A historian explains why Bernie Sanders is right about the 1933 Glass-Steagall Act

A historian explains why Bernie Sanders is right about the 1933 Glass-Steagall Act

HISTORY NEWS NETWORK
04 APR 2016 AT 11:25 ET

Both Hillary Clinton and Bernie Sanders are talking tough about Wall Street reform. But only Bernie Sanders is advocating a reprise of the 1933 Glass-Steagall Act, specifically that section of the Depression-era act that had prohibited commercial banks and investment banks from operating under the same roof. Sanders believes that the repeal of Glass-Steagall in 1999 led to the formation of banks that became “too big to fail,” contributed to the financial crisis in 2008—and will lead to another crisis without corrective legislation.

Most observers think Sanders is on a quixotic quest and, with Wall Street’s political power, the chances of any revival of Glass-Steagall are, like his election to the presidency, slim. Yet Sanders has a strong argument, one that can be effectively made using Citigroup, the two-century old bank that, along with other Wall Street banks, has a history of wreaking havoc on itself and the economy when it mixes commercial banking with investment banking.

The first instance occurred in the 1920s when Charles “Sunshine” Mitchell became president of what was then National City Bank. The bank was the largest in the U.S. and its securities affiliate, under his aggressive management, had also become the country’s largest investment operation, with sixty-nine sales offices in fifty-eight cities. Much of National City Bank’s growth, however, was at the expense of its growing clientele of unwary investors, who became victims of shoddy securities offerings the bank originated and, most famously, the notorious investment pools the bank sponsored in the Roaring Twenties.

In 1933, long after the 1929 stock market crash and in the depth of the Great Depression, Mitchell was brought before the Senate Banking and Currency Committee to explain how investment pools worked and how National City Bank played a role. First, it turned out, the bank loaned money to a “pool manager” to facilitate the purchase of a selected “story stock” by a small group of initial investors. Then the pool manager planted rumors and bogus news accounts to entice the general public to purchase the stock at ever increasing prices. National City’s investment affiliate further aided the pool manager in its efforts by authorizing the payment of “premium” commissions to tout the targeted stock. When the stock’s price reached some level judged unsustainable by the pool manager, the early investors quietly bailed out, leaving smaller and less informed investors holding the bag. If those chump investors had purchased their stock on margin, they likely owed large sums of money in addition to holding the deflated stock....

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