Glass-Steagall Act of 1933
The Glass-Steagall Act of 1933 was a significant piece of legislation passed as part of the New Deal, aimed at addressing the widespread bank failures that occurred in the early 1930s. Sponsored by Senator Carter Glass and Representative Henry Bascom Steagall, the Act was enacted in two parts. The first part, established in 1932, aimed to enhance the Federal Reserve's regulatory control over the banking system. However, as bank insolvencies continued, a more comprehensive solution was needed, leading to the second part, which is most commonly referred to as the Glass-Steagall Act.
This second iteration sought to separate commercial banking from investment banking activities, prohibiting commercial banks from engaging in securities underwriting, which had previously put customer deposits at risk. The legislation also established the Federal Deposit Insurance Corporation (FDIC) to protect bank customers' deposits. By clearly delineating the functions of commercial and investment banks, the Glass-Steagall Act played a crucial role in restoring stability to the U.S. banking sector and rebuilding public trust in financial institutions.
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Glass-Steagall Act of 1933
The Law New Deal legislation created to protect bank depositors from speculative practices contributing to thousands of bank failures
Also known as Banking Act of 1933
Dates Enacted on June 16, 1933; repealed in 1999
In an effort to end the banking industry’s speculative excesses, which contributed to thousands of bank failures in the early 1930’s, the Glass-Steagall Act severed the business of commercial banking (collecting deposits) from that of investment banking (underwriting securities).
Passed as part of the New Deal, the Glass-Steagall Act sought to quickly address the thousands of bank failures that occurred nationwide in 1932 and 1933. The act was sponsored by Senator Carter Glass, a Democrat from Virginia, and Representative Henry Bascom Steagall, a Democrat from Alabama, and was passed in two parts. The first part, enacted in February, 1932, strengthened the Federal Reserve’s hand in regulating the nation’s banking system. In the months that followed, however, thousands of insolvent banks closed, and pressure mounted for additional legislation to permanently address the country’s banking woes. The second Glass-Steagall Act—the one most historians refer to by that term—was enacted to end the involvement of commercial banks in the risky practice of securities underwriting, or the buying and selling of new stocks and bonds.
While underwriting was highly lucrative for the banks, it often put bank customers’ deposits at risk. Underwriting also resulted in great inflation of the perceived value of stocks and bonds that were issued. Once this false price inflation became apparent, securities prices fell, contributing greatly to the 1929 stock market crash and ensuing bank failures.
The act prohibited commercial banks’ involvement in investment banking practices, relegating the banks to their traditional lines of business: collecting deposits and making loans. The act also prohibited investment banks from collecting customers’ bank deposits and created the Federal Deposit Insurance Corporation, which guarantees bank customers’ deposits.
Impact
By ending the mingling of the business of commercial banking and investment banking, the Glass-Steagall Act was able to effectively return stability to the U.S. banking sector. Eventually, it restored the trust of the American public in their local banks.
Bibliography
Benston, George J. The Separation of Commercial and Investment Banking: The Glass-Steagall Act Revisited and Reconsidered. New York: Oxford University Press, 1990.
Cohen, Henry. The Glass-Steagall Act: A Legal Overview. Washington, D.C.: Congressional Research Service, 1982.
McKinney, J. “Financial Free-for-All.” Black Enterprise 30, no. 11 (2000): 197-201.