Secrets of the 1%: FDR’s Attempt to Reform the 1%’s Wall Street

Editor’s note: This is the second in a series of articles examining the history, activity, secrets and identity of the 1% in the US. See the first article here.

Today’s Democrats and progressive reformers often turn to the New Deal of the 1930s as an alternative model to the bankrupted policies the Republican Party has embraced since the 1980 election of Ronald Reagan. Their thinking is that if President Franklin D. Roosevelt could pull the country out of a Depression in the 1930s (and save capitalism along the way), then surely the Obama Administration can do it again, even by applying some of the same principles. Take for example Thomas Geoghegan’s “What Would Keynes Do?” (The Nation, Oct. 17, 2010), a strong defense of the deficit budgeting in times of economic crisis championed during the New Deal by British economist John Maynard Keynes. President Barack Obama’s stimulus spending on public works was inspired by the New Deal’s Public Works Administration, and even though Obama’s spending package did not match the New Deal’s, Keynes’s economics has become “The GOP’s Latest Whipping Boy,” as headlined in The Washington Post recently. Here I take a closer look at FDR’s reforms, especially the economic reforms, to see if a new New Deal has any merit.

FDR’s Structural Reforms for Wall Street

The Roosevelt administration adopted a two –prong strategy to attack the Depression. The first strategic prong had the long term goal of using structural reforms in government to restore investor (read the 1%) confidence in productive industries, and the public’s confidence in the banks. The second strategic prong had the short term goal of mitigating mounting political unrest by alleviating the suffering of the laboring classes in the cities and the farms, and by providing jobs that would revive the consumer spending which was viewed as crucial to economic recovery.

Both strategies were applied simultaneously to achieve sustained economic growth in an attempt to end the greatest crisis the capitalist system had faced up to that time. President Franklin D. Roosevelt’s promised “New Deal for America” did curb some of the worst excesses of the 1% during the “Roaring Twenties” – excesses that contributed to the great stock market crash of 1929 and the ensuing Great Depression, when unemployment hit 25% of working families.

Among the most important actions of the 1% at the time – and familiar to us after watching the stock market speculation since the Reagan presidency of the 1980s— was “insider trading.” Insider trading takes place when a few major stockholders make investments based on information to which only they, and not the public, are privy. Insider trading, despite too-common Martha Stewart-like violations in recent decades, was outlawed by the Securities Act of 1933. This law was an effort at providing greater transparency in order to restore investor confidence. The law required corporations which sold stock to the public to make quarterly reports, annual financial reports (to discourage accounting fraud), and narratives written by corporate officials explaining in detail how the company performed in the previous year.

The Democratic-majority Congress followed that up with the Securities Exchange Act of 1934. This legislation set up the Securities Exchange Commission (SEC) to enforce the 1933 law. The SEC’s first Commissioner, Joseph P. Kennedy Sr., was a major donor to Roosevelt’s 1932 campaign, a successful real estate and stock speculator, and the father of the Kennedy brothers of later fame and tragedy.

Despite the poorly drafted regulations and corporate non-compliance which undermined the law’s enforcement during Roosevelt’s first administration, the president’s landslide re-election in 1936 ended speculators’ illusions of a quick repeal of the SEC; the Commission became successful by the end of the second administration in 1940. By then Congress had also passed the Trust Indenture Act (1939), the Investment Holding Company Act (1940), and later in 1942, the Investment Advisers Act.

These laws were designed to set government standard practices in order to protect investors in the stock market. They also required more disclosures on the 1%’s ownership and control in corporations and banks. Despite many Wall Streeters’ claims that this was an unnecessary regulatory burden, the economy had a mild recovery by 1936 and stock prices soared.

At the beginning of his second administration in 1937, Roosevelt, acceding to Wall Street’s and Treasury Secretary’s worries about the debt, made large cuts in government spending. But as public jobs eroded, the economic recovery disappeared, and the stock market went through a sharper collapse than it had even in 1929.  Shocked, Roosevelt grew desperate; he resumed government spending.

