It is indeed fascinating, when we consider the dramatic events of June 26, 1933, and Consul General Messersmith’s prescient warning, to then turn our attention to the domestic financial landscape of the United States in that very same pivotal year. The Banking Act of 1933, often recognized by its more common name, Glass-Steagall, stands as a landmark piece of legislation that did far more than simply regulate banks; it fundamentally began to strip power from the Federal Reserve Bank of New York, shifting it decisively towards politically appointed members of the Federal Reserve Board in Washington. This was not merely a bureaucratic reshuffling, but a profound redefinition of the relationship between private financial power and public governance, born from a period of immense crisis and popular demand for accountability.
To truly understand the impetus behind this shift, one must recall the sheer desperation and widespread public anger that permeated America in the early 1930s. The banking system had been in freefall since late 1930, with a major wave of failures hitting New York City in December of that year, including the collapse of the large Bank of the United States, which locked up the savings of over 400,000 people. By January 1933, bank suspensions were sweeping Chicago, Idaho, and Nevada, with the crisis fulcrum in Michigan, where the implosion of the automobile industry caused factory employment to plummet by 70 percent, leading deposits to flee banks. When Franklin D. Roosevelt took office on March 4, 1933, the financial massacre was nearly complete; out of 25,000 banks in 1929, some 7,000 had failed.
Amidst this chaos, the public’s ire was firmly directed at Wall Street. Roosevelt, in his inaugural address, delivered a stinging indictment, declaring that “the money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths”. This popular sentiment was fueled by far-reaching public investigations, most notably the Senate Banking Committee hearings led by Ferdinand Pecora, which had begun in 1932. Pecora’s aggressive inquiry exposed shocking practices within the financial sector. For instance, he revealed that Ivar Kreuger, the “match monopolist,” had raised $760 million through American banking syndicates, much of which he stole before committing suicide. Samuel Insull’s utility empire, controlling much of the American electric utility field with borrowed money, was also exposed. Pecora’s most impactful revelations, however, came in late February 1933, when he “eviscerated” the business practices of National City Bank, a “superbank” and precursor to today’s Citibank. These hearings, and Pecora’s “savage and demagogic assault on Wall Street,” created an atmosphere that permitted the sweeping financial legislation of the “First 100 Days” of the New Deal.
Within this highly charged environment, a titanic struggle for control unfolded between America’s major financial groups: the long-dominant House of Morgan and an ascendant alliance of Rockefeller, Harriman railroad, and Kuhn, Loeb investment banking interests. The Rockefellers and other newly rising groups had grown to resent the Morgan grip over both the Federal Reserve (especially the powerful New York Fed) and the Republican administration of the 1920s. When the Rockefeller-controlled Equitable Trust Company found itself vulnerable after the 1929 crash, its head, Winthrop W. Aldrich (brother-in-law of John D. Rockefeller, Jr.), engineered a merger with Chase National Bank in March 1930, making Chase the world’s largest bank. Aldrich was destined to be a key Rockefeller figure in banking and political manipulation for decades. He sought to “refurbish the bank’s image” and actively pushed for the division of commercial and investment banking. This internal “furious backbiting and jockeying for advantage” among bankers themselves played a crucial role, with Aldrich’s actions interpreted as a “Rockefeller assault on the House of Morgan”.
The Banking Act of 1933, spurred by this crisis and the political will to rein in financial power, enacted three major provisions that directly impacted the structure of American banking and the Federal Reserve System:
- Compulsory Separation of Commercial and Investment Banking: This was arguably the most significant blow to the Morgan Empire. It prohibited commercial banks from issuing, underwriting, selling, or distributing most securities (with government securities being exempt), and conversely, it prevented investment banks from accepting deposits. This provision was a direct attack on the Morgan model, which characteristic fused these two forms of banking. Aldrich, representing Rockefeller interests, was a key agitator for this clause and even drafted Section 21 of the Senate bill on Glass’s behalf. The Morgans fought bitterly, but Roosevelt personally intervened to ensure its passage, marking what was effectively the “coup de grace for the House of Morgan” in its integrated form.
- Federal Deposit Insurance: The Act provided for federal insurance to guarantee all bank deposits, which had the effect of “cartelizing the industry” and supposedly guaranteeing every bank’s success.
- Prohibition of Interest on Demand Deposits: This was a particularly “cartelizing device,” forcing banks collectively to keep interest payments to their depositors at zero and preventing competition for accounts.
Crucially, the Banking Act of 1933 also initiated the process of “stripping away the dominant power of the Federal Reserve Bank of New York” and “transferring that power to political appointees in Washington”. Historically, the New York Fed, particularly under its first governor, Benjamin Strong (a staunch Morgan protégé who virtually “ruled as an autocrat” over Fed policy until his death in 1928), had wielded immense power, often without consulting the Federal Reserve Board in Washington. Strong had even convinced his mentor, Henry P. Davidson, that he could “operate the Fed as a ‘real central bank run from New York'”. The New York Fed’s dominance stemmed from its central role in open market operations, given that the bond market was located in New York.
The 1933 Act began to dismantle this dominance by creating a statutory Federal Open Market Committee (FOMC). While the FOMC initially consisted of one member from each Federal Reserve district, selected by the board of directors of each Federal Reserve Bank (in practice, the regional governors), and thus still heavily influenced by private bankers, it marked a significant first step. The new law required that every Federal Reserve Bank’s open market operation “conform to Federal Reserve Board regulations,” even though each still retained the right to refuse to participate. Furthermore, a “direct slap” at the New York Fed’s powerful role in international finance was a provision in the 1933 Act that “forbade the New York Fed or any other Federal Reserve Bank from conducting negotiations with foreign banks”. This directly targeted the extensive “connivance” between Benjamin Strong and Montagu Norman of the Bank of England, a relationship “so important for the House of Morgan”.
While the 1933 Act began this transfer, it was the subsequent Banking Act of 1935 that would largely complete the centralization of power over the banking system in Washington. That later act would further empower the Federal Reserve Board, removing the Treasury Secretary and Comptroller of the Currency as ex officio members and broadening the types of assets eligible for Fed rediscounting to “any paper whatever deemed ‘satisfactory’ by the Fed,” effectively eliminating the last qualitative restraints on credit expansion.
In essence, the Banking Act of 1933 was a pivotal moment. It was born out of profound economic distress and a public demand for accountability from a perceived “money trust”. It was shaped by the intense rivalry between powerful financial factions, particularly the Rockefeller and Morgan interests. Through its core provisions—the separation of banking functions, deposit insurance, and restrictions on interest—and crucially, by beginning to shift the locus of control within the Federal Reserve from the privately-aligned New York Fed to the politically appointed Board in Washington, the Act fundamentally restructured American finance. This legislative action was not merely a response to the crisis, but a deliberate move toward “government coordinated cartelization” and increased public control over the nation’s money and credit, a radical departure from the laissez-faire ideals of the previous era, driven by the New Deal’s broader aim to stabilize the economy and prevent social unrest.