431 Days: Joseph P. Kennedy and the Creation of the SEC (1934-35)

Dr. Kenneth Durr and Dr. Adrian Kinnane, History Associates, Inc., Curator
Opened December 1, 2005

"The Commission will undoubtedly make new advances and arrive at fresh triumphs. But whatever it achieves, the men and women who have toiled for it during its infancy, who have nourished it and cherished it, will remember that it was Joe Kennedy’s strength and courage and Herculean labors which really put it over."
- September 24, 1935 Letter from David Saperstein to Joseph P. Kennedy

Introduction

During the 1920s, confidence in business rose with the stock market. Middle America heard in Wall Street's ticker tape the rhythm of unfolding prosperity. "Everyone ought to be rich," pronounced a Ladies Home Journal article. Few Americans suspected that these were, in fact, the Last Days of the Financial Frontier in which a small number of insiders were able to control the market (and the investments of unsuspecting millions) to their own benefit. After the Crash, Congressional investigations revealed that the Great Depression stemmed in part from a great betrayal of trust: having encouraged investor faith in the free market, financiers and stock jobbers manipulated it to their own ends.

When Franklin Roosevelt took office, a groundswell of reaction had set in against bankers, financiers, and most particularly the New York Stock Exchange. Some even called for a drastic rollback of the free market system. Instead, FDR turned to a coterie of Politicians and Professors who helped frame new legislation that tempered ideology with practicality. The Securities Act of 1933 was one such effort, but it nevertheless touched off a period in which progressive reformers and economic conservatives battled in administrative agencies like the Federal Trade Commission (FTC) and in the halls of Congress over the ultimate shape of ongoing reform.

From the tumult of politics emerged an elegant solution: the creation, under the auspices of the 1934 Securities and Exchange Act, of the Securities and Exchange Commission (SEC). And while some pushed for the appointment of progressive reformers to the Commission, FDR confounded partisans by appointing Joseph P. Kennedy one of the SEC's first five Commissioners and insisting that the group designate Kennedy as Chairman. Kennedy had profited handsomely from financial manipulation, but he understood keenly the need to balance the interests of the people with the imperatives of the financial markets. Kennedy now faced the daunting task of Building an Institution.

True to FDR's intent, Kennedy began his tenure by declaring the SEC the partner of honest capital. He believed that through Friendly Enforcement of the new statutes, the SEC would "help all proper enterprises by helping them establish new checks and by setting up more positive standards." Accordingly, Kennedy's SEC launched enforcement efforts sparingly at first, and mostly against the financial industry's less scrupulous participants.

But in the context of the Great Depression, the SEC faced a much tougher job--that of Encouraging Capital. The crash had driven investors out of the market, and many believed that tough registration rules recently imposed by the FTC had helped keep them out. Others argued that the nation was experiencing a "capital strike" by industrialists hoping to force a rollback of the new legislation by refusing to market securities. Kennedy approached this task on two fronts: he worked with industrialists and financiers to develop more streamlined rules, and he exhorted capital in public venues to return to the market in the national interest. By the spring of 1935, Kennedy had succeeded in reviving America's flagging capital markets.

In 1935 a frustrated Roosevelt and his New Dealers began to take a more adversarial approach toward business. Kennedy had never planned to stay long at the SEC and, having reached his goals, he stepped down before newer, tougher regulation went into effect. Despite this brief tenure, The Kennedy Legacy was substantial. He had helped create an institution that was flexible, resourceful, and arguably the most respected of the New Deal agencies. Kennedy would go on to other government posts, but never again would he be as effective an administrator or as acclaimed an official. Subsequent SEC chairs wielded the power of an established regulatory agency with varying degrees of success, but only after Kennedy had proven to a nation that the SEC could be a critical source of stability in the constantly changing world of finance.

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Photos

September 23, 1935

Paul Gourrich (front row, second from left); Robert E. Healy (front row, fourth from right); Joseph P. Kennedy (front row, third from right); James M. Landis (front row, far right); George C. Mathews (front row, second from right); Kemper Simpson (back row, fourth from right)

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