Todays talk by Matthew P Fink is something i have been looking forward to because i like matt. I dont know anything about the subject. I will be learning with you today also. Matt comes to us he is retired now. He spent the bulk of his career with the mutual fund association. He wrote what you described to me as a Landmark Book on mutual funds. He followed it up with this book last year. Carter glass and financial regulation. He has a few images to supplement his discourse and then he will take some questions. Come on up. I have a funny thing happening getting here, i live in ceviches maryland, and then i called for lift, and they came within a minute. I had purely barely put on my tie. I i got my lift as he was pulling away, i realized that i had not put a belt on my trousers. So i had a vision of being on here without having a belt and my trousers falling elm on air. So carter glass, i will talk for 2025 minutes and then take questions. So carter glass, was a major figure in American History a recent writer called him the single most important lawmaker in the history of American Finance. I think thats true, but very few people know about him today. I spoke recently at the Historical Society of virginia where glass is from, and no one in the audience knew anything about carter glass, but a lot of people were related to him. Thats what led me to my book. I want to say three things about glass. Glass was a racist and a complete reactionary. He made his fame getting the virginia constitution amended at the end of the 19th century to prevent 95 of blacks in the state of virginia from voting. He was a democrat. He opposed 80 of the new deal. He was a total reactionary racist and he hated change and reform. He came to the senate in 1920. The senate then had an operator run phone system. They switched on automatic, where you could dial yourself. Glass insisted they go back to operator, and they did. Another example, he was at the Mayflower Hotel in Downtown Washington during the week. He came in one morning to find out the mayflower had renovated its lobby and he left the hotel in a huff. He did not like any kind of change. Reactionary in his personal life and political life. Second point, he made a major exception in the case of laws dealing with finance. He not only supported but he authored three very important laws designed to curb the power of American Finance, the Federal Reserve act of 1913, the glasssteagall act of 1933, and portions of the securities and exchange act of 1934. So, glass disliked and distrusted government. He disliked and distrusted even more wall street. The third point is i think the most interesting. He like many others, like brandeis, believed that the way to deal with finance was not to regulate it, that regulation would always fail. Instead, the way to deal with financial power was to break it up, fragmented. Those are the three points about glass. General reactionary. Exception in the case of laws dealing with finance, and believe the way to deal with finance was not through regulation but through fragmentation. Let me talk about his background. He was born in virginia so two years before the civil war. Lynchburg was a perfectly southern town. Veterans last remembered seeing confederate soldiers up in the hills around lunch break. And his family like many southern families was devastated by the civil war and reconstruction he was largely self educated. He read shakespeare, english poets, greeks and romans. He went to work at age 14 and started selling newspapers on the corner in lynchburg. He became the assistant to the printer, called the printers devil in those days, then the printer, then a reporter, than the editor. The owner arranged for people with money to lend glass the money to buy the newspaper. Glass was an extremely successful publisher of the lynchburg news. He bought the morning paper, bought the afternoon paper, installed presses, wrote editorials on everything from a case in france to reconstruction in the United States. He made for that time in that era a lot of money. Like a lot of successful Business People, he decided to go into politics. There was only one party to be in virginia then, the Democratic Party. He was elected deck to be in in virginia then, the Democratic Party. He was elected and was the guy who came up with the formula in the virginia constitution that prevented most blacks and a lot of whites from voting. Believe it or not, that made glass a hero to white virginia. He was a big figure in the state, so he was elected to congress in 1902. He was elected as a democrat in 1902, and he might as well not be there because the republicans had firm control of the national government. Teddy roosevelt was in the white house. Republicans had overwhelming majorities. Democrats like glass were isolated. He wanted to go on the Foreign Affairs committee. He did not get that. He was put on the house banking committee. He had no background or interest in banking and thats where he was put. Always a conscientious striver, he read every article and book and spoke to every person he could speak to about finance and banking. He educated himself on finance just as he had on shakespeare and the english poets. At that time, the United States was the only Major Industrial country in the world that did not have a central bank or similar mechanism to control the currency. England had the bank of england. France the bank of france. Germany the bank of germany. There was no such entity in the United States. A few Business People and intellectuals worried about this, but