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A New Deal:  Financial Reforms

Financial Reforms

During his first week as president, Roosevelt prevented the collapse of America's banking system. "Capitalism was saved in eight days," adviser Raymond Moley later recalled. But further financial reforms were needed to reduce risk and restore confidence.

FDR acted quickly to protect bank depositors and curb risky banking practices. He pushed reforms through Congress to fight fraud in the securities markets. He provided relief for debt-ridden homeowners and farmers facing the loss of their homes and property. And he worked to stimulate inflation in an effort to prop up sagging prices and wages that were dragging the economy down.

Reforming the Banks

From 1929-1933, thousands of banks in towns and cities across the nation failed and millions of Americans lost their life savings.

The Glass-Steagall Banking Act stabilized the banks, reducing bank failures from over 4,000 in 1933 to 61 in 1934. To protect depositors, the Act created the Federal Deposit Insurance Corporation (FDIC), which still insures individual bank accounts. It granted the Federal Reserve System greater control over bank credit. And it ended risky stock speculation by commercial banks by separating commercial banking from investment banking. Congress dismantled this barrier in 1999.

Abandoning the Gold Standard

During the Depression, prices fell to disastrous levels - a deflationary spiral that hindered economic recovery. Farmers especially needed higher prices to make a profit on their farm products.

Before 1933, the dollar's value was tied to the price of gold, and U.S. currency could be converted into gold on demand. This monetary system was known as the "gold standard." In April, FDR announced that America would follow the example of Great Britain and other nations and abandon the gold standard. This made it possible for FDR to increase the supply of dollars in circulation by printing more currency, the value of which now "floated." He and his advisers hoped this would help end ruinous deflation and stimulate economic activity. FDR's actions had a positive effect, though not as great as he anticipated.

Helping Homeowners

The Depression put tremendous pressure on homeowners. By early 1933 nearly half of the $20 billion in home mortgages was in default. The defaults weakened lending institutions and undercut home values.

Roosevelt responded to the mortgage crisis by creating the Home Owners Loan Corporation (HOLC). During the next three years, the HOLC made nearly one million loans. By 1936 it had financed 20 percent of the mortgaged urban homes in America. The corporation also issued cash advances to pay for property taxes and home repairs and redeem properties lost to foreclosure. The HOLC pioneered a large Federal Government role in home mortgages that continues to this day.

Fighting Fraud

The stock market crash of 1929 exposed the lack of regulation in America's financial markets. Investor fraud, risky credit deals, and other abuses were widespread.

The Securities Act was designed to curb such abuses, reduce risk, restore public confidence, and encourage investment. For the first time, the Federal Government became directly involved in policing the securities markets.

The Act required companies that issue stock to file detailed information about new securities with the Federal Trade Commission (FTC). Any false statements could lead to criminal prosecution and civil suits. The Act broadened the investigating and prosecuting powers of the FTC. Since 1933, the Federal Government has taken a strong hand in protecting investors.
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