Banking Act of 1935
The Banking Act of 1935 was a significant reform of the U.S. banking system that aimed to enhance the structure and stability of the Federal Reserve. Building on earlier legislation like the Federal Reserve Act of 1913 and the Glass-Steagall Act of 1933, the 1935 Act introduced critical changes to governance and oversight within the banking sector. One of its key features was the establishment of a seven-member Board of Governors, appointed by the president for fourteen-year terms, which increased centralized control over member banks. Additionally, the Act made the Federal Deposit Insurance Corporation (FDIC) a permanent institution, ensuring safe deposits and bolstering public confidence in the banking system.
The Banking Act of 1935 also restructured the Federal Open Market Committee (FOMC) by increasing the authority of the Board of Governors, thereby enhancing its role in monetary policy decisions. These reforms were aimed at addressing the inadequacies highlighted by the banking challenges of the 1920s and early 1930s, particularly during the Great Depression era. Overall, the Act played a crucial role in stabilizing the banking system and improving its capacity to manage national and international financial needs. Its legacy continues to influence banking practices and regulatory frameworks to this day.
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Banking Act of 1935
The Law Federal legislation that changed and strengthened the Federal Reserve system
Date Enacted August 23, 1935
The Banking Act of 1935 reformed the Federal Reserve system by making the Federal Deposit Insurance Corporation (FDIC) permanent, by allowing the secretary of the Treasury to purchase FDIC stock, by replacing the Federal Reserve Board with a seven-member board of governors, by authorizing the board to set reserve requirements, and by restructuring the Federal Open Market Committee.
In 1913, the U.S. Congress passed the Federal Reserve Act, which created the Federal Reserve system. A significant improvement over the national banking system of the Civil War days, the Federal Reserve Act divided the country into twelve regional districts with a regional bank in each, set up a Federal Reserve Board with reserve requirements and rediscount rate powers, and stabilized the U.S. banking system overall. All national banks had to join, while state banks could join the Federal Reserve Board if they chose to do so. Despite the fact that the Federal Reserve Board had done fairly well during World War I, its actions, or inactions, during the 1920’s, especially in terms of the stock market, demonstrated a need to reform the banking system again.
In 1933, Congress passed the Glass-Steagall Act, which created the FDIC, separated investment and savings banks, and passed Regulation Q, which prohibited banks from competing over interest rates. Glass-Steagall was a major accomplishment for the U.S. banking system. Nonetheless, there were some, such as Marriner Eccles, who felt that the banking industry needed to be more centralized. Eccles, head of the Federal Reserve, worked on a bill to accomplish more centralization. The House passed it, but in the Senate, Carter Glass, founder of the Federal Reserve System, opposed it. Attacking the Eccles bill mercilessly, Glass thought he had gutted it. The truth, however, was that the Banking Act of 1935 remained a major advance for the U.S. banking structure.
As a result of the law, the president could appoint the seven-member board of governors to fourteen-year terms each. The board had more control over member banks, more control over reserve requirements and rediscount rates, and more authority in the Federal Open Market Committee (FOMC), which was composed of seven board members and five members of reserve banks. All large banks had to join the Federal Reserve Board, and the law made FDIC a permanent establishment with secure funding. While more laws and changes came after 1935, especially after World War II, the U.S. banking system was stable, secure, and capable of handling national and international financial intermediary functions. Finally, credit for the Banking Act of 1935 goes to Eccles and, to an extent, Glass as well.
Impact
The Banking Act of 1935 did much to reform and strengthen the Federal Reserve system. It made FDIC a permanent establishment, established a new board of governors for the system, and centralized the FOMC. It also disqualified the comptroller of the currency and the secretary of the Treasury from serving on the board. Its long-term impact was measured in how it sustained public confidence in the U.S. banking institutions.
Bibliography
Dwyer, Gerald, Jr. “The Effects of the Banking Acts of 1933 and 1935 on Capital Investment in Commercial Banking.” Journal of Money, Credit, and Banking 13, no. 2 (May, 1981): 192-204.
Eccles, Marriner. Beckoning Frontiers: Public and Personal Recollections. Edited by Sidney Hyman. New York: Alfred A. Knopf, 1951.
Hyman, Sidney. Marriner Eccles: Private Entrepreneur and Public Servant. Stanford, Calif.: Graduate School of Business, Stanford University, 1976.
Phillips, Ronnie. The Chicago Plan and New Deal Banking Reform. New York: M. E. Sharpe, 1995.
Smiley, Gene. Rethinking the Great Depression. Chicago: I. R. Dee, 2002.