nobody paid much attention. The economy was doing well. Teddy roosevelt, the president , found banking very boring, which i agree with him. Then comes the panic of 1907. The worst financial panic we had until 1929. A number of companies fail. They threatened to bring down brokerage firms, insurance companies, and the new york stock exchange. There is no federal or state entity that can deal with this kind of panic. The panic is stopped when one individual, jp morgan, who had a small Investment Banking firm, went around and raised money from his other friends on wall street, other banks and Securities Firms, and they raised money and rescued a number of failing banks and trust companies. The panic stopped. The economy came back. Morgan was kind of hero. Suddenly, congress realized, we cant go on like this. As one of them said, we are going to have panics in the future and we wont have jp morgan with us forever. There was a real conversation among people who care this about this kind of stuff that we need Something Like the bank of england or the bank of germany. Congress names a very powerful senator, nelson aldrich, probably the most powerful republican senator i cant think of anyone today of that stature and power and a special committee of congress to draft legislation to provide the equivalent of the bank of england or the bank of germany. He assembles every expert he can think of in the United States, bankers, businessmen, professors, students of finance generally. They go overseas. They meet with people in london, paris, berlin, and they develop a model for a very powerful u. S. Central bank, modeled largely on the bank of germany. One main office, probably in new york city. Not government controlled, controlled by private bankers. A very powerful Private Banking organization modeled on the german central bank. Had aldrich and his colleagues introduced that plan in 1908, 1909, 1910, it probably wouldve been enacted. We had come out of a panic and aldrich had the Business Community behind him, but republicans did not act. They had the feeling they would be in power forever. They had largely run the government since the civil war, and probably felt they would run the government for another 50 years. By the time he introduced his plan in congress, the country had swung in a progressive way. Democrats are taking control of the house. Progressive republicans had taken control of the senate. And they were not about to enact a conservative, private bank like aldrich was proposing, so the aldrich plan died. The house is now controlled by the democrats. The ball is in their court. And who do they name to prepare their version of a central banking type bill, but carter glass. They dont know much about him but he is probably the only guy, at least in the Democratic Party in the house, who had ever studied banking issues. So he is named to devise the democratic plan. He comes up with a scheme very few people had talked about or thought of. He is not going to have a single, central bank as they have in england, france, and germany. Hes going to have series of Regional Reserve banks in 12 or 20 cities around the country because he does not want finance centered in new york. He wants it scattered around the country. He wants a central bank in virginia to help farmers and merchants. He wants a bank in sacramento or San Francisco to help california farmers, merchants, and bankers, so he comes up with the Regional ReserveBanking System of x number of reserve banks. He realizes he has to have somebody on top of this to coordinate these reserve banks, so he says i will use the control of the currency. He names a top federal banking official whose main job it is to authorize National Banks. If you wanted a bank at that time you went to the state or you went federally. If you went federally, this was the guy who oversaw the license. One author had a very good characterization. The aldrich plan was called the National Reserve association. Glass called his the Federal Reserve association. It was federal in nature. When he comes up with the scheme, we dont know who the next president is going to be. Its early 1912, and we are headed toward the most famous election probably in American History, the 1912 president ial election. Three major candidates. The republican president , William Howard taft, Teddy Roosevelt who had been a republican president but now is in the progressive party, and Woodrow Wilson, a democratic governor from new jersey. Nobody knows when glass comes up with his plan who is going to be the next president. Wilson gets 40 of the vote, is elected. He and glass had never met but glass contacts him, goes to visit him, and glass says ive got a great deal for you. Ive come up with this banking scheme. And glass and wilson kinda fall in love with each other. They are both southerners, virginians, racists. They dont like a strong federal government. Glasss plan is just the kind of thing wilson would like, and he does. He says carter, i would like to make one change. I dont want a controller to be on top. Why dont we have an independent board of disinterested people who will be in charge of the system . Glass agrees. We now have a plan for a Federal Reserve system of 12 or 20 reserve banks around the country under the general supervision of a board and washington, d. C. This gets presented to congress, and all hell breaks loose. Republicans love the plan, and this is complete heresy. Some hayseed from a town in virginia is proposing a Regional Reserve plan . 