What is the Glass Steagall Act?
• The Glass Steagall Act (also referred to as the Banking Act) of 1932 and 1933 was a federal law that formally established the Federal Deposit Insurance Corporation in the United States. Through this creation, numerous banking reforms were affirmed, some of which, were designed to control speculation. The majority of the act was repealed in 1999; however, the provision, particularly the regulatory powers of the Federal Reserve and the governing bodies are still debated today.
• The Glass Steagall Act is encompassed by two separate laws; the first Glass Steagall Act of 1932 was enacted to curb deflation, expand the Federal Reserve’s ability to offer rediscounts on a number of asset types, including commercial paper and government bonds. The second Glass Steagall Act, known as the Banking Act, was passed in response to the collapse of a large portion of the commercial banking system in the United States.
• The Glass Steagall Act, in total, introduced the separation of bank types based on their business model (commercial vs. investment banking). Furthermore, the Glass Steagall Act founded the Federal Deposit Insurance Corporation; the premiere government agency for insuring bank deposits.
Why was the Glass Steagall Act passed?
• The act of rediscounting was a way of providing finances to a bank or other financial institution. During the 1800s and early 1900s, banks offered loans to their customers by discounting customer notes; these notes formalized an agreement where the borrower promised to pay a certain amount at a specified, future date. This system; however, ultimately failed when the Great Depression rocked the American Economy.
• The Glass Steagall Act was a fundamental part of Franklin D. Roosevelt’s first 100 days in office. The Great Depression and the complimentary bank failures served as the primary impetus to passing the Glass Steagall Act. The majority of commercial banks, as a result of the rediscounting system, participated in faulty investment strategies. During this time, banks were taking obscene risks and investing depositor assets in unstable assets.
• The Glass Steagall Act attempted to correct these wild practices by separating commercial banks from investment banks and by placing stringent restrictions on their financial maneuvers. After a year, under the Glass Steagall Act, banks would have to choose whether to be an investment or commercial bank, in which case only 10% of their revenue could come from investment securities.
The Creation of the FDIC:
• In short, the Glass Steagall Act restricted commercial bank investment strategies to re-instill confidence in America’s lending and savings system. The Glass Steagall Act, to bolster this initiative, created the FDIC. The Federal Deposit Insurance Corporation insures checking and safety deposits up to $100,000 per depositor for each member bank. At the time, this was a monumental creation, for it protected depositors from losing their money in the event of a run on a bank.
Repeal of the Glass Steagall Act:
• The Glass-Steagall Act was, for the most part, repealed in 1999. The Gramm-Leach-Bliley Act, which was pushed through Congress, made it possible for commercial and investment banks to merge together. Additionally, a subsequent act allowed banks to underwrite insurance.