rodgers: We're doing our commission series and I think there's a thing we cannot leave out and that is money. The Benjamin's. Monetary policy.
John Aughenbaugh: The Jack, the coin, the dinero.
Nia Rodgers: Exactly, the bitcoin now. Apparently that's the hot thing. Everybody keeps saying, "Are you going to invest in bitcoin?" I was like, "I can't afford to invest in bitcoin." Apparently, a bitcoin cost you 80 million dollars or something? I don't know.
John Aughenbaugh: Yeah. I get asked that question.
Nia Rodgers: You know I work for the public, right?
John Aughenbaugh: [inaudible] One, I work for the government, and two, I struggle to go ahead and keep current with my IRA, my individual retirement account, right? They're asking me to go ahead and spend valuable intellectual capital on a currency that, one, I'm not entirely sure what it is.
Nia Rodgers: Exactly. How it works. I don't really understand it because I barely understand fiat currency as it currently exists. Let alone the Elon Musk pretend currency that is big, it's not pretend actually, now there was an open IP and a marketing staff. Good for them, I'd say.
John Aughenbaugh: I still occasionally rue the day that we don't have a legal tender in our pocket books and wallets. There was something tangible and reassuring about being able to look into my wallet and see, a couple $10 bills. But now I have cards. I have plastic.
Nia Rodgers: Now when you give people cash, sometimes they'd look at you like they don't know what to do.
John Aughenbaugh: Yes.
Nia Rodgers: You know what I mean? People who count the money back from the register get distressed because then they have to slowly count it into your hand to make sure they got the right amount. I get it. It's math and math is hard, and because so many people pay with plastic now, I imagine that cash is just a foreign object like, what am I doing with this thing?
John Aughenbaugh: Yeah.
Nia Rodgers: But women everywhere we'll hear me when I say I rue that there is no more mad money. What used to happen is that your mom, if you're mostly young women, I think maybe some young men, but mostly young women. You took a little bit of money back in your wallet and then if you didn't like him, if you're out on a date and he said something rude or obnoxious or you didn't like him or her, depending on who you're out on a date with, you could just get up and leave and the mad money was to pay for your cab ride home.
John Aughenbaugh: How about this, if you reached into a coat pocket and you found a $20 bill.
Nia Rodgers: Found money, yes, like magic. Oh my gosh, you wash your jeans and you've lost a $10 bill and it's all soft and spendable. You're like, "Thank you. The universe just gave me money."
John Aughenbaugh: The rest of your day or your week could be terrible, but you're just like, that's all right. I found $20. Okay, I'm good. The rest of you all can go ahead and be a bunch of meanies. It doesn't matter.
Nia Rodgers: Exactly. Banking, there's not one banking commission I think that we're going to talk about. There's three or four that we're going to talk about?
John Aughenbaugh: Yes.
Nia Rodgers: Because as far as I can tell, what happens and correct me if I'm wrong, is that it's a cyclical sort of thing, where there'll be a problem with money and banking and people will go, "This was terrible, somebody should look into that, " and there'll be a commission and they will look into it and then we'll go along for 20 or 30 years, and then there'll be another one of these and another commission. It just seems like it's a cycle where we're trying to actually figure out capitalism, and money, and banking and all that sort of stuff.
John Aughenbaugh: If you think about it historically, Nia, banking has always been a fraught contentious issue in the United States. If you think about it. One of the first policy debates within our first presidential administration was between Alexander Hamilton and Thomas Jefferson regarding whether or not the United States federal government had the authority and if it had the authority, should it create a national bank? Think about it.
Nia Rodgers: Because Hamilton was the Secretary of the Treasury, right?
John Aughenbaugh: That's right and Jefferson was Secretary of State. Hamilton proposed a national bank that would help the States pay off their debts to the British Crown because that was one of the negotiated points to end the Revolutionary War. British Crown was just like, "Okay, you guys beat us in this war.
Nia Rodgers: But you still owe us money.
John Aughenbaugh: You still owe us money because that was part of your charters, your contracts with the British Crown. We're not going to end this war unless you guys agree to pay your debts. Hamilton was like, "If we create a national bank, and the federal government collects revenue through the imposition of tariffs this will allow us to help the States pay off the debts. Jefferson was just like, "Hey, wait a minute here. Why do we need a national bank when each of the former colonies, now States have their own banking systems?"
Nia Rodgers: Let them pay their own debts.
