As President Obama and his economic advisers work to establish “new financial foundation,” they would do well to examine the challenges faced by Franklin Roosevelt in the first months of his presidency. FDR inherited an even greater financial collapse than President Obama; one that not only all but destroyed the American banking and financial system, but also brought down the “real economy” with it, resulting in massive unemployment and an unprecedented drop in the level of economic activity. The hardship felt by Americans at that time is unimaginable today — in large part because of the many New Deal programs that remain in place to help protect the average citizen from the worst shortcomings of the free-market system.
But the greed and avarice that led to the collapse in the first place are remarkably similar. So too were the powerful vested interests that rallied against the idea of reform. FDR and his advisers essentially ignored those interests, pressing ahead with a series of acts that regulated the financial industry and shielded the real economy from the vagaries of the market.
If investors were going to play fast and loose with what FDR termed “other peoples money” then it was high time for the government to step in and stop these practices. In short, investment banking needed to be separated from commercial banking so that the home owner and small business owner’s assets would be protected.
Equally important, if investment houses and stock brokers were going to engage in unscrupulous and even fraudulent activity, then it was high time to demand transparency and establish rules and regulations that would eliminate such activity and provide small and large investors alike with the confidence that their investments were secure.
Taken together, FDR’s reforms — spearheaded by such landmark pieces of legislation as the Glass-Steagall Act and the Securities and Exchange Act — provided a structure for the American banking and financial system that allowed the financial markets to rise and fall without threatening to bring about a total economic collapse when times on Wall Street got tough. This system, which remained largely in place until the 1980s and 90s, served the country well and is very much a part of the economic success story of the post-war world.
Shielded by the New Deal, Americans today are unsure about the degree to which the Obama Administration should go in overhauling the financial system. Perhaps a good place to start is to ask ourselves which is the more important– Main Street or Wall Street?
For FDR there was no doubt. He put the interest of the average American ahead of the demands of lobbyists and the wealthy establishment and designed a financial system that reflected this philosophy. As he once said “the test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”
Let us hope that President Obama, his economic team and our representatives in Congress are guided by the same spirit.
David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.