The Glass Steagall Act

Establishing the FDIC


The Glass-Steagall Act of 1933 was an important step in creating the investment banking industry. The act established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation. In 1933, in the wake of the 1929 stock market crash and during a nationwide commercial bank failure and the Great Depression, two members of Congress created an Act that essentially separated investment and commercial banking activities. At the time, "improper banking activity", or what was considered overzealous commercial bank involvement in stock market investment, was deemed the main culprit of the financial crash. According to that reasoning, commercial banks took on too much risk with depositors' money.

The Glass-Steagall Act was created in two parts:

  • The First Glass-Steagall Act: The first Glass-Steagall Act was the first time currency (non-specie, paper currency etc.) was permitted to be allocated for the federal reserve.
  • The Second Glass-Steagall Act The second Glass-Steagall Act, passed on June 16th, 1933, and officially named the Banking Act of 1933, introduced the separation of bank types according to their business, and it founded the Federal Deposit Insurance Company for insuring bank deposits.

The Repeal


Over the years, the act became less relevant, and by the 1980's, many were calling for a repeal of the act. By 1987, there were several arguments for and against the repeal of the act:

  • Arguments for preserving Glass-Steagall
    • Conflicts of interest in granting credit
    • Banks possess enormous power - it must be limited
    • Banks make risky moves, which could lead to enormous losses - the government should be there to insure these losses
  • Arguments for repealing Glass-Steagall
    • Banks are losing market share to strictly regulated independent securities firms
    • Conflicts of interest can be prevented by enforcing regulation against them
    • Combinations of commercial and investment banks would lead to diversification, decreasing overall risk.

Ultimately, the act was repealed, and commercial lenders were able to trade exotic securities, which ultimately lead to the subprime mortgage crisis. Thus, the repeal of this act had huge implications on today's crisis.

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