Banking Act of 1933 (or “Glass-Steagall Act”)
Sponsored by U.S. Senator Carter Glass (D-VA) and U.S. Representative Henry Steagall (D-AL), the Glass-Steagall Banking Act was signed into law by President Roosevelt on June 16, 1933 [1]. Senator Glass was the primary force behind the bill, first introducing the legislation in January 1932.
The goals of the law were, “To provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes” [2]. The act contained several important provisions: separation of investment banking from commercial banking; tighter oversight of national banks by the Federal Reserve Bank; creation of the Federal Deposit Insurance Corporation (FDIC); prohibiting interest payments on checking accounts; and banning banks from lending money to their executives [3]. The most important elements of the act were: (a) the creation of a “firewall” between commercial and investment banking; commercial banks, which handle ordinary deposits, transfers and loans, were forbidden from investing in stock markets in order to reduce speculation; and (b) insurance for ordinary depositors’ savings through the FDIC.
Glass-Steagall is one of several laws that helped bring stability to America’s financial system, following the excesses of the “Roaring Twenties” and the Stock Market Crash of 1929. In the free-fall of the Great Depression from 1929 to 1933 there were nearly 10,000 bank failures around the country; and even during the 1920s annual bank failures routinely numbered in the hundreds [4]. After Glass-Steagall and other bank reforms, there were only 565 bank failures over the whole postwar era up to 1980. (There has been has been a significant rise in bank failures since then) [5]. Similarly, stock markets were quiet during this time, and accelerated thereafter.
As prosperity reigned through the 1960s, financiers chaffed against the firewall and other restrictions. They were able to loosen federal regulations during the 1970s and 1980s, and, finally, in 1999, after intensive lobbying efforts, Congress repealed Glass-Steagall [6]. Investment and commercial bank mergers became commonplace, credit creation soared (especially mortgages) and stock markets shot up. After the financial meltdown of 2007-08, a vigorous debate broke out over the role of the repeal of Glass-Steagall in the disaster [7]. Ironically, some of the key players behind the repeal of Glass-Steagall have changed their position in the wake of the recession. Former Citigroup CEO Sanford Weill, one of the fiercest advocates for repeal, said, “What we should probably do is go and split up investment banking from banking…” [8], and former Merrill Lynch CEO David Komansky stated, “Unfortunately, I was one of the people who led the charge to try to get Glass-Steagall repealed. I regret those activities and wish we hadn’t done that” [9]. There have been attempts to renew Glass-Steagall, but none has gained traction.
Sources
(1) “Banking Act of 1933, commonly called Glass-Steagall,” Federal Reserve History, https://www.federalreservehistory.org/Events/DetailView/25 (website managed by the Federal Reserve Bank of Richmond), accessed April 22, 2015. (2) Find the full text of the law at “Public Law 73-66, 73d Congress, H.R. 5661,” Federal Reserve Archive, accessed April 23, 2015, https://fraser.stlouisfed.org/scribd/?title_id=991&filepath=/docs/historical/congressional/1933_bankingact_publiclaw66.pdf#scribd-open. (3) See note 1. (4) “The FDIC: A History of Confidence and Stability,” Federal Deposit Insurance Corporation, https://www.fdic.gov/exhibit/p1.html#/10, accessed April 23, 2015. (5) For a yearly list of bank failures, go to https://www2.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30&Header=1. (6) “The Long Demise of Glass-Steagall,” Frontline, https://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html, accessed April 23, 2015. (7) See, e.g., Corinne Crawford, “The Repeal of the Glass-Steagall Act and the Current Financial Crisis,” Journal of Business and Economics Research, January 2011, Vol. 9 No. 1, https://www.unarts.org/H-II/ref/949-3747-1-PB-1.pdf, accessed April 24, 2015. (8) See note 6, and also “Wall Street Legend Sandy Weill: Break Up the Big Banks,” CNBC, July 25, 2012, https://www.cnbc.com/id/48315170, accessed April 23, 2015. (9) “Ex-Merrill CEO Komansky Regrets Backing Glass-Steagall’s Repeal,” Bloomberg Business, May 5, 2010, https://www.bloomberg.com/news/articles/2010-05-05/merrill-s-ex-chief-komansky-regrets-backing-glass-steagall-s-1999-repeal, accessed April 24, 2015.
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