Great Depression learning journal 2

Since the first learning journal, we have made some changes and decided to narrow down our focus to one aspect of the Great Depression - the Glass-Steagall Act of 1933. As such, the background section is going to be changed slightly from what is detailed in the first journal to make it more relevant to the act, and thus less broad. It will include information on the 1920s economic boom leading to companies and firms needing to expand quickly to meet demand thus borrowing on the margin, some information more generally on banks and their questionable activities during this time (conflicts of interest), some information on the Federal Reserve and then information on the actual crash that happened in late 1929. The research tasks from the first journal have thus been completed successfully but need tweaking a little to fit this narrower focus. This will lead us nicely onto the diagnosis of the problem and the subsequent sections of the report.

Moving forward, we have decided to split the report research up as follows:

•    Diagnosis of problem: Poppy & Sachi. We aim to talk about the lending activities of banks during the 20s, the fact there was no regulation or laws prohibiting or limiting the underwriting of securities and thus the conflict of interest (as Glass termed it), and firms borrowing easy credit on the margins. When the crash happened, these margins led to small banks losing a lot of money, hence so many of them collapsing. Moreover, commercial banks were seen as being too risky (speculative) with depositors’ money. The original 1933 Pecora Report will be very helpful for this part of our report as it details the main issues the industry faced in the years leading up to the crash. 

•    Key response: Fritzi & Luca. This section will be the details of the actual act which was enacted precisely to stop another crisis of such a scale happening. In a nutshell, commercial and investment banking activities were separated through a “regulatory firewall". Commercial banks were no longer able to underwrite securities, nor have any business in corporate securities. Only 10% of commercial banks’ income could come from securities, severely limited their underwriting ability with the rationale to stabilise the industry through regulation.

•    Long-term recommendations: Joe & Rob (to be completed after the latter two). This is an interesting section because we potentially have the scope to talk about the current financial crisis linked with the repeal of the Glass-Steagall Act. The fact that between 1933 and 2008 there were very few financial crises, whereas before the act they were far more frequent. Phil Gramm’s argument that the act came about during a time of government intervention (i.e. Keynesian policies) and thus was redundant and outdated in an era of free-market neoliberalism was a somewhat weak argument and should be challenged. More research needs to be done in this area of our report in terms of recommendations moving forward. 

Whilst we are researching, we intend to constantly post our progress to avoid crossover and/or confusion. We think this could happen most easily in the diagnosis/key response section.