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The Glass-Steagall Act, passed in 1933, aimed to prevent imprudent financial speculation by separating commercial and investment banks. The act also created the FDIC to protect depositors. The act was largely repealed in 1999 with the Gramm-Leach-Bliley Act, allowing banks to merge and underwrite insurance.
The Glass-Steagall Act (GSA), passed by the Senate in 1933, instituted the FDIC and banking reforms that gave the Federal Reserve more regulatory power. The act aimed in particular at imprudent financial speculation. Many provisions of the Glass-Steagall Act were repealed in 1999.
The law was part of President Franklin D. Roosevelt’s first hundred days in office, commonly called “The Hundred Days.” The Great Depression and related bank failures were the direct impetus for the Glass-Steagall Act. Commercial banks have been accused of recklessly investing depositors’ money and engaging in flawed financial speculation. Financial speculation means that investment includes a risk of loss, such as investing in the stock market or currency exchange.
Speculation is a standard financial process, but in the pre-depression era, banks took great risks and invested depositors’ assets in unstable securities. The Glass-Steagall Act sought to correct this practice by separating commercial banks from investment banks. After one year the banks would have to choose whether to take on the role of investment, or commercial bank, in which case only 10% of their income could come from securities.
The Federal Deposit Insurance Corporation (FDIC) was added to the bill to involve Rep. Henry Bascom Steagall with Senator Carter Glass, the bill’s primary advocate, in passing the Glass-Steagall Act. The FDIC ensures audits and security deposits of up to $100,000 US Dollars (USD) per depositor at each member bank. This was especially relevant during the Depression, as it protected depositors from losing all their money in the event of a run on the bank.
Despite allegations that the Glass-Steagall Act’s regulations were too harsh and merely reactionary to the Great Depression, Congress passed an extension of it in 1956 called the Bank Holding Company Act. A bank holding company is any corporation that owns one or more banks. The Bank Holding Company Act required these companies to register with the Fed and gave the Federal Reserve Board the power to inspect and regulate their activities, especially if that company owns 25% or more of a bank’s voting rights. Further restrictions were added to the law in 1966 and 1970.
The Glass-Steagall Act was largely repealed in 1999 with the Gramm-Leach-Bliley Act. The law was passed in Congress by Representative James Leach and Senator Phil Gramm and allowed commercial and investment banks to merge. The Gramm-Leach-Bliley Act also allowed banks to underwrite insurance. Supporters of the bill argued that this diversification of money made lending and investing less risky and that banks would not misuse depositors’ money because so much of a bank’s success depends on its reputation.
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