At the same time, however, Roosevelt moved toward accepting the anti-monopoly arguments that high concentration of personal wealth and corporate power had caused the Depression and was now preventing recovery. This argument against over-concentration of power in the corporate economy distorting the market was persuasively articulated by Supreme Court Justice Louis Brandies and other veterans of the earlier Progressive era (1886-1916). This earlier Progressive reform movement had backed the anti-trust “Fair Deal” policies of Roosevelt’s uncle and personal hero, President Theodore Roosevelt . On April 29, 1938, a day after President Franklin Roosevelt announced a resumption of government deficit spending (spending more than income), he recommended to Congress “a thorough study of the concentration of economic power in American industry” in order to curb monopolies.

Exposing the 1%’s Families’ Financial Groups

Roosevelt envisioned a committee composed of officials from his own administration. Instead, in June of 1938 Congress established the Temporary National Economic Committee (TNEC), with Democratic and Republican representatives from both the Senate and the House composing 50% of the committee’s members, leaving Roosevelt to appoint the other 50%. Among Roosevelt’s appointees was Thurman Arnold, chief of the Antitrust Division of the Justice Department. Arnold’s presence was seen by business leaders as an ominous sign, and sure enough, over 500 witnesses in hearings soon produced startling revelations of just how huge the 1%’s control over the American economy was. For the first time in U.S. history, the government officially acknowledged and exposed the 1% super-rich families who controlled the country’s largest banks and corporations.

For the 1%, this was another example of Roosevelt’s “betrayal of his class” and his “drift toward socialism.” They were mistaken. Roosevelt wanted compliance with reforms from his class, not the class’s destruction. He knew that political power derived from economic power. If America was to achieve market equilibrium between supply and demand – especially consumer demand – and restore political stability, the 1% had to be compelled to comply with reforms, including ending the owners’ traditional tyranny over workplace wages and conditions, improving consumer spending that would in turn stimulate investment in not only existing companies, but new ones as well.

Like today, huge banks and corporations were unwilling to risk investing in new industries, however, so Roosevelt wanted to see if following his uncle’s supposedly trust-busting footsteps would help recovery. Breaking up such price-fixing cartels might restore competition, and exposing the 1% “economic royalists” by name as allied financial groups personally controlling the economy was one way of bringing them into line.

The TNEC’s final report to Congress in 1940 came to naught. War was looming, and Roosevelt needed the 1%’s cooperation to mobilize their industries. Much of the corporate data on which the TNEC’s reports were based remain sealed by Congress to this day. With war on the horizon, those of Roosevelt’s advisors who were urging more spending easily won the day. Assistant Attorney General Arnold’s Anti-Trust Division was told to back down.  For the next 70 plus years, no White House would ever again sponsor another TNEC report to the American people on the super-rich 1% and how much they controlled America’s economic life.  Instead, wartime collaboration between government and the 1% reached new heights, and grew steadily after the war to the present day’s serious attempts to destroy the legacy of the New Deal.

The assaults, which had begun in the 1980s under the presidency of Ronald Reagan, were encouraged by long-time New Deal haters like the powerful Du Pont family of Delaware, and such oil dynasties as the Pews of Philadelphia (Sunoco) and the Kochs (the original backers of the ultra-right John Birch Society). These families and their allies constitute the right wing of the 1%.

They have long tried to destroy the New Deal’s heritage of government intervention in the marketplace: government support for old age and survivors insurance (Social Security), workers’ rights to collective bargaining, affordable housing projects, unemployment insurance, government regulation of banks and the stock exchange, assistance for the poor (passed during New Dealer Lyndon Johnson’s presidency), media ownership concentration (most significant for an informed citizenry), and the environmental protection, occupational safety and health laws passed since the Republicans’ own President Richard Nixon. Nixon was, ironically enough, the last president willing to call himself a follower of John Maynard Keynes.

Next: How Roosevelt, Unlike Obama, Fended Off the 1%’s Attacks To Try To Save His Reforms

See previous article: Introducing The 1% and Their Target: The Middle Class

© Gerard Colby.

Gerard Colby is the author of DuPont: Behind The Nylon Curtain (Prentice Hall, 1974), DuPont Dynasty (Lyle Stuart, 1984), and with Charlotte Dennett of THY WILL BE DONE, The Conquest of the Amazon: Nelson Rockefeller and Evangelism in the Age of Oil (HarperCollins, 2005). He has taught international economics, political science and the history of Latin American political economy at various colleges, has lectured throughout the U.S. and Brazil, and has done investigative journalism for national and local news services for over 30 years. From 2004 to 2009 he served as President of the National Writers Union, Local 1981 of the Office, Technical and Professional Division of the United Auto Workers.