Banking Regulation and the Glass-Steagall Act of 1933

Banking Regulation and the Glass-Steagall Act of 1933

The world of business has changed dramatically in recent years, yet one sectorùbankingùremained shackled by age-old regulations. That is what the framers of the Glass-Steagall Act intended. The law, passed in 1933, placed strict limits on banks to prevent a repeat of the Great Depression. In recent years, however, Glass-Steagall has come under attack, with banks, politicians, and even regulators calling on Congress to reform federal regulation of financial institutions. This paper will examine the politics of bank reform, and how a concerted and expensive lobbying effort finally paid off in 1999.

The Glass-Steagall Act, which Congress passed in 1933, sought to cure the excesses that spurred the Great Depression. The legislation also sought to restore the nation’s faith in banks. During the 1920s, banks served as underwriters on securities, and many lost millions in speculative ventures. Banks extended themselves into so many areas that they could not weather the economic downturn. As Americans hoarded money, banks simply ran out of capital, prompting numerous ôrunsö and bank failures. That lack of liquidity helped turn a recession into the Great Depression (Campagna, 1987, pp. 101-113).

To restore confidence, Glass-Steagall established the Federal Deposit Insurance Corporation, which guarantees deposits in insured banks. To prevent banks from becoming overextended and illiquid, Glass-Steagall divorced investment banking from commercial banking, and gave the Federal Reserve the authority to regulate banks. The Fed established new guidelines for capitalization, and slowly but surely, America rebuilt its banking system (Campagna, 1987, p. 113).

Fast forward to the 1990s, where a bull market had pushed the stock market to unthinkable highs and confidence in the economy has never been greater. None of the old rules seemed to apply in a searing economy based on technology. But those rules still applied to banks, whi…

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