90 of republicans cannot wait to kill the plan. A lot of the democrats from the south and west hate anything with the name bank. They are Andrew Jacksons successors. They oppose it. There is complete fragmentation, but glass, very clever, gets the bill through the house of representatives. Even though he is just a congressman, he plays a big role in getting the bill through the senate. Its almost regarded as a miracle, but on christmas day, 1912, Woodrow Wilson signs into law the Federal Reserve act. And glass, while most americans dont know him, is a huge figure now in American Finance and american politics. A year before, nobody knew his name. An opening happens in treasury, so wilson names glass to become secretary of treasury. A virginia senator dies and the governor of virginia names glass to a term in the senate. Glass is elected four more times. There he is in 1920, a United States senator. I ought to go back and say the most interesting thing about glass is he believed in fragmentation and the Federal Reserve reflects that. Fragmented economic power. Hes a senator, well respected, on the cover of Time Magazine a couple of times, a big figure. And like anybody else watching the country in late 1920, he notices the stock market is going up in 1927, 1928, 1929, and like any other observer he notices whats happening is money from across the country is pouring into wall street so investors can buy stock on margin. There were no federal or state limits on how much you could borrow, what a bank would allow, so at that time, in 1928, if you had 2000, you could buy 10,000 of stock. That meant if the stock went up another 2000, you would double your money. But you are very highly leveraged. Many did this. My wifes grandfather owned a farm outside of philadelphia. He put all his money into stock on margin. My fathers older brother put all of his money in the market. Glass said where is this money coming from . Its coming from all across the country. The bank in sacramento, richmond, wichita is not lending to local farmers and merchants. The bank in wichita is lending to Chase Manhattan Bank in new york, which is lending to merrill lynch, which is lending to its customers. Money is coming from across the country, a river of gold, a lot of money from across the country pouring into wall street from brokers loans. Glass is horrified by this. He is even more horrified when he finds out the Regional Reserve banks are lending money to the local banks who are lending to chase manhattan or citibank and then to merrill lynch, and then to my uncle and my wifes grandfather. So, this system glass had created to prevent concentration in new york is now being used in a very efficient way to get that concentration. These Federal Reserve banks are funnels making it easier for money to go to new york city. Glass is horrified. His whole Federal Reserve scheme has been dashed by circumstance. He jumps up and down. He goes to the Federal Reserve board which he created and says do something. They say not a bad idea, carter. It is a little dangerous. We will have to think about it. They kind of blow them off. He goes to congress. He writes editorials. He gets ridiculed by his colleagues in the senate. He gets ridiculed by wall street. They hire a professor at princeton who publishes a book in may of 1929 called wall street and washington which calls glass and his colleagues a bunch of hayseeds. These uneducated country rubes are making fun of the greatest Economic System the world has ever created. They are hayseeds. They are antidarwin. Well, we all know what happens. October 1929, just as glass and others had fears, the stock market breaks. All kinds of people cant meet their margin requirements. The go bankrupt. They have to borrow money. They jump out of skyscrapers. We see what happens when leverage reverses itself. There is devastation. Congress in Firm Republican hands decides it has to do something. So they write remedial legislation named for carter glass. Class starts preparing a bill to prevent this from ever happening again glass starts preparing a bill to prevent this from ever happening again. His main concern is the river of gold, so he puts provisions that limit how much a commercial bank and lend to security speculation, how much they can lend to buy stock, to brokerage firms, to other banks. He puts a total ban on reserve banks lending to banks in their community for speculation. At that point, glass was probably ready to go home. He hoped to get it through congress. But two other things, come along. One is deposit insurance. In the late 1920s and early 1930s, banks around the country 5000 banks failed, mostly in farming and rural states. The bank of wichita lens on wheat. The price of wheat plummets. Caught in the south, same story. Cotton in the south, same story. 