John Aughenbaugh: Yeah. Hamilton was just like, "But banking can unify the country," and Jefferson was just like, "Yeah, but a national bank would be just as oppressive as the British Crown wanting us to go ahead and pay them money every year." Banking has always been contentious. We got a landmark Supreme Court decision, McCulloch versus Maryland, which was about States trying to tax the second iteration of the national bank.
JOHN AUGHENBAUGH: This has been a contentious issue. We're going to talk about it in this podcast episode. Guys, as recently as the Great Recession of 2007-2009 was in part about the role of banks. The role of banks. You were correct in saying, ''Wow, we just can't seem to get a really good handle on banking in the American, if you will, version of democracy/capitalism.''
NIA RODGERS: Yeah, it's complicated.
JOHN AUGHENBAUGH: Yes.
NIA RODGERS: That's part of the problem, is that banking is complicated. I don't know about you, but I did not go back into the 1800's because there's only so much commission I can think about in terms of banking because we probably could have gone back to Egyptian times when they had banking. If we were so inclined, but we started in the 1900's because there was this panic of 1907, which were bank runs. We think of panics, I think at least I thought of it, as starting with the Great Depression. But there had actually been a series of them in the late 1800's and early 1900's, culminating right in the 1997 crazed panic. Basically, what happens in a panic is that people think that they're not going to be able to get their money. So they go to the bank to try to withdraw their money and so many people do that, that the bank either has to shut down or it has to regulate the amount it's going to give people or something else. It has to protect itself from being completely depleted.
JOHN AUGHENBAUGH: Yeah, because for the banks to make money, banks first need to have people who will deposit money into the bank.
NIA RODGERS: Right.
JOHN AUGHENBAUGH: Let's just say for instance, Nia you are a thrifty person and you set aside $50 every pay period and you want to put it in the bank as savings. Now, the bank will go ahead and say, ''Nia, hey, thanks for your deposit. In over a period of time, we might go ahead and give you a return of 25 percent.''
NIA RODGERS: One percent at [inaudible] But whatever. Let's say we give a quarter on that every month, we'll give you a quarter of your $50.
JOHN AUGHENBAUGH: Now the way the banks make money, then they loan it to people who want to buy a house, buy a car, start a business, etc. Because they charge a higher interest rate on the loan.
NIA RODGERS: Than they're giving me. They owe me a quarter. But if they lend my $50 to a person and say you owe us a dollar each month in interests. There are 75 cents out there that the bank has made. I know those numbers aren't correct, but there's 75 cents that the bank has made and they can still give me my 25 cents. So then they have more money that they can either lend to people or they can invest in other things, depending on what bank they are.
JOHN AUGHENBAUGH: But a panic occurs when a whole bunch of people are like, I might need to dip into my savings because I might have my pay and my job reduced or I might lose my job. So I'm want to I want to dip into my savings.
NIA RODGERS: I need my $50 and 25 cents back.
JOHN AUGHENBAUGH: If a whole bunch of Americans feel that way, now banks got a problem. Because they've already loaned out the money. By the way, if the nation's economy is getting so poor that all bunch of Americans are going to banks to dip into their savings, chances are a whole bunch of people who borrowed money can't pay the money back.
NIA RODGERS: The first thing they do is they say, ''Give us the money back.'' Those people say, ''I don't have it.''
JOHN AUGHENBAUGH: I don't have it.
NIA RODGERS: Here's my property. But the problem is the bank then has to sell that property to someone in order to get me my $50, which doesn't happen immediately. Then the bank is short even though they have the property that they could take from the person who can't pay the bill. They still have to turn around and sell that property to give me my money which takes time.
JOHN AUGHENBAUGH: It takes time, but also too, remember if the nation's economy is so bad that a bunch of people are not paying their loans back, chance are, there aren't a whole bunch of people out there waiting to go ahead.
NIA RODGERS: Buy stuff.
JOHN AUGHENBAUGH: Buy those distressed assets that the bank now owns.
NIA RODGERS: Speculators and you get all kinds of stuff like that, which is by the way, getting way into the weeds because there's all that thing.
JOHN AUGHENBAUGH: What you had to happen in the panic of 1907. Here's a whole bunch of Americans ran to the bank. That's where you get the phrase, a bank run, a run on the banks. They actually walked really fast. We're running into the banks and said to the banks, ''We want our money.'' The banks were like, ''We don't have it.''
NIA RODGERS: What some banks do is they close the doors. Then you see people standing outside the bank pounding on the doors and yelling and freaking out and, and all that thing. After this, the government did what it does, which it said, somebody ought to look into that.
