The Glass-Steagall Act of 1933 was a groundbreaking financial regulation that separated commercial and investment banking in response to the 1929 stock market crash. It established the FDIC and remained in effect until 1999.
The Glass-Steagall Act emerged during one of America's darkest financial periods - the Great Depression. Enacted in 1933 as part of President Franklin D. Roosevelt's New Deal reforms, this landmark legislation fundamentally transformed the U.S. banking system.
Named after Senator Carter Glass and Representative Henry B. Steagall, the act created a firewall between commercial and investment banking activities. This separation aimed to protect ordinary Americans' savings from the risky speculation that contributed to the 1929 stock market crash. For over six decades, Glass-Steagall stood as a cornerstone of financial regulation until its eventual repeal in 1999 through the Gramm-Leach-Bliley Act.
Origins of the Glass-Steagall Act
#The Glass-Steagall Act emerged from the devastating financial collapse of the late 1920s and early 1930s. Senator Carter Glass of Virginia and Representative Henry B. Steagall of Alabama introduced the legislation in response to widespread bank failures and economic instability.
The Stock Market Crash of 1929
#The stock market crash on October 24, 1929, triggered a catastrophic financial downturn, with the Dow Jones Industrial Average falling 89% from its peak. Commercial banks' involvement in securities speculation contributed to the crash through:
- Establishing security affiliates to underwrite stocks bonds
- Using depositors' funds for risky market investments
- Creating conflicts of interest between banking divisions
- Selling questionable securities to unsuspecting customers
Banking Crisis of the Great Depression
#The banking system experienced unprecedented failures during 1930-1933, leading to a complete collapse of financial confidence:
| Banking Crisis Statistics | Numbers |
|---|---|
| Bank failures 1929-1933 | 9,000+ |
| Deposits lost | $1.3 billion |
| Banks closed (1933) | 4,000 |
| States with bank holidays | 48 |
Key factors in the banking crisis included:
- Bank runs depleting cash reserves
- Default on loans due to business failures
- Frozen assets in failed securities investments
- Interconnected bank collapses across regions
The combined impact of the stock market crash high unemployment created a domino effect of bank failures that devastated the American economy for nearly a decade.
The Enactment in 1933
#The Glass-Steagall Act became law on June 16, 1933, as part of the Banking Act of 1933, marking a pivotal moment in U.S. financial regulation. Congress passed the legislation with overwhelming bipartisan support, receiving 262 votes in favor and 19 against in the House of Representatives.
Key Congressional Leaders and Supporters
#Senator Carter Glass of Virginia led the Senate campaign for banking reform alongside Representative Henry B. Steagall of Alabama. Glass, a former Treasury Secretary, brought extensive financial expertise to the legislative process, while Steagall chaired the House Banking and Currency Committee. Representative Samuel Rayburn of Texas rallied Democratic support in the House, securing crucial votes from both major parties. The bill gained backing from prominent senators including Robert Wagner of New York, Duncan Fletcher of Florida, and Robert Bulkley of Ohio.
President Roosevelt's Role
#President Franklin D. Roosevelt championed the Glass-Steagall Act as a cornerstone of his "First 100 Days" initiatives. Roosevelt suspended all banking operations on March 6, 1933, through a national "bank holiday" to prevent further collapse. He delivered four radio "fireside chats" between March and June 1933, explaining the banking crisis to the public and building support for reform. The President signed the Banking Act into law at the White House, accompanied by Glass, Steagall, and key Cabinet members including Treasury Secretary William Woodin.
| Key Enactment Statistics | Data |
|---|---|
| House Vote in Favor | 262 |
| House Vote Against | 19 |
| Date of Enactment | June 16, 1933 |
| Bank Holiday Duration | March 6-13, 1933 |
| Presidential Fireside Chats | 4 |
Major Provisions of the Act
#The Glass-Steagall Act introduced fundamental reforms to the U.S. banking system through four separate sections, commonly known as Sections 16, 20, 21, and 32. These provisions established strict regulations to prevent the risky banking practices that contributed to the 1929 stock market crash.
Separation of Commercial and Investment Banking
#The act mandated a complete separation between commercial banking and securities activities. Commercial banks were prohibited from:
- Underwriting securities or engaging in investment banking activities
- Maintaining securities affiliates for trading or speculation
- Sharing directors board members or employees with investment firms
- Using depositors' funds for stock market investments
The legislation established a one-year period for banks to decide whether to operate as commercial or investment institutions. By 1934, major financial institutions like J.P. Morgan & Co. split into separate commercial banking and securities firms to comply with the new regulations.