5000 small banks fail. Everybody in the country who has more than a High School Education thanks deposit insurance is the stupidest idea ever. Hoover, roosevelt, the Federal Reserve board, citibank, everybody thinks its awful because you will be making good banks that are run well pay premiums to shore up bad banks. Everybody said its just awful. I found a quote in a book the other day that i really liked. I am not going to find it. Here. Just before the inauguration, roosevelt comes in. So glass has to put deposit insurance in his bill to get the reforms he wants on restricting bank lending and reserve lending for speculation. He knows he has to have deposit insurance. He hates the idea, but he puts it in. Roosevelt is coming into be inaugurated, and he has to decide what to do. He told gardner, there is more work. The weak banks will pull down the strong. Vice president gardner says to fdr, they are all down now anyway, the weekend the strong. You will have to come up with deposit guarantees eventually. Everybody knows deposit guarantees will be a part of it. Thats the second major part of the glasssteagall act, deposit insurance. The third is what we know the act for today, though it was not a big deal then. What happened was, at the start of the 20th century, the big banks in new york city and chicago want to go want to expand from the banking business of making loans to underwriting and dealing in securities. But their lawyers, sterling, and the other lawyers read the National Banking act and say it is illegal to do that. The National Banking act does not allow National Banks to deal in securities. So, they come up with a scheme. They create separate companies called security affiliates. They have the same officers and directors as the bank. You get a stock certificate they sell. In your drawer you have 50 shares of citibank. You get a letter, here is a replacement certificate. You now own shares of the bank and the affiliate. They become a huge thing in the 1920s. All big banks have them. Banks can only do business in their home state that there is no geographic limit on their securities affiliate. The oddity is in 1929 citibanks basically doing business in new york. Its securities affiliate is doing business in all 48 states. It is the biggest Securities Firm in the country. These the affiliates engage in a lot of dubious practices. When an issue comes up, as glass is working on his bill he did his limits on speculation. Got stuck with deposit insurance. What should he do about securities affiliates . Glasss first bill provided they would be regulated National Bank affiliate regulated by control of the currency and state banks their affiliates were regulated by the fed. That is glasss first bill. His second bill takes a different approach and outlaw securities affiliates. Bans banks from being affiliated with Securities Firms. And i did a lot of research and i was trying to find out what drove glass to make this change. One writer who was one of fdrs advisor said glass always wanted to do this. But if he made a change, why did he change . And i did not a find a clear reason. One was back in 1907, the same year that glass was given the job of creating the Federal Reserve on another committee of Congress Called for certain financial reforms and one reform they called for was banning securities affiliates. So, there was precedent in the Democratic Party not to allow security utilities. Second, glasss first approach was regulation but in the 1920s he had gone to the regulators said all this money is being ported to speculation. You can do something and they blew him off. Glass was not a believer in the efficacy of regulation. Third when the fed testified before glasss committee and he said what should we do about securities affiliates, the fed gave the following answer. If we could do it all over again we would not have them but it is hard to unscramble the eggs. Here is some language you can use if you want to get rid of them. That was not exactly a ringing endorsement over revelatory approach. As glass is teetering as to what to do, two related events happen that force him to go for separation, abolishment. One is a major bank in new york, bank of the United States fails. It is not a white shoe downtown wall street bank. It is a bank for immigrants. It has a misleading name so a lot of immigrants thought it was part of the government. It fails and it has 59 affiliates. Real estate affiliates, not security affiliates. But the headlines in new york city are full of bank of new york with affiliate sales leaving 200,000 depositors bankrupt or destitute. And so, the word securities affiliate has a bad sound. Second, that leads the banking commissioner of new york, joseph broderick, to introduce legislation to ban state, new york state charter banks from having securities affiliates. So the most powerful financial state in the country is now proposing to get rid of affiliates, and glass follow suit. I think these different elements, the early democratic call to get rid of affiliates, glasss dealings with regulators in the 1920s, the fed or the bank of the United States the failure of the bank of the United States caused glass to separate the two required banks to get rid of their securities affiliate. That is what we remember glass steagall for today. But ahead deposit insurance and so on. So, glass gets this build on. Remember in 1912, he presented president wilson with a draft of the Federal Reserve act. Glass now goes to franklin roosevelt, whos about to come in and gives them a draft of the glass steagall act that has limits on lending for speculation, deposit insurance, banning bank affiliates. Roosevelt hesitates because he, like everybody else thinks deposit insurance is a terrible idea but eventually events cause roosevelt to support the glasssteagall act. So, that is the second major accomplishment of glass. Fragmentation is a better thing to addressing the regulation. Because the glasssteagall act instead of providing regulation of securities affiliates provides further abolition. The third act in which glass played a major role is securities. When the new deal comes in on its list of reforms are dealing with the securities markets. And in the 1933, in the first 100 days the same period when glass steagall act was signed by roosevelt, they index the securities act of 1933, which says a new issuer