NIA RODGERS: Figure out how we can not have that happen again. Thus is born the National Monetary Commission, also known as the Aldrich commission.
JOHN AUGHENBAUGH: Name for the chair, one Nelson Aldrich, who was a senator. Nia, do you want to discuss the membership of the Aldrich committee?
NIA RODGERS: We had Senator Nelson Aldrich, Republican from Rhode Island. Then we had representative Edward Vreeland, a Republican from New York. By the way just as a side note. If you've heard of them, you've heard of them because of the Aldrich Vreeland Act of 1908. They came up with a way to temporarily give money to people through promissory note things. It didn't last very long, but that's where you might have heard the names. Then this is what I love. It's really hard to find the actual names of the membership. Because there's not really much in the way of about this commission. There are some things we'll get to in a minute that are really cool about this commission. But one of the things that's really hard to find, are the names of the members, I couldn't find them. There were eight senators appointed by Vice President Charles Fairbanks for Republican and three Democrat. There were eight representatives are chosen by Speaker of the House, Joseph Canon, five Republican and three Democrat. You see that it's heavily Republican?
JOHN AUGHENBAUGH: In which by the way, makes sense because at that time, the Republican Party dominated national politics in the United States. In the early 1900's the majority party at this point in our country's history was the Republican party. By the way, the Republican Party back then was associated with representing banking interests. The Republicans were just like, ''Hey, if we don't solve this, this might hurt us in future elections.''.
NIA RODGERS: Spoiler.
JOHN AUGHENBAUGH: Yeah, right.
NIA RODGERS: Spoiler alert.
JOHN AUGHENBAUGH: Again, I tell my students all the time. Yes, the government wants to solve public policy problems, but remember, elected officials want to do what in the future?
NIA RODGERS: Get elected some more.
JOHN AUGHENBAUGH: Yeah, they want to win re-election.
NIA RODGERS: They are really open about what they want.
JOHN AUGHENBAUGH: If they do a calculus that's like, hey if we don't do something about this, this is going to be on our backs in future elections. They're gonna do something about it. They're going to attempt to do something about it.
NIA RODGERS: They also have a secretary and a special assistant. Their secretary was Arthur Shelton and their special assistant was Piatt Andrew.
JOHN AUGHENBAUGH: That's not a first name that you see very much these days in the United States.
NIA RODGERS: No, but I like it. P-I-A-T-T. As you can tell, it's a relatively small group of people. 22 people total.
John Aughenbaugh: By the way, listeners, if you've been listening to our series about commissions, the larger the commission, the less likely it is to actually do meaningful work. It's just a rule of thumb in government. If you make a committee work commission too large, it's almost impossible to get consensus.
Nia Rodgers: Which makes sense. That's just a lot of voices that you have to compromise with. What's great about this commission is, boy, did they have some output.
John Aughenbaugh: My goodness. Yes.
Nia Rodgers: They had 30 reports folks, and you can read them all. One of the great things about the Federal Bank System, is that the different Federal Banks around the nation, gather documents and keep historical documents, and bless the St. Louis Fed, for they gathered all 30 of these reports in one spot. Sorry.
John Aughenbaugh: But this also reflects something else that was going on in a country at the turn of the 20th century. The progressive movement, okay? Was a huge believer, that you could study an issue, find solutions, and that you should issue reports.
Nia Rodgers: Transparency.
John Aughenbaugh: Yes. Because we put together a whole bunch of experts, and of course, they're going to go ahead and want to tell us their expert recommendations. This stuff to where we hope we can cover, we can obfuscates, et cetera, okay? That didn't happen back then. When they had commissions, they wrote reports, and they're fascinating reads if you're into that kind of stuff.
Nia Rodgers: Did the best thing. Again, I would want to be on this commission.
John Aughenbaugh: Oh, yeah.
Nia Rodgers: Because they went to Europe. What they did was, they tried to figure out if there was a better way to do banking than what was being done in the United States at the time. They went all over Europe. When you go to those reports, there's the banking of Italy, and the banking of the various countries. Think about in 1907-1908, they're not flying. They're taking steamships, so it's an adventure to go there. They're taking a steamship, it's going to take a little while. All this was done in three years. They managed to do a lot of these reports in a really short period of time, and they're fascinating to read. For the historians in the crowd, they're a really good snapshot of Europe's banking system at the turn of a century. That's not really encapsulated in many places, but it's encapsulated in these series of reports. I can't speak highly enough about a series of reports, if you have some time and you have a chance to read them, they're really interesting.
