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The Glass-Steagall Act: Definition & Summary

Instructor: Daniel McCollum

Dan has a Master's Degree in History and has taught undergraduate History

The Glass-Steagall Act was a law that was passed in 1933 to prevent banks for speculating in the stock market and then failing during a stock market crash. The law remained in effect until 1999 when it was repealed by Congress.

What Was the Glass-Steagall Act?

Senator Carter Glass of Virginia
Senator Carter Glass

The Glass-Steagall Act, officially known as the 1933 Banking Act, was an attempt to reform the American banking sector in 1933 in response to The Great Depression and Black Tuesday. Just three years previously, the stock market had crashed on October 29, 1929, an event that became known as Black Tuesday and which ushered in the Great Depression in the United States. During the course of the stock market crash, one out of every five banks in the United States failed and many people lost their savings in the process. The failing banks also left many businesses with few options to seek loans, further damaging the weak economy.

One of the reasons that many banks were so badly hurt by the stock market crash was that many not only extended credit and made loans to citizens and businesses, but also engaged in speculation. Speculation is when banks attempt to make money off of fluctuations in markets by investing in things like bonds, currency, real estate and stocks. When the economy boomed in the Roaring 20s the banks made money, but when the stock market crashed many institutions lost most of their wealth and collapsed. Even worse, many Americans had lost faith in the nation's banks and were unwilling to do business with them.

Glass-Steagall was the brainchild of Senator Carter Glass of Virginia and Congressman Henry B. Steagall of Alabama, and is often considered part of President Franklin Delano Roosevelt's New Deal. It attempted to fix these problems by recognizing that there should be two types of banks: investment banks and commercial banks. Commercial banks would be allowed to take in deposits and make loans to businesses and citizens, but would no longer be allowed to engage in speculation, although an exception was made that allowed these banks to still underwrite government bonds. Investment banks, on the other hand, would still be allowed to engage in speculation, but could no longer be closely associated with commercial banks (such as serving as share owners or directors). After the bill was passed in 1933, banking institutions were given a year to decide whether they wanted to qualify as investment banks or commercial banks.

What Else Did Glass-Steagall Do?

Congressman Henry B Steagall of Alabama
Congressman Henry B Steagall of Alabama

Although the rules relating to investment and commercial banks are the most well-known aspects of Glass-Steagall, the 1933 Banking Act actually contained several other reforms to the banking sector. One of these reforms was the creation of the Federal Deposit Insurance Corporation (FDIC). The FDIC insured bank deposits up to $5,000 with a pool of money that was collected from all banks. (The FDIC still exists, but now ensures to a much higher level.) This was very popular with smaller, often rural banks because it helped them protect themselves and their clients' deposits. It was also popular with the American public and helped restore faith in the banks by assuring Americans that their savings would be secure. It was less popular with larger firms who feared that money would be taken from them to help keep smaller banks afloat during times of economic troubles.

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