Creation of the FDIC
#The Federal Deposit Insurance Corporation (FDIC) emerged as a cornerstone provision of the Glass-Steagall Act. Key features included:
- Initial insurance coverage of $2,500 per depositor
- Mandatory membership for all Federal Reserve member banks
- Regular bank examinations to ensure compliance with safety standards
- Authority to take control of failed banks for orderly liquidation
| Protection Measure | Coverage Details |
|---|---|
| Basic Coverage | $2,500 per depositor |
| Bank Assessment | 0.5% of total deposits |
| Reserve Requirement | 5% of deposits maintained |
| Emergency Fund | $289 million initial capitalization |
Impact on the Banking Industry
#The Glass-Steagall Act transformed the American banking landscape through strict separation of commercial and investment banking activities. This separation created distinct financial sectors with specialized functions and regulatory frameworks.
Restructuring of Financial Institutions
#The Act's implementation led to immediate structural changes in major financial institutions. J.P. Morgan & Company split into two entities: Morgan Stanley for investment banking and J.P. Morgan & Company for commercial banking activities in 1935. Many other financial giants followed suit:
- First Boston Corporation separated from First National Bank of Boston
- Chase Securities Corporation dissolved its connection with Chase National Bank
- National City Bank divested from National City Company
- Goldman Sachs maintained its investment banking focus exclusively
New Banking Regulations
#The Glass-Steagall Act established comprehensive regulations that reshaped banking operations:
- Commercial banks limited deposit-taking and lending activities
- Investment banks restricted to underwriting securities and merger advisory services
- FDIC requirements mandated regular bank examinations and reporting
- Interest rate regulations (Regulation Q) set maximum rates on savings deposits
- Capital requirements increased to maintain 10% of total assets
- Branch banking restrictions limited geographic expansion
| Regulatory Impact | Before Glass-Steagall | After Glass-Steagall |
|---|---|---|
| Banking Activities | Combined services | Separated functions |
| Deposit Protection | No federal insurance | FDIC coverage |
| Interest Rates | Unregulated | Regulated maximums |
| Capital Requirements | No standard minimum | 10% minimum |
| Geographic Expansion | Unrestricted | Limited by state |
The regulatory framework introduced standardized practices across the banking sector while creating distinct operational boundaries between different types of financial institutions.
The Act's Evolution and Eventual Repeal
#The Glass-Steagall Act underwent several modifications between 1933-1999 as financial markets evolved. Federal Reserve interpretations in the 1960s allowed commercial banks to generate up to 5% of their gross revenues from investment banking activities. This limit increased to 10% by 1989 through a series of regulatory adjustments.
Notable changes occurred through specific legislative actions:
- The Bank Holding Company Act of 1956 extended restrictions to bank holding companies
- The Federal Reserve's Section 20 exemptions in 1987 permitted limited securities subsidiaries
- The Revenue Limit Order of 1989 expanded allowable securities activities to 10% of revenues
- The Federal Reserve's 1996 reinterpretation raised the revenue cap to 25%
The formal dismantling process accelerated in the 1980s-1990s:
| Year | Key Development | Impact |
|---|---|---|
| 1986 | Fed allows banks to handle commercial paper | 3% revenue limit from securities |
| 1987 | Section 20 subsidiaries approved | Limited investment banking permitted |
| 1989 | Revenue limit increase | 10% cap on securities activities |
| 1996 | Further Fed reinterpretation | 25% revenue cap established |
The Gramm-Leach-Bliley Act of 1999 officially repealed the Glass-Steagall Act's core provisions. This legislation passed with a Senate vote of 90-8 and House vote of 362-57, creating financial holding companies that could engage in:
- Commercial banking
- Investment banking
- Insurance underwriting
- Securities brokerage
- Merchant banking
Major financial institutions rapidly consolidated after the repeal. Citicorp merged with Travelers Group to form Citigroup in a $70 billion deal, creating the first universal bank in the United States since the 1930s. The repeal marked the end of the strict separation between commercial and investment banking that had defined American finance for 66 years.
Key Takeaways
#- The Glass-Steagall Act was enacted on June 16, 1933, during the Great Depression as part of President Franklin D. Roosevelt's New Deal reforms
- Named after Senator Carter Glass and Representative Henry B. Steagall, the act created strict separation between commercial and investment banking activities to prevent risky speculation
- The legislation was a direct response to the 1929 stock market crash and subsequent banking crisis, which saw over 9,000 bank failures between 1929-1933
- Key provisions included the creation of the Federal Deposit Insurance Corporation (FDIC) and regulations prohibiting commercial banks from engaging in investment banking activities
- The act remained a cornerstone of U.S. financial regulation for 66 years until its eventual repeal in 1999 through the Gramm-Leach-Bliley Act
Conclusion
#The Glass-Steagall Act of 1933 stands as one of the most significant financial regulations in American history. Its enactment during the Great Depression created a clear separation between commercial and investment banking that lasted over six decades.
The legislation's passage represented a direct response to the devastating financial crisis of 1929 and the subsequent banking collapse. Through its comprehensive reforms and strict regulations it helped restore public confidence in the American banking system.
Though repealed in 1999 by the Gramm-Leach-Bliley Act the Glass-Steagall Act's legacy continues to influence discussions about financial regulation and banking reform today. Its fundamental principles of separating risky investment activities from traditional banking operations remain relevant in modern debates about financial stability.