John Aughenbaugh: If you like comparative politics or comparative history, the reports are fascinating. Because they were honestly trying to figure out if there was a better way to do banking in a democracy with a capitalist economy than what was going on in the United States. Because as Nia pointed out, in the late 1800s, early 1900s, the country basically went from boom to bust in the economy pretty much every decade. Economists will tell you this, you can't keep on going from those wild extremes. Ideally you have consistent growth with very few down periods. That's the sweet spot in regards to a capitalist economy. That was the overall arching question for the Aldrich commission. How can banking mitigate these boom and bust periods? Nia, what was their ultimate recommendation?
Nia Rodgers: Ultimately, it led to the Federal Reserve Act of 1913.
John Aughenbaugh: Yes.
Nia Rodgers: It has created the Federal Reserve System. Now, we often talk about conspiracy theories as part of our commission stuff. We had tape in salute you people who think that the Federal Reserve is somehow a conspiracy of, what is it? The Bilderberg Group, and the raphe styles, to control American banking. I can't understand that particular conspiracy theory because it's too convoluted for me.
John Aughenbaugh: Yeah. The overarching conspiracy theory that arose was that the Federal Reserve Act was a law passed by Congress to basically benefit the rubber barons, the capitalist who drove the Industrial Revolution in the United States.
Nia Rodgers: At that time it would have been the Rockefellers and Moraines.
John Aughenbaugh: Yeah. If you subscribe to that theory, there's probably very little Nia, that you and I could say, that will bump you off that block. Now let's be very clear. The Federal Reserve System was designed to go ahead and mitigate, economic booms and bust. Because it's basically a system of regional banks that are designed to control the supply of money in the United States. That's the basic purpose of the Federal Reserve System.
Nia Rodgers: Hence why you get means around the nation, and you get Federal Reserves around the nation. Like the aforementioned St. Louis, who we'd love because they're hugely into documenting all things. That's historically been one of the best things about the St. Louis, although there are lots of reserve documents out there. The reserve system encourages that, for instance, one of the reports that came out of this, is about the banking laws of all the states. It's really important that the reserve system keep those historically so that we know what we tried before and what didn't work. There's a lot of that sort of thing. But the Federal Reserve Act, I think that it affected the way Woodrow Wilson approached the 1912 presidential race. Because people wigged out when there was this discussion of a centralized bank.
John Aughenbaugh: Yeah.
Nia Rodgers: Because people didn't want a centralized bank.
John Aughenbaugh: Because this went ahead and tapped in to that long-standing dispute that I mentioned at the start of this podcast episode. The Democratic Party tended to represent southern and rural states that did a lot of farming. Historically, farmers have had love-hate relationship with banks. Because farmers typically need to borrow a whole bunch of money for equipment, and for planting, then it's a big bet. Will the growing season and the harvest seasons produce enough yield with the prices being high enough so that farmers could pay off their loans? If that does not happen, who then takes ownership of the farm and the equipment? Banks. In those parts of the country, bankers have not always been warmly welcomed. Again, Woodrow Wilson was a Democrat. For listeners today, who are aware of where the support for the Democratic and Republican parties, the 21st century versions of those parties, that's been flipped. Most support for the Democratic Party today, are in the large cities on the coast. Whereas a lot of the support for the Republican Party is now in the deep South and rural America, so it's been flipped. But in the 1912 presidential race, Woodrow Wilson, a Democrat, was very responsive to those parts of the Democratic Party who were like, this looks like a central banking system, and we don't like banks. We don't like bankers.
Nia Rodgers: We certainly don't want someone centralized far from us with people who don't know us. A huge amount of relationships with farmers and banks is personal.
John Aughenbaugh: Yes.
Nia Rodgers: They know each other, there's a trust there.
Nia Rodgers: Although it eroded, especially as you get into the Great Depression, it eroded because banks had to do what banks had to do.
John Aughenbaugh: I think if you were a farmer in early 20th century America, the nation's economy had already begun to shift from agriculture to industrialization. Forces outside of your control were basically saying to farmers across the country, "You're no longer as important."
Nia Rodgers: Up until then, I think what is some amazing number before the Industrial Revolution, 96 percent of people worked on farms.
John Aughenbaugh: Yes.
Nia Rodgers: Because the few that didn't were special trades. They were blacksmiths, they were bakers, and then you get industrialization and more and more people leave the farm and go to work in cities and go to work in an industry. Less and less now, it's almost entirely reversed. I think four or five percent of people in the United States work in agriculture.
John Aughenbaugh: That's right.
