Glass-Steagall Act

Overview

The Banking Act of 1933, commonly known as the Glass-Steagall Act, was a landmark piece of U.S. legislation. It was enacted during the Great Depression to restore public confidence in the nation’s banks.

Key Concepts

The core of the act was its separation of two main types of banking:

• Commercial Banking: Accepting deposits and making loans.
• Investment Banking: Underwriting and dealing in securities.

This separation aimed to prevent banks from engaging in risky investment activities with depositors’ money.

Deep Dive

Prior to Glass-Steagall, many financial institutions engaged in both commercial and investment banking. This led to conflicts of interest and contributed to the speculative excesses of the Roaring Twenties, which many believed exacerbated the severity of the Great Depression. The act created the Federal Deposit Insurance Corporation (FDIC) to insure bank deposits.

Applications

For decades, Glass-Steagall provided a framework for the U.S. financial industry. It fostered a period of relative stability in banking. However, as financial markets evolved, arguments arose that it hindered American banks’ competitiveness globally.

Challenges & Misconceptions

A major misconception is that Glass-Steagall alone caused the 2008 financial crisis. While its repeal in 1999 (via the Gramm-Leach-Bliley Act) is debated, many factors contributed to the crisis. The act’s provisions were also eroded by regulatory interpretations over time.

FAQs

What was the main goal of Glass-Steagall?

To separate commercial and investment banking to prevent risky speculation with depositor funds and stabilize the financial system.

When was Glass-Steagall repealed?

It was largely repealed in 1999 by the Gramm-Leach-Bliley Act.