Remembering a Great American
On Tuesday, December 7th, 1971, Ferdinand Pecora passed away, age eighty-nine. Readers may struggle to recall the name. He is both familiar and yet unknown to generations of Americans who owe, in part, their prosperity to his labors.
Pecora held many positions in government service at all levels, in which his integrity and courage were instrumental in defense of the public good. His fame though was sealed while serving as the Chief Counsel to the U.S. Senate's Committee on Banking and Currency.
On March 4th, 1932, the committee (then headed by Senator Peter Norbeck of South Dakota) began inquiries into Wall Street's role in the 1929 stock market crash and the ensuing Great Depression. By January 1933, when Pecora was appointed, the committee was in the process of winding down its proceedings and preparing to issue a report of its findings.
Pecora felt the investigation had not burrowed deep enough to reveal Wall Street's culpability. The incoming committee chairman, Duncan Fletcher of Florida, acceded to Pecora's request, granting him authority to continue investigations for another month. In the course of that month, Pecora, personally taking testimony from Wall Street's titans called before the committee, exposed a culture of conflicted interests, double dealing and outright criminality. The revelations so shocked and appalled the nation that Pecora was given carte blanche to continue the investigations. When the committee ceased taking testimony in May 1934, Pecora's name was synonymous with the committee. So although the final was issued under Fletcher's name, it has always been known as the Pecora Report.
In its wake, Congress went on to write and pass several seminal pieces of security, banking, commodity and exchange legislation. The revelations Pecora wrung from Wall Street's chieftains inspired much of the regulatory framework in place from the mid-1930s until it was dismantled during President Clinton's second term.
Perhaps it is a stretch to attribute special genius to the architects of the resulting regulatory structure; but their instincts reflected a hard-headed common sense that a segmented financial system might prove sounder and more durable than the free-for-all which hitherto prevailed. In drafting legislation, Congressmen were not only incorporating lessons learned in the wake of the October 1929 stock market crash, but from earlier financial panics as well.
Before there was a '29 Crash, there was the '07 Panic which haunted the popular imagination. The market decline and subsequent economic collapse was so severe that it spurred the enactment of the Federal Reserve Act in 1913. While the 1913 act was a start, the '29 Crash and the Great Depression exposed its inadequacies.
Sailing into the 1920s the nation's financial regulatory structure was akin to a massive ship with lots of pumps but no bulkheads. Even a small breech could thus prove catastrophic. This is the reason we suspect for the segmented, redundant and overlapping regulatory regime implemented in the 1930s. For all its faults, the system had the virtue of successfully containing financial market turmoil, preventing it from spilling over into the real economy. From the post-war period until 2008, sharp market declines did not translate into recessions. The link between the two had been severed. Pecora and his contemporaries were certainly not guided by the pursuit of the same academic arbitrage-free grail which, by the end of the 20th century, had dismantled and scrapped the regulatory structure constructed in the '30s. No. Theirs was a more practical goal: to enable savings to be translated into productive investment sans speculative excess.
Today, as we grapple with the 2008 mortgage debacle, we do so without the courage and integrity of the likes of Ferdinand Pecora.
Notes on Sources and Methods:
GDP (Gross Domestic Product) is a common measure of the aggregate quantity of economic activity within a country or region. As a barometer of the flow of goods and services over a period, GDP includes only final consumption (excluding the value of intermediate products), investment spending, changes in inventory levels and the difference between imported and exported goods and services. It may be expressed in nominal, or, current prices, or in real terms, adjusted for inflation. The chart is based on real GDP computed using 2005 price levels.
The Dow Jones Industrial Average (DJIA) is a price weighted, scaled average index. The DJIA consists of thirty stocks believed to serve as a representative barometer of U.S. equity market conditions. It is the second oldest U.S. equity market index, first introduced in 1896 by Charles Dow.
Included on the chart are selected post-war financial market events indicated by an inverted triangle.
(Sources: MeasuringWorth.com; AIFS estimates.)
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