Nia Rodgers: Everybody else works in something else. Again, the flip, you're seeing all reversals from the turn of the century.
John Aughenbaugh: Though Woodrow Wilson used the various proposals that came from the Aldrich commission as a wedge issue in a number of states.
Nia Rodgers: He won.
John Aughenbaugh: He won.
Nia Rodgers: That's why Wilson's President at that point.
John Aughenbaugh: Again, I remind my students, the Democratic Party of the early 20th century was not the Progressive Party. The Progressive Party in the early 20th century was the Republican party. It was the Republican Party led by politicians like Theodore Roosevelt, John Dewey, who were like, government can study an issue and regulate that behavior that creates problems in the economy.
Nia Rodgers: Now if you said to Mitch McConnell, I'm going to need you to do that. He would have to lay down and put a cold compress on his forehead.
John Aughenbaugh: Yeah.
Nia Rodgers: That's not the current Republican position
John Aughenbaugh: We have a flip. It's flipped.
Nia Rodgers: Can we move on to one of my favorites?
John Aughenbaugh: Yes.
Nia Rodgers: We're going to treat these two episodes in the way that often history is taught in American government, which is from war to war to war. I'm going to pretend that nothing happened in the banking system between 1908 and 1929. That's not completely accurate, but the shifts were not horrific. Then you get the Wall Street crash of 1929. That is the famous crash and everybody started the Great Depression on that. I think people think it happened on one day. It didn't, it happened over the course of what, like six or eight weeks because it dipped and then recovered and then dipped harder and then recovered and then couldn't recover. This is the totally thin basic. What happened with the crash was, people got into stocks, regular humans got into stocks. Stocks stopped being a wealthy people thing and started being a regular person thing. But people bought them on margin, what's called on margin, which is, I only have to put 10 percent down in order to get this stock. Or however much percentage down, I think 10 percent was common, but there may have been other percentages that people used. But when the stock market started to fail, people were asked to repay those loans, which were essentially loans. I put 10 percent down and the stockbroker loans me 90 percent of the money to buy the piece of stock. Let's say the stock is a dollar. I put down a dime, he puts down 90 cents, he's loaning that 90 cents to me so that I can buy that piece of stock and then sell it or hold onto it or whatever. When those started to come due.
John Aughenbaugh: That's fine if the value of the stock continues to increase. But as part of the stock market crash, as stocks were then being sold for lower prices, you had a bunch of, as you pointed out, Nia, average Americans who had taken out a loan to buy stocks, but the value of the stocks had decreased. Not only were they losing money because the value of the stocks had decreased, you had stockbrokers who are like, "But you owe me next month a payment on the loan that I extended you to buy that stock that's now in some cases worthless." By the way, listeners, I want you to remember this because it's part of what happened with the 2007-2009 recession. A whole bunch of Americans took out loans to buy houses. As the value of their homes decreased, they still owed what to the banks?
Nia Rodgers: The original amount.
John Aughenbaugh: The original amount.
Nia Rodgers: What that's called is being upside down.
John Aughenbaugh: Or underwater.
Nia Rodgers: Or underwater.
John Aughenbaugh: Yeah, because you still owe the bank for the loan you took out for a piece of property that now is not worth as much.
Nia Rodgers: We'll get to that one because that one's also another favorite. But we'll get to that one a little bit, probably next episode. But the Wall Street problem, people were upside down with their loans to their stockbrokers. Stockbrokers were calling in all those loans, meaning you have to pay me all of it. If you don't pay me all of it, I'm going to charge you extra. People ended up losing a huge amount of money. Now, that would be fine if they were rich, but they were normal folk who were just buying and selling because it was exciting and it was opened to them for the first time in history. If they could do that, normal people could get in and try their luck in the stock market. Part of the problem was too, that a lot of professionals got out. They got out the summer before the stock market crash. You have Kennedy, for instance, was one of those folks. But lots of folks got out and sold because they could see that the market was heating up and it was heating up too much. That stocks, when they go, say, suddenly zoom up really high, that's dangerous because there's only one place for that to eventually go and it's down. But people thought that it would keep making money forever. You're talking about the Roaring Twenties, where people are living the Great Gatsby life and then all of a sudden, boom. The boom was horrible. You went from way, way high to absolute ground, bottom floor. You get what's called the Pecora investigation. It's a little convoluted. But on March 2nd in 1932, Senate Resolution 84 passed authorizing the US Senate Committee on Banking and Currency to investigate "practices with respect to the buying and borrowing and lending of stock and securities." That's an actual Senate committee. It's not an extra committee. A lot of our commissions or committees have been outside or they've been put together as a joint thing. This was just the committee from the Senate.
