The Banking Act of 1935, enacted on August 23, 1935, by President Franklin D. Roosevelt, played a pivotal role in reshaping the structure, powers, and functions of the Federal Reserve System and the financial landscape of the United States. This article delves into the key provisions of the act, drawing upon reputable sources such as the Federal Reserve History website, Wikipedia, and the Federal Reserve Bank of St. Louis’s FRASER digital library.
Key Facts
- Creation of the Federal Deposit Insurance Corporation (FDIC):
- The Act amended section 12B of the 1933 Act to establish the FDIC and define its duties.
- The FDIC’s board of directors included the Comptroller of Currency and two members selected by the President and confirmed by the Senate.
- The Act made the FDIC permanent and set the maximum insured deposit at $5,000.
- Changes to the Federal Reserve System:
- The Act changed the name of the “Federal Reserve Board” to the “Board of Governors of the Federal Reserve System.”
- The Board of Governors consisted of seven members selected by the President with advice and consent of the Senate.
- The Act also created the Federal Open Market Committee (FOMC), which included the governors of the Federal Reserve System and representatives of the Federal Reserve banks.
- Loans to member banks:
- The Act renewed the ability of each Federal Reserve bank to make loans to its member banks.
- The rates for these loans had to be 0.5% above the current discount rate at the Federal Reserve.
- Technical amendments:
- Title III of the Act included 46 sections of technical amendments that clarified banking legislation.
- These amendments covered various aspects such as stock ownership, double liability, surplus requirements, loans to executives, branch banking, securities transactions, and rights of shareholders.
Creation of the Federal Deposit Insurance Corporation (FDIC)
The Banking Act of 1935 introduced significant changes to the Federal Deposit Insurance Corporation (FDIC), which was initially established under the Banking Act of 1933. The act amended section 12B of the 1933 Act, solidifying the FDIC’s existence and outlining its duties. The FDIC’s board of directors comprised the Comptroller of Currency and two individuals appointed by the President and confirmed by the Senate. The act also established a permanent FDIC and set the maximum insured deposit at $5,000, providing a crucial safety net for depositors and promoting stability in the banking system.
Changes to the Federal Reserve System
The Banking Act of 1935 brought about substantial alterations to the Federal Reserve System. The act renamed the “Federal Reserve Board” as the “Board of Governors of the Federal Reserve System,” emphasizing the shift towards a more centralized and powerful governing body. The Board of Governors consisted of seven members selected by the President with the advice and consent of the Senate, serving fourteen-year terms. Additionally, the act established the Federal Open Market Committee (FOMC), which included the governors of the Federal Reserve System and representatives from the Federal Reserve banks. The FOMC was tasked with overseeing open market operations, a critical tool for managing the nation’s monetary policy.
Loans to Member Banks
The Banking Act of 1935 renewed the authority of each Federal Reserve bank to extend loans to its member banks. This provision aimed to ensure that banks had access to liquidity during times of financial stress. However, the act stipulated that the interest rates for these loans should be set at 0.5% above the prevailing discount rate at the Federal Reserve, ensuring that borrowing from the central bank remained a less attractive option compared to obtaining funds from other sources.
Technical Amendments
Title III of the Banking Act of 1935 encompassed 46 sections of technical amendments that clarified and revised various aspects of banking legislation. These amendments addressed a wide range of issues, including stock ownership regulations, the elimination of double liability for bank shareholders, surplus requirements, rules governing loans to executives, branch banking restrictions, securities transactions, and the rights of shareholders. These technical adjustments aimed to enhance the overall functioning and stability of the banking system.
Conclusion
The Banking Act of 1935 stands as a landmark piece of legislation that reshaped the U.S. financial system during a period of economic turmoil. The creation of the FDIC provided a vital safety net for depositors, while changes to the Federal Reserve System centralized authority and enhanced the central bank’s role in managing monetary policy. The act also addressed various technical aspects of banking legislation, contributing to a more robust and stable financial framework. The Banking Act of 1935 remains a significant milestone in the history of U.S. banking and financial regulation.
Sources:
- https://www.federalreservehistory.org/essays/banking-act-of-1935
- https://en.wikipedia.org/wiki/Banking_Act_of_1935
- https://fraser.stlouisfed.org/title/banking-act-1935-983
FAQs
What was the primary purpose of the Banking Act of 1935?
The Banking Act of 1935 aimed to reform the U.S. financial system, particularly the Federal Reserve System, in response to the economic challenges of the Great Depression. It sought to enhance the stability and effectiveness of the banking system, protect depositors, and promote economic recovery.
What was the most significant change introduced by the Banking Act of 1935?
The creation of the Federal Deposit Insurance Corporation (FDIC) stands as the most notable change brought about by the Banking Act of 1935. The FDIC provided deposit insurance up to $5,000, instilling confidence in depositors and promoting stability in the banking system.
How did the Banking Act of 1935 alter the Federal Reserve System?
The act renamed the “Federal Reserve Board” to the “Board of Governors of the Federal Reserve System,” centralizing authority and strengthening the role of the Board of Governors. It also established the Federal Open Market Committee (FOMC), tasked with overseeing open market operations, a key tool for managing monetary policy.
What other provisions were included in the Banking Act of 1935?
Title III of the act encompassed 46 sections of technical amendments that addressed various aspects of banking legislation. These amendments covered stock ownership regulations, the elimination of double liability for bank shareholders, surplus requirements, rules governing loans to executives, branch banking restrictions, securities transactions, and the rights of shareholders.
How did the Banking Act of 1935 contribute to the stability of the U.S. financial system?
The act’s creation of the FDIC provided a critical safety net for depositors, boosting confidence in the banking system and reducing the likelihood of bank runs. Additionally, the centralization of authority within the Federal Reserve System and the establishment of the FOMC enhanced the central bank’s ability to manage monetary policy and promote economic stability.
What impact did the Banking Act of 1935 have on the U.S. economy?
The act’s reforms contributed to restoring stability to the U.S. financial system, which in turn facilitated economic recovery from the Great Depression. The FDIC’s deposit insurance instilled confidence in depositors and encouraged them to keep their money in banks, preventing a collapse of the banking system.
Is the Banking Act of 1935 still relevant today?
Yes, the Banking Act of 1935 remains relevant today as it laid the foundation for the modern U.S. financial regulatory framework. The FDIC continues to play a crucial role in protecting depositors and maintaining stability in the banking system. The Federal Reserve System, as reformed by the act, remains the central bank of the United States, responsible for managing monetary policy and ensuring the stability of the financial system.