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Definition: Glass-Steagall Act from The AMA Dictionary of Business and Management

1933 legislation that separated commercial banking from investment banking in the United States and that established the Federal Deposit Insurance Corporation. The legislation was introduced as part of the New Deal to curb the speculation that led to the Great Depression. The act was repealed in 1999.


Summary Article: Glass-Steagall Banking Act (1933)
From Gale Encyclopedia of U.S. Economic History

The Glass-Steagall Banking Act of 1933, passed in response to the stock market crash of 1929, prohibited commercial banks from underwriting or selling securities investments (stocks and bonds). It also established the Federal Deposit Insurance Corporation (FDIC) to insure bank deposits up to a specified amount ($5,000 upon the law's inception, $250,000 as of 2013). Many economists believed that the crash was precipitated by the speculative investment of commercial banks in the securities market using depositors' funds. During this period, securities investments were highly volatile and prone to wild fluctuations based on the rapidly changing values of real estate, stocks, bonds, and other financial instruments. The law was passed to prevent commercial banks from making such risky investments with their depositors' money, effectively separating commercial banks from investment banks.

Following the stock market crash of 1929, many depositors rushed to pull out their savings from U.S. banks, which in turn caused thousands of bank failures. Responding to the public's lack of confidence in banks, Senator Carter Glass, a Virginia Democrat, and representative Henry Steagall, a Democratic Representative from Alabama, crafted a bill that would prevent commercial banks from investing in the securities market. The purpose of the legislation was to insulate bank depositors from the risk of speculative securities investments. The Glass-Steagall Act was initially passed as an emergency measure under the New Deal, a broad economic and social reform effort initiated by President Franklin D. Roosevelt's (in office 1933–45), but the law was made permanent in 1945.

The Glass-Steagall Act established tighter regulation of national banks by the Federal Reserve System, and it created the FDIC (made permanent with the Banking Act of 1935), which insured the deposits of depository institutions with a pool of money supplied by the member banks. The act also prevented commercial banks from underwriting securities, except for a limited number of asset-backed securities, such as corporate bonds and U.S. Treasury and federal agency securities. As a result of the act, the underwriting of securities was largely left to investment banks, which were also authorized to set up corporate mergers, acquisitions, and restructuring, and to provide brokers or dealers in investment transactions. The Glass-Steagall Act represented a significant change in the nature of banking in the United States. Although it prevented banks from becoming too large and posing a threat to the national economy should their financial investments sour, it also prevented banks from providing a number of different financial services under a single roof.

During the ensuing decades, federal legislation relaxed the initial tenets of the act, and the passage of the Gramm-Leach-Bliley Act (1999) effectively repealed the separation of commercial banking and investment banking activities, paving the way for large banking conglomerates such as CitiGroup and Bank of America. Many economists argued that the weakening and eventual loss of Glass-Steagall legislation was at least partially responsible for a number of financial crises in the late twentieth and early twenty-first centuries, including the Savings and Loan Crisis of the 1980s and 1990s and the Panic of 2008.

SEE ALSO Bank of America; Federal Deposit Insurance Corporation (FDIC); Federal Reserve System; Gramm-Leach-Bliley Act (1999); Great Depression; Investments; New Deal; New Deal: Reform or Revolution; Panic of 2008, Causes of the; Savings and Loan Failures; Stock Market Crash of 1929

COPYRIGHT 2015 Gale, Cengage Learning

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