John Aughenbaugh: A lot of our commissions are created by presidents. They don't exist as part of the formal executive branch or legislative branch. The core of the investigation was part of a congressional committee.
Nia Rodgers: The membership shows that, which is cool because the membership, the chair changes. The reason he changes is because there's an election.
John Aughenbaugh: Because before the 1932 presidential election, the chair of the committee was Pete Norbeck. That's when the Republicans had an overwhelming majority in both houses of Congress. The 1932 election, not only did FDR, a Democrat win the presidency, but the Democratic Party in one of the biggest realigning elections in our country's history, took control of both houses of Congress. The next year the chair of the committee was Duncan Fletcher. If you look at the committee membership, it looks like any other congressional committee. It had a smattering of Republicans and had a smattering of Democrats.
Nia Rodgers: It's half and half but if the leadership changes because of the election.
John Aughenbaugh: What was really fascinating for both Nia and I is every congressional committee, and when I teach as an intro to US government, my students are like, "Each committee has a staff?" and
I'm like, "Yeah. What you actually think that members of Congress?" Most members of Congress are supposed to be in attendance at four different committees at the same time.
Nia Rodgers: In fairness to them, they are called on to do a lot which is why they have the staff.
John Aughenbaugh: It's the committee staff.
Nia Rodgers: Right.
John Aughenbaugh: In this case, the Committee on Banking and Currency had a staff and their last chief counsel was this individual by the name of, and he's one of our all-time favorite, okay?
John Aughenbaugh: Government officials. He only served for a brief period of time. But the dude's name was Ferdinand Pecora and that's the reason why this becomes known as the Pecora Investigation.
Nia Rodgers: I'm sorry.
John Aughenbaugh: Who was Ferdinand Pecora and why is he known by congressional historians?
Nia Rodgers: The thing is, when committees have councils, they have a lawyer basically, who sits in the committee and says, "You-all can't do that, that's illegal." except I'm sure without the southern accent. But, well in some cases, probably. This committee plowed through four.
John Aughenbaugh: Different councils.
Nia Rodgers: Ferdinand Pecora was the 4th counsel. One could argue. Let's be fair.
John Aughenbaugh: No. Let's be very clear. The first three had very little desire to figure out why the stock market crash happened and why it had such an oversized impact on the nation's economy. Because again, remember after we had the Aldrich Commission, the hope was if we have a sound banking system, we're not going to get these booms and busts anymore in the US economic cycle, right?
Nia Rodgers: Right.
John Aughenbaugh: But then all of a sudden less than 20 years later, we have the Great Depression, right?
Nia Rodgers: Right. Not just a little panic, but world-shattering.
John Aughenbaugh: Yeah. It wasn't just here in the States. This was worldwide.
Nia Rodgers: The Great Depression was worldwide. We dragged everybody down with us when we went.
John Aughenbaugh: The first three councils had no stomach, no interest. At least one of them from what I read, seemed to be the tool of actually the stock market. I don't know how the fox got into the hen house but nevertheless, he was there, but Pecora was different.
Nia Rodgers: Well, and the thing is, the others didn't really want to subpoena people. They didn't really want to dig in. One could argue that maybe the committee didn't want to do that necessarily. Also, think about Congress and how Congress has a relationship with Wall Street. That was true then too as well, and there was a lot of complication. But Pecora basically, I think, went to the president and said, "I want to be able to subpoena people. I want to figure this out, and because you have FDR," He's like "Heck yeah, you need to figure this out because I don't want this happening again on my watch."
John Aughenbaugh: Then you get a change in the committee membership and who was Chair. Again, many Americans don't understand this. Congressional committees have subpoena power, okay?
Nia Rodgers: Right.
John Aughenbaugh: Because how else are you going to get people to testify who may not want to go ahead and say, "Well this is the reason why and I actually contributed to this."
Nia Rodgers: Exactly. Who do you subpoena, Aughen?
John Aughenbaugh: This is beautiful, okay.
Nia Rodgers: This is Pecora with some, as we would say, crudely stones.
John Aughenbaugh: Yes. Okay. Some serious hoods spar. He interviewed the President of the New York Stock Exchange, Richard Whitney. He interviewed the chairman of the National City Bank, which we now call Citibank. This was unheard off.
Nia Rodgers: Yeah.
John Aughenbaugh: You don't call these people to testify.
