The Glass-Steagall Era Redux

For those looking for new ways to periodize American history (and who isn’t?), let me suggest a new way. Let us call the period from 1933, when the Glass-Steagell Act, separating commercial from investment banking to 1999, when it was unceremoniously repealed, the Glass-Steagel Era in American history. I am not sure what to call the next ten years, perhaps (after the bill the repealed it) the Gramm-Leach-Biley Era. This has come to an end, and perhaps we are in the Tim Geithner Era now. Now, the Glass-Steagell Act was finally interred in 1999, but it had long been a ghost of its former self, whittled away in numerous ways during the 1970s and the 1980s, and it had become so much of a lost cause that my the time it was finally repealed, not that many people noticed.
The significance of the Glass-Steagall Act goes beyond the separation of investment and commercial banking. It was an effort to limit the role of investment banks and bankers, a time when the big commercial banks, the Chase Manhattans and First National Citys reigned supreme, and not that many people were paying close attention to the Bear Stearns and Goldman Sachs of the world, a time of tight and many would say rigid financial regulation, a time when the watchword of the financial services was reliable returns and not “innovation.” As Paul Krugman suggests today, we need to return to that era.

Another financial term from the 1930s is “capital strike,” which is what FDR accused Wall Street of doing during the recession of 1937, staying on the sidelines with their hands in their pockets, letting the economy to fail simply for the joy and political satisfaction of blaming Roosevelt for the mess. Now, the truth is somewhat complicated (most scholars believe that FDR’s foolhardy effort to balance the budget was more of a factor than Wall Street) but the possibility of a “capital strike” seems to be one of the things that Geithner and Obama are most concerned about. Obama is trying to coax Wall Street’s money back into the market; and they are demanding both favorable terms and that government back off its regulatory proposals—particularly when it comes to limiting compensation. Like FDR, Obama is trying to save capitalism, and like Wall Street in the 1930s, Wall Street in the 2000s doesn’t want to be saved, or wants to be saved on its own terms, in a place and manner of its own choosing. In the end, in the 1930s, there was a tense compromise—Wall Street was genuinely restructured in the 1930s, through Glass-Steagall and similar acts, and a new generation arose that was willing to live with the New Deal, but both sides felt that they had been given a raw deal, and the compromise started to break down in the 1970s. A new arrangement has to be found, and if Geithner’s proposals do not begin to go far enough, they are a decent start. But Obama and Geithner can’t be afraid of a “capital strike” and can’t shy from a confrontation with Wall Street over the fundamentals of its program. Without it, the eventual deal, like many since the 1970s, will be entirely on Wall Street’s terms.