Concept
-
After Hoover’s term ended in 1933, Franklin Delano Roosevelt was elected to office and began to address these issues differently. FDR and his cabinet created regulatory frameworks and oversight bodies that would prevent an economic downturn of this magnitude from ever happening again. They also added safeguards, detailed below, which restored investor confidence in the banking sector.
FDR’s assessment and application of financial policy over these years remains iconic as an example of well-actioned market regulation. Three of the most significant regulatory changes that were enacted during his term include:
1. The Banking Act of 1933 (the Glass-Steagall Act) which sought to separate the roles of commercial and investment banks. This act drew a legal distinction between these entities, so that the savings of the ordinary person could not be used for speculative investment purposes.
2. The Federal Deposit Insurance Corporation (FDIC) which was a regulatory body that guaranteed that the savings of individuals would be backed by the government in the event a bank failed.
3. The Securities Act of 1933, which gave rise to the regulatory body called the Securities and Exchange Commission (SEC). The SEC is an agent of the USA’s federal government responsible for monitoring and regulating market activities, as well as enforcing laws related to American securities markets.
Once these and similar regulations were put in place, the American economy recovered. This historic period offers great insight into the effects of regulation. Firstly, it shows a direct and powerful correlation between social well-being and financial well-being. This has important implications for financial regulation which is the framework for poor or prosperous financial standing.
Secondly, we see that both presidents enacted regulation in order to stem the devastation of the Great Depression. Both presidents worked hard to rectify the situation and cared for their people, but only one was effective in their outcome. The difference between them was the ability to assess the market and social environment and implement the right kind of regulation at that point in time. To elaborate on the traffic example in the earlier video, what Hoover did was try to let people get themselves out of their own jam. What FDR did was to build more roads and avenues so that they could.
This illustrates the role of regulation within financial markets in curbing the kinds of behavior that the very same markets produce, from the creation of financial instruments, to trading and the ethical or unethical treatment of investor funds in market activity.