Nia Rodgers: Charles Mitchell, who is the Chair of the National City Bank. He basically made Charles Mitchell cry and then Charles Mitchell had to resign, like three or four days after his testimony because Mitchell basically said, I like that's how he answered. When Pecora I said, "Well, what about this decision?" Because Pecora had this phenomenal memory. Pecora was great at financial shenanigans and he was one of those lawyers who could remember lots of detailed exchanges within the bank and he asked about them and those guys had to answer. I think that's awesome because he does not an hint. He wanted to know what the word was.
John Aughenbaugh: Pecora basically went ahead and exposed listeners as to how and why the roaring 20s was unsustainable.
Nia Rodgers: Right.
John Aughenbaugh: It was unsustainable. Right?
Nia Rodgers: Right.
John Aughenbaugh: He exposed the fact that the New York Stock Exchange knew that a whole bunch of these trends were unsustainable. There were no regulations in place. You had stockbrokers who basically we're counting on the fact that you had a whole bunch of Americans who didn't know how the stock market actually worked, and we're taking their money. Then as Neil pointed out, a whole bunch of them got out before the stock market crashed. That was just the stock market. Then he went ahead and exposed with the big banks, almost all of which were headquartered in New York. How the big banks knew that Americans were borrowing money with very little chance to pay it back. That they went ahead and made all these kinds of bad loans, but they insulated themselves from it. We're counting on the federal government to actually do what the federal government actually did when the stock market crash and there was yet another run on the banks in the early 1930s. The banks counted on the federal government closing the banks.
Nia Rodgers: Right.
John Aughenbaugh: They counted on it and Pecora went ahead and expose this. In economic terms that's known as a moral hazard. You engage in bad behavior, but you don't correct your bad behavior because you know, somebody's going to go ahead and bail you out. I want you guys to remember this because in the next podcast episode when we look at the great recession of 2007-2009, that's actually one of the criticisms of the two-part government bailout. The first part by the Bush 43 administration, the second bailout by the Obama administration. That's actually one of the criticisms. Right?
Nia Rodgers: Right. There's so much about that one. But preview on that.
John Aughenbaugh: Okay, but Pecora was fascinating. Because again, Nia and I do research before these podcast episodes. I know some listeners are like, "Really you guts do research because it doesn't seem like you guys do research." But no, we actually do. What was fascinating was Pecora had this phenomenal memory. He used the subpoena power.
Nia Rodgers: He's on the job for a year only.
John Aughenbaugh: He's on a job for a year and by the way, there were members of Congress on this committee. Who were vehemently opposed to the hymn subpoenaing these individuals because they were just like, "You just don't do that." He was just like, "How are we going to figure out what actually went wrong and how do we correct it unless we get the major players to testify under oath. How their industries actually did stuff?"
Nia Rodgers: Pecora sets the standard.
John Aughenbaugh: Yes.
Nia Rodgers: He sets the standard for future commissions. When he is like a bulldog. We're going to keep asking the question until somebody dang well answers it. Because we have enormous loss of asset, we have enormous loss of life. It's just horrific what happens in the crash and the aftermath. He's like, "This can't be allowed to continue." I hate to leave it there. Are we going to do the recommendations this time or we're going to hold them for next time?
John Aughenbaugh: I think we need to just focus one entire episode on the great recession of 2017- 2019. To conclude this particular episode, Nia, the final report of the Pecora investigation was 400 pages. Then make any official recommendations. But his work was so thorough. Then it ends up becoming the basis of one of the two most important new deal pieces of legislation in our country's history. First is the Glass-Steagall Act, which restructured the banking system. You might be like, "Oh, wait a minute here. Isn't that what the ultra-rich Commission did?" Well, Glass-Steagall went ahead and separated commercial banks from investment banks. This is the reason why I wanted to cover it in this particular episode because listeners, I want you to remember that distinction. Because one of the things Pecora found out was commercial banks needed to be separate from investment banks. Investment banks, their job is to go ahead and invest capital into, if you will, economic initiatives, economic entrepreneurship.
John Aughenbaugh: But that is risky behavior.
Nia Rodgers: Right.
John Aughenbaugh: That's risky behavior.
Nia Rodgers: Needs to be separated from mom and pops savings in the bank, which is risky but not nearly as risky.
John Aughenbaugh: Nearly as risky. Commercial banks need to be separate from investment banks. To give you a metaphor, commercial banks are like the backbone of the US economic system, right?
Nia Rodgers: Right.
John Aughenbaugh: People are going to want to borrow money, for instance, to buy a car.
