Banking Act (1935)

« Back to Glossary Index

A broad-scale restructuring of the Federal Reserve—begun under the Hoover Administration and carried forward by the Roosevelt Administration—culminated in the Banking Act signed by President Roosevelt on August 23, 1935 [1].

The Banking Act of 1935 curtailed the powers and independence of the Federal Reserve district banks and concentrated power in the Federal Reserve Bank board in Washington, DC. It also reorganized leadership positions and titles, gave the Federal Reserve more independence from the executive branch, established a more secure Federal Deposit Insurance Corporation, and cemented earlier reform efforts [2].

The Banking Act of 1935 was largely crafted by Marriner Eccles, chairman of the Federal Reserve from 1935 to 1948, and a man often credited for being Keynesian (i.e., in support of government stimulus in recessions) before Keynesian economics established a foothold in the United States. The act was controversial, sparking a fierce, months-long debate in Congress and elsewhere: “Opposition came from people who feared inflation and worried about the centralization of monetary policy in Washington. Opposition also came from business leaders, bankers, economists, and politicians who doubted the economic theories underlying the controversial provisions of the initial bill and valued ideas embedded in the original Federal Reserve Act [of 1913]…” [3].

The legacy of the Federal Reserve Bank’s re-structuring and the Banking Act of 1935 is debated to this day. Most economists believe that the bank has been better at regulating monetary policy since the 1930s than it was before, but controversy has swirled over such policies as a drastic tightening of credit in 1979 which helped trigger the sharp recession of 1980-81 and the loose financial leash of the 1990s and 2000s which promoted the credit bubbles that ended in the recessions of 2000-01 and 2008-10 [4]. One commentator argues that rather than becoming more independent, the Federal Reserve Board became less so in the long run, with dire effects:

“As long as Eccles was Board chairman, the Roosevelt Administration would have tremendous influence over Federal Reserve policies. The Banking Act made it a stronger Federal Reserve, but, unfortunately, one that could more easily be co-opted by the private banking interests once Eccles was gone…Over the past two decades, evidence has mounted that suggests the Federal Reserve is largely in the hands of powerful private financial institutions and their representatives…This may help explain why the Federal Reserve failed to regulate or supervise the declining lending standards of the biggest banks prior to the 2008 crash. It also helps explain why the Fed under Ben Bernanke appeared to be in no rush to exercise its full authority to lend to business enterprises and infrastructure projects as it did under the enlightened leadership of Marriner Eccles in the 1930s and 40s. Instead, it preferred to confine its largesse to purchasing bonds from its banking and hedge fund clientele” [5].

Sources: (1) “Banking Act of 1935,” Federal Reserve History, http://www.federalreservehistory.org/Events/DetailView/26, accessed May 6, 2015. (2) Ibid. (3) Ibid. (4) Robert Barbera, The Cost of Capitalism: Understanding Market Mayhem and Stabilizing Our Economic Future. New York: McGraw-Hill, 2009. (5) Timothy A. Canova, “The Bottom Up Recovery: A New Deal in Banking and Public Finance,” 2014. In Sheila D. Collins and Gertrude Schaffner Goldberg (Ed.), When Government Helped: Learning from the Successes and Failures of the New Deal, (pp. 64-67), New York: Oxford University Press.

« Back to Glossary Index