Category Archives: Interns

Banking Act of 1933

Carter Glass (left) & Henry B. Steagall

 

 

 

 

 

The Banking Act of 1933, also known as the Glass-Steagall Act, established the Federal Deposit Insurance Corporation (FDIC), which guaranteed banking deposits up to a specified amount, and joined two Congressional projects sponsored by Representative Henry B. Steagall.  That is, the Act combined both the creation of a federal system of bank deposit insurance and the regulation of mingling commercial, investment banking and other “speculative” banking activities.

Though synonymous to one another, the Glass-Steagall Act today usually refers to the four provisions that separated commercial banking from investment banking.  Of these provisions, section 16 prohibits Federal Reserve Member banks from acquiring securities on their own account.  Sections 16 and 21 further prohibit member banks from accepting deposits for the buying or selling of securities.  Section 20 disallows these banks from having any association with companies that deal with securities, including employee relationships with (i.e. sharing employees with) as stated under section 32.  Moreover, Regulation Q forbade banks from paying interest on demand deposits and capped interest rates on other deposit goods.

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The Bonds That Sparked New York’s Transportation History

Sonia Huang

A few days ago, New York’s Metropolitan Transportation Authority (MTA) announced it is selling a “catastrophe” bond worth $125 million, in order to cover the damage from future natural disasters.

The New York City transportation system has a 109-year-old history, but it has “never faced a disaster as devastating” as Hurricane Sandy, the chairman of the MTA, Joseph J. Lhota, said in a statement. After Sandy smashed the city in October 2012, the “Metro-North Railroad lost power from 59th Street to Croton-Harmon on the Hudson Line and to New Haven on the New Haven Line. The Long Island Rail Road evacuated its West Side Yards and suffered flooding in one East River tunnel. The Hugh L. Carey Tunnel is flooded from end to end, and the Queens Midtown Tunnel also took on water and was closed.”

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Stock Trading Then and Now

Technology has strongly changed the way stocks are traded from a decade ago to today. Historically, stock markets like the NYSE are a physical location for buyers and sellers to meet and negotiate trades. However, in the 20th Century technological improvements in stock trading have made the physical location to meet irrelevant, giving rise to electronic trading.

Before the telegraph arrived in the 1950s, brokers would place agents on top of hills and buildings between Philadelphia and New York City with signal flags and telescopes to rely stock prices between cities in about half-an-hour. Homing pigeons were also used to transmit information.

Later on, “runners” in the 1860s would carry stock prices handwritten on large chalkboards from the exchange to brokerage offices, so that the brokerages would be aware of a stock’s price. The NYSE was referred to as the “Big Board” supposedly because of these large chalkboards.

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State Level Deposit Insurance Before the FDIC

The Federal Deposit Insurance Corporation (FDIC) has been the government agency responsible for providing deposit insurance to banks since its creation in the Glass-Steagall Act of 1933. While the establishment of the FDIC was an important event in the history of government regulation of the economy, it was not the first instance of deposit insurance in the United States. Several states had previously had state level institutions of deposit insurance in the 1800s and early 1900s.

President Franklin D. Roosevelt signing the Banking Act of 1933 (Glass-Steagall Act), which established the FDIC.

At various times before the Civil War, Vermont, Michigan, Indiana, and New York insured both banknotes and deposits, while Iowa and Ohio insured only banknotes. Most of these systems operated successfully up to the Civil War, with the notable exception of Michigan’s which had been established immediately before the Panic of 1837 and had failed rather quickly. These state deposit insurance systems generally required participating banks (and participation was voluntary) to pay for insurance to pay off deposit returns from failed banks.

Such systems did not survive the Civil War and nationalization of the banking system. However, interest in state level deposit insurance systems was increasing again by the end of the 1800s, though it was not until 1907 that Oklahoma became the first state since the Civil War to establish a state deposit insurance system. Seven more states followed suit in the following ten years. The deposit insurance systems of the early 20th century had less positive results and unintended consequences. A common observation of banks insured by state deposit insurance in the 1920s was that in spite of nominal regulations against risky behavior by banks, the state deposit insurance actually encouraged risky behavior by banks, increasing the proportion of bank failures and thus insurance burden. By the end of the 1920s the state deposit insurance schemes had largely failed. In some states voluntary participation left banks the option to simply opt out, and most did, while in other states high insurance costs led to deposit insurance being repealed. Yet while state level deposit insurance appeared to be a failure, it was a model that would pave the way for the establishment of the FDIC, deposit insurance on the federal level and subject to stricter regulation.

Vaughn Rennie  is a summer museum intern at the Museum of American Finance.

 

Thursday Excursions

The Federal Reserve Bank of New York

As Senior Museum Interns, we get the opportunity to participate in out-of-office learning experiences once a week.  We have been given the privilege visiting some of the most important financial institutions located in the New York area.  Thus far, these sites have included the Federal Reserve Bank of New York and the New York Mercantile Exchange.  Visiting the Federal Reserve, located a short walk from the museum, presented a once-in-a-lifetime opportunity.  The Bank takes part in more transactions than any other bank in the United States Federal Reserve System.  At the building, security kept a watchful on us, and they informed us that security officers have their own private shooting range on the premises for target practice.  This might seem extreme, but remember that the bank houses over 300 billion dollars worth of gold.  The museum portion of the building featured many interesting exhibits, including the most valuable US coin in existence.  They even allowed us a chance to visit the gold vault on the tour.  Located several floors underground, the gold vault holds the gold reserves of many foreign nations and multi-national corporations.

Our next visit was to the New York Mercantile Exchange. The tour took us straight to the observation deck located right above the trading floor.  From this vantage point, we saw the entire trading floor, and observed the controlled chaos transpiring below on the exchange.  The guides at the New York Mercantile Exchange took us to the trading floor, and allowed us to walk among the traders as they conducted business.  We saw the “pits” where different commodities, such as gold and silver, trade amongst buyers and sellers.  Each pit contained traders communicating to each other, computer screens, and terminals with telephones.  The guide informed us that the number of people who work on the trading floors has decreased over the last decade.  Automation and digitalization resulted in a decreased demand for human traders on the floor as more and more trades now take place electronically.  The guide continued by saying that he thinks the trading floor would always be a necessity, because of the resources the building offers and the need for face-a-face interaction when making deals.