Nia Rodgers: They go to a credit union or a bank and there is a normal procedure that you go through and it's very bland and it's not really exciting.
John Aughenbaugh: You know if I want to put a new roof on my house and I don't have the money, I can go to my bank and take out a small personal loan. Put that new roof on and in five years I can pay it off. That's the backbone of a capitalist economic system.
Nia Rodgers: Why does it work? Because of the FDIC.
John Aughenbaugh: Yes.
Nia Rodgers: Which is part of the Glass-Steagall. If I put my $50, my aforementioned $50 a month into the bank, the FDIC now guarantees me that up to $250,000 I will have, the government will make sure that my first $250,000 is protected if there's another crash. That gives the bank a chance to loan my money to Augie to put on his new roof.
John Aughenbaugh: That's right.
Nia Rodgers: Because both of us are safely guaranteed.
John Aughenbaugh: That means money is flowing through the economy. Nia is being encouraged to save, and feel confident that if she puts money in a savings account in her bank, that if she goes to take it out it will be there. It encourages me to go ahead to borrow that money to put a roof on, which means I'm hiring contractors, etc.
Nia Rodgers: Buying the materials, exactly.
John Aughenbaugh: But investment banks are designed to take risks, right?
Nia Rodgers: Right.
John Aughenbaugh: We're going to invest in the Internet in the 1990s.
Nia Rodgers: It might be fabulous. Then again.
John Aughenbaugh: It could crash and burn.
Nia Rodgers: Right.
John Aughenbaugh: But the economic system won't go down with it if some of those investments don't pay off.
Nia Rodgers: What happens through investment banks isn't how small businesses pay their employees. Pay their employees through banking, through regular banking.
John Aughenbaugh: Yes.
Nia Rodgers: When you mix those things you endanger people's employment, you endanger people's small businesses and their ability to do small business loans that keep small businesses going. Separating those two things was huge.
John Aughenbaugh: But then the 2nd law is not only important substantively, it was important symbolically, because the 1934 Securities Exchange Act, T=the Fletcher-Rayburn Bill, actually created regulations for the stock market. Think about how the United States stock market around the world is the symbol of capitalism. For the first time in our country's history, the stock market was going to be regulated. It created the Securities and Exchange Commission, an independent regulatory commission that sets up rules for the stock market. Now mind you, I understand listeners. There had been critiques about the Securities and Exchange Commission for not being aggressive enough in regulating the stock market. For you listeners who are supporters of Senator Bernie Sanders. He rails about that, the SEC on a regular basis. I get that. But this was huge and it all flowed from the Pecora investigation because he went ahead and exposed the fact that it was basically the Wild West during the 1920s.
Nia Rodgers: Exactly. While Bernie might complain, Bernie, like I know him. While Senator Sanders might complain about the SEC, the SEC existing is enormous.
John Aughenbaugh: Yes.
Nia Rodgers: The idea that you can tell the titans of Wall Street what they can and can't do, that's a totally new concept that we get in 1934. Until then, rich men could do whatever they wanted to do. Like there was no abrogation of their power.
John Aughenbaugh: Yes.
Nia Rodgers: This was the first time.
John Aughenbaugh: Yeah. They could do insider trading.
Nia Rodgers: Which they did all the time. They did a lot of things where they messed up.
John Aughenbaugh: They could lie to potential investors and then use the legal system to go ahead and get margin calls repaid.
Nia Rodgers: Publicly traded companies didn't have to give you any report about what they were doing or how much money they were making or where they were working. None of that. They didn't have to do any of that.
John Aughenbaugh: Or if they issued a report it could be chock-full of lies and there was no legal repercussions.
Nia Rodgers: Now in 1934 you get this commission saying, "No, there's got to be a report for every publicly traded stock. For every publicly traded company there's got to be a report. It's got to be accurate. We will investigate to make sure it's accurate." But there has to be a level of transparency which did not exist until 1934, and that is because of Ferdinand Pecora, and I love the fact that it is named for him and not for the chair of the commission. The [inaudible] commission might sound cool, but the Pecora Investigation, and by the way, it's not a commission because it was not a commission it
was committee. He was the counsel. So yay exciting, and we're up to the 1950s and we will talk about that in our next episode. But if you read nothing else, reading about Pecora, he's just a fascinating figure in history. He was only there for a year and he made this enormous change to the banking system that has carried through to today.
John Aughenbaugh: Yeah. Good stuff.
Nia Rodgers: Yeah. Thanks Augie.
John Aughenbaugh: Thank you, Nia.
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